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At, Flash Trumps Flexibility

Sure, has received some good press -- but its image might be mightier than its model.

SAN FRANCISCO -- Sure, (PCLN) has gotten plenty of hype, but its image might be mightier than its model.

The company's plan is to match customers with the products they want to buy at a price they are willing to pay. started out applying this model to the travel industry, filling airlines' leftover seats and hotels' empty rooms, and now the company is looking to expand into new areas of business.

To bid on, customers specify a price, enter their credit card information and sacrifice flexibility: They can't choose the airline or the time. This blind shopping appeals to maybe 2% of online shoppers, according to

Forrester Research

. It also leaves some investors cold. "It's buying with your eyes closed," says Stephen Kahn, a portfolio manager for

Talvest Global Science & Technology

fund who recently sold his position.

Shares of are trading as if the company figured out how to slice bread online. Five weeks after it went public, the company's market cap is nearly $20 billion, bigger than the combined market caps of

United Airlines

(UAL) - Get United Airlines Holdings, Inc. Report



American Airlines






Northwest Airlines


combined. And if those offline comparisons seem tired, consider that's

(AMZN) - Get, Inc. Report

market cap stands at $23 billion.

Like many Net start-ups, is seeing fast-growing revenue and steep losses. The company reported Tuesday an operating loss of $17.6 million, or 12 cents per share, for the first quarter ending March 31, beating the

First Call

consensus estimate by a penny. Operating loss was $73.3 million in the fourth quarter. Revenue was $49.4 million, up from $19 million in the fourth quarter. (Comparisons for the same quarter last year aren't applicable because didn't launch until April 1998.)

And fans of the company say is different. Its radical business model can apply easily to new businesses: cruises, rental cars, consumer electronics, even financial services. "It's transforming the way people and companies do business," says

Warburg Dillon Read

analyst Sara Zeilstra, who rates the stock a buy and has no underwriting relationship with the company. "It's much more revolutionary than evolutionary."

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Much of the business media seems to agree. The current cover of


features Vice Chairman Jay Walker under the title "New Age Edison."

Maybe, but will face some stiff competition in consumer electronics from Net retailers like




, in financial services from companies like


(INTU) - Get Intuit Inc. (INTU) Report

and, most of all, from Internet auctioneers like





, Onsale and others. "Auctions are more desirable," says Evie Black Dykema, an analyst with Forrester Research. "You know what you are bidding for."

Even the travel segment of the business will face competition from auctions. Forrester expects Net travel auction sales to be about $2.1 billion in 2003. That's 17% of the business-to-consumer auction market.

What's more, many on Wall Street still feel uneasy with the model itself. It's never a good business model to promote a product that you aren't ready to sell, says Steve Demirjian, a portfolio manager at

Westfield Capital Management

who sold his position in the stock recently. "If I go to a store that says they sell shoes, and they don't sell any shoes," he says, "then I won't go back."

Many bidders are turned away empty-handed. According to's data, fewer than one in eight bids are successful. During the first two months of the year, there were about 830,300 bids for tickets, and a little more than half were considered "reasonable," or no more than 30% below the lowest available price, according to a company filing. Just 25% of the reasonable bids resulted in sales. So the company can't even fill most of the


orders it receives. Zeilstra says that number will increase as more airlines sign on with the company to sell their excess inventory.

The model doesn't lend itself to building loyal customers either. Price alone isn't enough; customers are likely to migrate to any rival that can guarantee lower prices. "They are going after the bottom dwellers," says Dykema. "It's only for people who value price over everything."

Talvest's Kahn says the model won't work for goods like consumer electronics or PCs because people like to have some control over what they are buying. "You don't want to end up with a brand that you don't really like," he says. "And I'm not sure all products are created equally," so settling for whatever kind of PC manages to score for consumers isn't going to be good enough.

And not knowing is a crap shoot: "If you're lucky enough to get it," says

Jupiter Communications

analyst Fiona Swerdlow, "you are stuck with it."