priceline.com Bidding for a New Source of Revenue: Licensing Its Business Model

The firm is backing up that patent claim with a lawsuit against Microsoft alleging that Microsoft infringed the priceline.com patent.
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SAN FRANCISCO -- When

priceline.com

(PCLN)

announces its third-quarter results, expected Thursday afternoon, some analysts will be looking to see how a new source of revenue will be affecting the company -- revenue coming from licensing the broad-based patent that is the company's business model.

Back in 1998, priceline.com patented a buyer-driven form of commerce that had its share of skeptics. In this year's second quarter, the company generated $112 million in revenue by matching airline tickets and hotel rooms with bids from its customers. Increasingly, the company is looking to the patent itself as a source of revenue.

"We would like to work with other companies," says Mari Shaw, a priceline.com patent litigator with

Morgan Lewis and Bockius

. "But we have intellectual property, and we should be compensated for it."

Earlier this month, priceline.com showed how earnestly it will enforce that patent when it sued

Microsoft's

(MSFT) - Get Report

Expedia

Web site for allegedly infringing it.

Even though it is caught up in other legal snarls, Microsoft is still a risky adversary to take on. But if priceline.com prevails, as many legal experts believe it will, the patent could mean more revenue growth for the company. Sara Zeilstra, a

Warburg Dillon Read

analyst, says she's confident she'll raise her revenue estimates for the company if priceline.com outlines more specifics of licensing deals in the company's conference call Thursday. Zeilstra rates the stock strong buy. Her firm hasn't done underwriting for the company.

Moreover, much of the revenue generated from licensing agreements will fall directly to the bottom line because the costs to maintain them are minimal, says Richard Zimmerman, an analyst at

Janney Montgomery Scott

. That should boost priceline.com's margins.

"From what we've seen so far, licensing can be a big part of the business," says Zimmerman, who rates the stock buy and whose firm hasn't performed any underwriting for the company. "Anything that is licensed will be gravy."

Analysts are expecting a loss of 10 cents per share for the quarter, according to

Thompson Financial/First Call

. Year-ago results weren't available.

So far, priceline.com has licensed its patent to

Alliance Mortgage

and

Budget Rent-A-Car

, a unit of

Budget Group

(BD)

, according to company press releases. priceline.com recently announced it would license the patent to an online grocer start-up called

Priceline WebHouse Club

. Analysts say they don't expect to see any substantial impact on the company's income statement until the fourth quarter at the earliest.

Details have been sketchy on how much revenue these deals will bring in. Outside of Alliance, which along with its affiliates will pay priceline.com $1.5 million for a license of an undisclosed length of time, no numbers are available. priceline.com wouldn't comment further on the licensing agreements.

priceline.com says it talked with Microsoft for eight months in hopes of working out a mutually beneficial agreement, including a possible joint marketing deal and licensing agreement. During that time, priceline.com provided Microsoft with confidential information. Then, priceline.com alleges Expedia launched its own competing service.

"priceline believes Microsoft is infringing its patents and is using other information that Microsoft got under the mistaken belief there would be a joint effort to work together," says Evan Chesler, head of

Cravath Swaine & Moore's

litigation department and lead attorney for priceline.com in its lawsuit. Microsoft couldn't be reached for comment.

On Oct. 13, priceline.com filed its suit, which also charges Microsoft with violating the

Connecticut Unfair Trade Practices Act

. priceline.com is seeking a permanent injunction, as well as actual and punitive damages.

Attorneys watching the case say priceline.com's chances of emerging victorious are good. "Given the breadth of the claim, it's not going to be tough to do," says Jordan Sigale, a patent attorney with

Sonnenschein Nath & Rosenthal

. priceline is protecting a patent that is "a piece of land larger than North America."

Microsoft's most likely course is to argue that priceline.com's patent on a method of business isn't valid. But in 1998, in a similar case between

State Street Bank

and

Signature Financial

, an appeals court held that business methods could be patented. In fact, two-thirds of patent suits where the defendant claims the patent stake isn't valid are upheld on appeal, estimates Mark Radcliffe, a patent attorney with

Gray Cary Ware & Freidenrich

.

The next step is in Microsoft's hands. The company needs to respond to the suit, and then there will be a discovery period, which stretches on for years, Chesler says. During that period, Microsoft is free to continue promoting its rival service.

And meantime, priceline.com will have the legal threat to any company that resists licensing its patent.