Back in the early '90s, Heidi G. Miller bailed out of Chemical Bank to work for a struggling financial services outfit named Primerica and its charismatic CEO, Sanford I. Weill. It was a gutsy move at the time, and many of her co-workers probably thought she was nuts. Of course, she wasn't. Miller went on to become one of the top-ranking executives at financial supermarket Citigroup.
Now Miller is raising eyebrows with another risky move. Earlier this year, she abruptly quit Citigroup to become chief financial officer at priceline.com Inc., the hugely ambitious Internet company founded by entrepreneur Jay S. Walker. "It's much more exciting to me to grow a business than sit at the top," says Miller.
Miller, 46, may be in for far more hair-raising excitement than she had ever bargained for. The highest-profile hire on priceline's blue-chip management team, she needs to demonstrate quickly that Walker's patented "name your own price" system of selling airline tickets can be successfully transferred to groceries, cars, gasoline, telephone minutes, and a raft of other products and services. The Norwalk (Conn.)-based company is pumping such new lines with its loopy TV ads starring William Shatner, but it's far from clear how they will fare. Complicating matters, several airlines and hotels are studying whether to launch Web services that could cut the legs out from under priceline's established travel businesses.
Investors, initially thrilled by company projections that new products would double revenues this year to $1 billion, have been taken on a roller-coaster ride of late. Earlier this year, shares rose by 88%, to nearly 96, only to be caught in the market's e-tailing downdraft, with shares falling back to 75. Compare that with last May, when investor infatuation pushed priceline shares to 162.
Now, investors could be hit with another curveball. Although priceline reported 1999 gross revenues of $482.4 million, up from $35 million in 1998, investors could be tested further in coming months if new accounting guidelines force priceline to change the way it reports sales. On a net basis, priceline's revenues were about one-eighth the size of its gross last year.
"TOUGH LANDSCAPE." Certainly the arrival of several high-profile executives bolsters priceline as more than a Net fly-by-night. CEO Richard S. Braddock, a former president of Citibank, arrived in August, 1998. In the past year, priceline lured Miller; chief marketing officer Michael McCadden, who ran Gap Inc.'s online ventures as executive vice-president; and President Daniel H. Schulman, an ex-president of AT&T's consumer division. "We have assembled...the best management team on the Internet today," boasts William E. Ford, a partner at General Atlantic Partners, a venture-capital firm whose 12% stake makes it priceline's second-largest investor. Walker, its largest shareholder with 37%, now spends most of his time at Walker Digital, a think tank.
Even with all that talent, though, there's no guarantee that Wall Street's on-again, off-again love affair won't come to a crashing halt once and for all. Priceline could soon face stiff competition from its own suppliers. Hyatt, Hilton, Marriott, Starwood Hotels & Resorts, and Cendant--most of which sell excess hotel rooms through priceline--are having "serious" discussions about starting their own company to distribute over the Internet, says Hyatt Hotels Corp. Vice-President Peter D. Connolly. The chains worry that by handing sales to priceline, they could lose control of their customers. "If you don't participate in your own pricing, you're encouraging the commoditization of your own products," Connolly says.
Airlines could move in the same direction. Several industry sources say that David Bonderman, head of Texas Pacific Group and a major investor in Continental Airlines Inc., is actively considering starting a company with other airlines to sell excess tickets online. Bonderman was unavailable for comment. He'd have plenty of company. Honolulu-based Cheap Tickets Inc., which sells discounted airline tickets online, just launched a $20 million marketing campaign and claims it is selling almost half as many seats a week as priceline. "The landscape is tough [and] the margins are tight," says Cheap Tickets President Sam E. Galeotos.
To stay one step ahead, priceline needs to swiftly broaden its lineup. Currently, 90% of revenues come from airline tickets, rental cars, and hotel rooms. But priceline will get less than half its revenues from travel by 2003, estimates Lauren Cooks Levitan, an analyst at BancBoston Robertson Stephens. In March, the company began selling blocks of long-distance phone time to consumers. It plans to sell gasoline starting in May, issuing cards similar to those already used for buying groceries. Still to come: auto and life insurance, electronic gadgets, and co-branded credit cards. Priceline also plans to get into business-to-business and overseas ventures. By yearend, the company estimates, 10 million people will have bid for goods and services via priceline, up from four million in 1999. "We're looking at 18 new products," Miller says.
The new lines make sense where priceline can sell excess supply and where customers are willing to sacrifice brand and convenience to get a deal. "If the market has oversupply or perishability, priceline is perfectly suited," says Ford D. Cavallari, an e-commerce consultant with Renaissance Strategy in Boston. Long-distance outfits, for instance, have to sell their phone minutes now or lose the revenue.
And priceline has shown it can move aggressively to lock up new customers. In its grocery business, the company signed deals with 25 manufacturers to buy consumer goods below retail. Priceline makes its money off the difference between that discount and the store's retail price. Consumers sign up for a WebHouse Club card, which is free for the first three months and then costs $3 each month you buy something. Grocery items are displayed on priceline.com with several prices. The site spits out a list of agreed-upon deals, which you take to the store with your card. Priceline says that 450,000 people have signed up so far.
But to build the business, priceline promises to discount many initial purchases by as much as 50%. "They lure you in. It's very smart," says Henry M. Blodget, an Internet analyst at Merrill Lynch & Co. But will customers use the service as enthusiastically once prices bounce up? Blodget estimates priceline loses money whenever it discounts a purchase by more than 20%.
BURNISHED IMAGE. An even bigger problem may be that some of the new businesses targeted don't have excess supplies for priceline to sell at a discount. Priceline promises it will deliver savings of 10 cents to 20 cents a gallon on gasoline, for instance. But anyone who has been to a pump lately knows that gas supplies are tight. "There's no large inefficiency in this market," says Cavallari.
Even if priceline pulls off its expansion in all the areas targeted, investors could still be spooked if it decides it has to change the way it reports revenues. It now books the entire sales price of, say, an airline ticket. That has helped burnish its image as a fast-growth company. But priceline only holds the ticket momentarily before transferring it to a customer and pockets only the spread between the ticket price and what it pays airlines. If it booked that net instead of the gross figure, 1999 revenues still would have grown sharply, but to only $57.8 million.
The question of net vs. gross revenues is likely to become stickier in coming months. Worried that some Web companies are manipulating revenues, the Securities & Exchange Commission asked the Financial Accounting Standards Board to look into it. An FASB task force could issue tighter guidelines this summer. Task force head Timothy S. Lucas says he can't say if priceline might be affected. "There are some cases where practicing accountants agree it ought to be gross and some where [they] agree it should be net. In some cases, it's debatable," he says. "Priceline might be in that gray area."
Miller, and most analysts, dismiss the debate as little more than a technicality. "I wouldn't have come here if I thought this was an issue," she says. Still, any change by priceline in a momentum-driven market could unsettle investors, analysts concede. "If priceline were required to change its revenue recognition, we would anticipate a negative reaction from the marketplace because of fears of another MicroStrategy scenario," says Sara Farley, an analyst at PaineWebber, referring to the collapse of that software company's stock after it announced it would revise revenues and earnings.
Execs at priceline say there's no comparison and that they're building a broad-based discounting powerhouse. "The strength of our brand is the No. 1 insulator," says CEO Braddock. Miller is reminded of her previous employers. "Given what I've seen so far, I believe [priceline] can be a huge company worldwideas big as Citi," she says, adding coyly: "I won't tell you when." Up to now, investors have felt a little like priceline customers: From day to day, they never know what price to expect. Meantime, there's no guarantee priceline can deliver the goods on its grand plan.