Priceline: A Net Monopoly No Longer?
Nothing thrills investors quite like a legal monopoly. That's one reason why priceline.com Inc. (page EB 30), with a broad patent on a method of auctioning goods and services on the Internet, rocketed up to a market value of $24 billion last April after only a year in business. The Stamford (Conn.) company's business model--letting consumers name their own prices for products such as airline tickets and hotel rooms in a variation of the "reverse auction"--promised to revolutionize the way people buy automobiles, mortgages, and dozens of other products.
And priceline.com has certainly gotten off to a stunning start. For the quarter ended June 30, revenues leaped 225%, to $111.6, from the previous quarter. But that was before the company had to meet the first major challenge to the patented techniques at the core of the company's business. On Sept. 8, Microsoft Corp.--apparently undaunted by priceline.com's vaunted patent protection--announced plans to offer reverse auctions of hotel rooms on Expedia, its Web travel site. Investors, who shrugged off earlier legal challenges, suddenly got scared Microsoft might wipe out priceline.com's head start. Priceline.com shares fell to 55 5/8 on Sept. 13, 67% off their high, before rebounding to 60 on Sept. 15 after priceline.com announced it had sold a record 50,000 airline seats in one week.
Were investors overreacting? Will priceline.com find itself pecked to death by clones, despite its patent? How well the priceline.com patent holds up could very well determine the answers. While the law allows companies to get patents on methods of doing business, intellectual property experts are increasingly skeptical that priceline.com's will hold up in court. Why? Because reverse auctions existed long before the Internet, and just transferring a selling technique to the Web does not necessarily constitute a novel invention, they argue. "I just don't see it standing up," says Greg Aharonian, editor of the Internet Patent News Service.
Priceline.com and Microsoft are mum about any potential legal conflict, but investors are clearly worried that the auction patent is vulnerable. "It's only the patent that is holding the barbarians at the gate," says James McQuivey, senior analyst at Forrester Research in Cambridge, Mass. "If not for the patent, what would priceline have to stand on?"
The company says that's nonsense. Any challenger will have to provide "clear and convincing" evidence that the U.S. Patent & Trademark Office made a mistake--a tough standard to meet. "Priceline has always had competitors," says founder Jay S. Walker. "What we haven't had is copycats."
TOUGH FIGHT. But if Walker feels so confident about the patent's validity, why has the company not taken on Microsoft? One reason, says New York intellectual property attorney Barry Rein, may be that the company could have a far tougher time proving its patent in court than it had at the PTO. For "a billion dollar market, [competitors] would turn over rocks to find" legal precedents invalidating the patent, he says.
Meanwhile, Walker is fighting a public relations battle to allay investor concerns. After months of boasting about his powerful patent, Walker is now trying to convince stockholders that the patent is less essential to the company's well-being. "What makes priceline successful is not one element," he says.
Still, the idea that Walker had a lock on the reverse-auction concept for e-commerce is what set priceline.com apart. Without it, it's just another online retailer. And when it comes to selling travel on the Net--84% of priceline's business--the company still trails some nonauction sites, such as Travelocity, which offer advice about hotels and sightseeing. If competitors now feel free to poach the reverse-auction concept, priceline's will be just one of the crowd. That's not nearly as appealing to investors as a monopoly.