BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESS WEEK E.BIZ -- CLICKS & MISSES

Priceline: Going...Gone?
To assess the auction site's future, we used its services--with mixed results

Priceline, we hardly knew ye. Only yesterday--O.K., in April, 1999--its stock was selling for $162 a share, cheered on by analysts who are now implausibly posing as aggrieved investors. At $4.53 a share, people are writing it off. But has anything really changed?

There are two ways to find out: You can believe conventional wisdom, or you can use Priceline.com Inc.'s ( PCLN) Web service and see if it's any good. Before I did the latter, I had two questions: Can it be a big travel agency? And can Priceline's famed name-your-own-price business model attract buyers of cars, long-distance calls, and other stuff too? If one answer is yes, Priceline.com is worth more than $4.53 a share. If both are true, it's worth a lot more. If neither is true, look out below.

Priceline's travel agency works--for some people some of the time. But the service isn't good for much else. When I shopped for long-distance minutes and cars, I didn't like my results. And when I looked at using the company that powers part of Priceline's mortgage lending when I bought my house in February, I decided not to use them. The mortgage market is so efficient that Priceline-like systems have trouble beating locally available rates. Priceline works best in markets like travel where market price information is extremely hard to get and to understand. These are my stories:

Travel: I used Priceline to arrange a last-minute business trip to San Francisco and a quick jaunt to see my in-laws in Florida. Out west, I shopped for a hotel. For Jacksonville, Fla., I just checked flights. In both cases, Priceline delivered great prices. In one case--Jacksonville--it also delivered the headaches it's famous for.

Priceline came up with $90 a night for a Wyndham hotel in San Francisco --a dirt-cheap price for the area, especially on short notice. When I last went to Silicon Valley, I ended up in Half Moon Bay, on the other side of the mountains, paying $149 for a motel. If this were my own money, well, a difference of $60 a night is a lot of money. It should be noted, however, that Expedia's Hotel Price-Matcher service did arguably as well--delivering a $99 room closer to where I wanted to be.

My airline ticket deal was equally cheap, but at a greater cost in convenience. First, I went for a flight out of Newark, N.J., near my home. I bid $110, then $135, and no airline bit. Before I could bid higher, I had to change something about my offer. Priceline's too smart to let you nibble them until you get just the deal you want. I had to agree to fly out of either Newark or LaGuardia Airport, which is on the other side of New York from my home. Boom: At $160, I could get there from LaGuardia. But, as in all Priceline deals, I was locked in: Priceline demands that you give your credit card in advance and agree to take whatever flight they can find at your price. In contrast, Travelocity.com served up fares from Newark that started around $240--with no lock-in.

This is ammunition for both Priceline lovers and Priceline haters. Yes, $160 on short notice at this time of year is seriously cheap, but getting to LaGuardia from my house in Jersey is seriously painful. Plus, my return flight was at 6:30 a.m., blowing a day at the beach. My experience underscores the idea that Priceline is a service for some of the people some of the time. It's best for those who have time on their hands and are willing to be extremely flexible, especially students. As a college student, I would have taken that fare and laughed all the way through 90 minutes of mass transit to LaGuardia. (College kids have a name for this: Road trip!) Now that my time costs money, I'd probably pay the $80.

Long-distance Service: Priceline faces an inquiry by Connecticut regulators into complaints that some of its come-ons are deceptive, and the way it markets long-distance service is a pretty good example of why. It gave me my price, but without clearly telling me I would get Internet phone service instead of the traditional kind until after I bought a bunch of prepaid long-distance minutes at 4 cents a pop. The service comes from Net2Phone ( NTOP), an Internet phone carrier. Phone calls via the Internet are typically of lower sound quality than calls on the traditional networks. Worse, I discovered that I could have bought the same minutes on Net2Phone.com's own site for 3.9 cents each, and without the auction rigmarole. I'm also not sure that Priceline gave me a fair comparison with other service providers. Priceline compares its rates to AT&T's ( T) base rates, but those rates are goofily high and paid mostly by people who pay no attention to pricing or barely use their phones.

My experience argues that Priceline will never be big in long distance. The price of long distance is falling too fast, and consumers have plenty of info about where to get the best deals. Name-your-own price works in travel because people don't understand complex hotel and airline yield-management schemes that produce a wide variance in the prices paid for the same flights or rooms. Everyone understands long-distance plans.

Cars: On first glance, cars seem like the perfect Priceline product. What's the difference between ''name your own price'' and a dealer asking: ''What will it take to put you in this car?'' But in fact, Priceline doesn't offer huge advantages. That's partly because cars aren't a ''perishable'' product like airline seats. Dealers can always find somebody else to sell a car to.

I tested the system on two cars: a Ford Taurus and a Honda Odyssey. My bids below sticker price for an Odyssey were all rejected. And I stopped there. But this doesn't reflect badly on Priceline, in particular. There's a lot of demand for the Odyssey and dealers are holding firm on pricing. Greenlight.com and CarsDirect.com quoted me $1,000 over sticker. So did my local dealer.

Worse, the dickering over the Taurus devolved into the same stuff people always do with car dealers--and hate. Instead of a they-take-your-price-or-they-don't deal, I got counteroffers. I could have a car close to the one I wanted for $300 more than I bid, or I could wait four to eight weeks for one with side air bags, and so on. I can get that on Route 22, the infamous Jersey car-dealer alley. And Priceline, unlike dealers, charges $100 every time a dealer meets my price but I decide not to buy the car.

Back in this company's heyday, when the market valued Priceline at $25 billion, investors thought it would be a huge travel agency and mega-car dealer. The closing of Priceline's WebHouse Club affiliate, which let people bid for groceries and gas, made analysts doubt the second part of that story. A slowdown in airline ticket sales growth the last two quarters has done the same for the travel business. The travel problems may be temporary, but some of the other problems are tougher to handle. When it comes to long distance, cars, and the like, the product is nothing special. And that may be unfixable.

By TIMOTHY J. MULLANEY, tim_mullaney@ebiz.businessweek.com

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