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Q&A with Jay Walker September 16, 1999 "It's a Completely New Way of Buying" Priceline founder Jay Walker explains the whys -- and hows -- of his Net business model Jay Walker is the founder of priceline.com, which launched in April, 1998. His patented system allows users to name their own price for a service and, in return, agree to trade off flexibility in brand and timing. Diane Brady, Business Week's Connecticut bureau chief, recently interviewed Walker about his business model. Edited exerpts follow: BW: A lot of sites now allow customers to bid on price. What makes your concept so different? Walker: The priceline system is a very unusual system. At its core is a trade of flexibility for savings. In the past, you had no way to tell a seller, "Look, I'm flexible in this way and, in return, will you give me savings of X?" It wasn't possible. You couldn't call up Delta and say you'd fly Delta or American to get the best price. In the Net, it's very practical to do that. In the past, you might say to the seller, "Now what's my price?" Now you can say, "Let me tell you what my price is for being flexible." It's a completely new way of buying. BW: Do you feel that others are starting to move into your turf? Walker: You are always going to have people who copy things that work. That's not going to change. The more successful priceline is, the more you can expect to see people copy elements of it. But what makes priceline successful is not one element. It's sort of like copying somebody else's garden. You can't copy just one plant. BW: So you don't feel threatened by others coming into the mix? Walker: Most companies that are growing at our speed don't spend a lot of their time looking over their shoulder. You spend most of your time focused on what makes the thing work. Am I taking care of my customers? Am I adding value? Am I improving my functionality at all times? Those are the things that count. Whether or not somebody is starting 400 laps behind you isn't the issue. I'm not saying you don't pay attention, but 95% of your energy is spent on your own business. BW: How can you have a defined strategy for the Internet when things are moving so fast? Walker: The Internet compresses all the time horizons quite dramatically. Whereas a normal product cycle might be two or three years, the Internet has no two- or three-year time horizon. But, then again, neither does a Broadway show. Neither does a sports team that suddenly finds itself in third place when it was first two weeks ago. There are plenty of analogs in the real world that have very accelerated product cycles. BW: So what's your strategy? Walker: You hear Jeff Bezos talk about his complete maniacal focus on the customer. That's his strategy. Our strategy is to provide the customer with a compelling pricing alternative. We also want to make it simple and fast. Our strategy is to get you off our site as quickly as possible. Others want to keep you there as long as possible. We're more like an ATM machine. The last time I went to my ATM machine, I didn't want stickiness. I didn't want to hang around. Your strategies transcend the Net, per se. They incorporate things the Net can and can't support, but your strategies are driven by growing the value proposition. Most successful Internet companies are more focused on doing their business than on dealing with the Net. BW: How did you come up with the concept of priceline.com? Walker: Six years ago, I started Walker Digital with the goal of bringing together technologists, marketers, and attorneys to reinvent certain key elements of what we thought the future of business would be. I believed strongly that genetic engineering was about to come to the business world. Until then, it had been about genes. But the base pairs of the DNA of business were, for the first time, accessible and recombinable. You could assemble a business method that looks unlike any business method before because we now have tools to reassemble the information layer of society. You can redefine how you genetically tackle a problem. BW: Did you see this system as ideally suited to the travel industry? Walker: We saw it as a pricing system. We have over 20 patents pending on different ways of using this type of pricing system. NASDAQ doesn't care if it's pricing a pharmaceutical stock or a steel stock. Its system works for every stock in that market. The same is true for us. But we started with the airline industry because we felt it had the largest spread between the lowest and the highest price paid on each plane -- and yet has half a million empty seats each day, domestically. There's an industry that could really use our system. So we went and called on every airline and, when we started, they universally told us to go away. They didn't initially believe we could sell airline tickets without the customer knowing the brand. That's a fairly industrial mindset: People aren't going to fly without knowing what airline they'll be on. Why? Because they never did. And then we were going to tell them when to fly, so you can fill your seats all day. They couldn't believe that, for enough savings, people will make enormous trade-offs. Because fluid pricing systems have rarely existed on the consumer side, people didn't think it would work. BW: How do you think the existence of priceline.com has changed the industries you sell? Walker: I think the biggest impact we've had on them is on their imaginations. For the airlines, we sell between 5% and 15% of their empty seats every day. So that has a real impact. It shows these industries that you can price things a whole new way. This Internet thing allows you to solve problems in an imaginative new way. I think you're going to see these industries become more imaginative in motivating people. Priceline has opened a lot of eyes about unique and novel ways to price. E-bay has done that in a different way. They opened a lot of people's eyes to the idea of having auctions. But an auction is a very limited pricing system. It forces buyers to compete against each other for a particular product. Sometimes people call priceline a reverse auction. We are not an auction. There's no competition here. The price isn't set because you and I are fighting over something. BW: Do you see any industries where this wouldn't work? Walker: The answer is generally no. If you're asking, is there any marketplace in the current commercial world where buyers are not willing to be flexible for significant savings? I don't think there is. Even in life-saving medicines, people will be flexible to save money. Some people won't take FDA-approved pharmaceuticals so they can take over-the-counter remedies or herbal remedies that are a lot less expensive. What many people who are affluent fail to appreciate is that most of the world is on a budget. The reason people clip coupons to save 30 cents and the reason why they wait until something is on sale to buy it is because they need to save money. They'll be flexible between brands to save money. You don't even have to be flexible between brands. If you're willing to buy a Ford Explorer from any Ford dealer, then you're flexible. If you're willing to get a mortgage at certain rates, you don't care who gives it to you. Is there any market where flexibility isn't traded for price? Of course not. There are limits. You might be very flexible in who delivers your long-distance service but less flexible on what type of fragrance you wear. But you might have three fragrances you will wear. BW: How big do you want to be in the next five years? Walker: We believe priceline is going to be a very large company. We believe we can serve tens of millions of customers in dozens and dozens of categories -- both consumer and business-to-business transactions. We believe our pricing system has broad extensibility, and we are committed to delivering that extensibility. We think the market's valuation is a direct reflection of that. It has nothing to do with travel. Some people think we're some airline ticket seller. That's not what we do. It's about whether or not we can profitably and intelligently grow this pricing system. Over the last quarter, we added 850,000 customers, and I think we added 40 new employees. There aren't many businesses in the world that can do that. The Net and pricing systems specifically on the Net are extraordinarily scalable. What makes Net businesses so exciting is when they are fully Net-enabled, they are radically scalable, explosively scalable. Look at Yahoo. Look at America Online. We believe strongly that priceline is explosively scalable. BW: You mentioned the market's valuation of priceline. Your stock is off a lot from its $165 high. What do you think is going on there? Walker: Fortunately, I'm not in the equity valuation business. I think the market is responding more to fashion than fundamentals at the moment. Priceline isn't worth 50% or 60% less than it was worth at some imaginary high, and it may not have been worth -- at that imaginary high -- what it was worth six weeks earlier. I think the market is desperately looking for a way to pick the winners from losers and desperately looking for a way to explain both the potential of the Internet and its immaturity. There are times when the potential faction wins and times when the immaturity faction wins. You can't spend your time trying to figure out why the market is what it is at any given moment, but there is a general belief that the Internet and the Information Revolution is a fundamental revolution. That's a statement about the bedrock of the commercial world. The people who are buying equities for the longer term are not fazed by the fashion trends. The people who are traders, who are looking at numbers on the roulette wheel, will come and go with the cycles. BW: When do you expect to turn a profit? Walker: The analysts are saying 2001, and that sounds fair to us. I think investors are looking at the future. The cable industry didn't turn a profit for how many years? When you build an oil platform to float in the ocean, it doesn't turn a profit for four to six years. Investors have long time horizons when they understand the business and have confidence in the management. They need to have confidence in the sustainability of the business model. BW: One thing that intrigues me is the rush among Internet companies to bring in mainstream old-style CEOs. You have Richard Braddock, who built his career at places like Citibank. Why bother if your model works? Walker: It's more critical than ever. One of the challenges of growing a hypergrowth company is that you have no time to react after the fact. It's too late when your cycle is down. It's too late when you can't handle the customer volume. It's too late when you're not prepared to deal with the crush of success. Entrepreneurs, which is what I am, are used to creating ideas, assembling resources, and launching new businesses. That is very different from the person you want at the helm, who is managing the hypergrowth. For that, you ask, where can I find someone who has had a million new customers in a quarter? The answer is Citibank or AT&T. They know what it means to add that many people in a quarter. They know the kind of people they need in senior management who will be nimble enough, smart enough, and yet have enough depth to manage that hypergrowth. You need people who aren't going to learn on your dime. It's hard for somebody to get 10 years' experience in your next quarter. You need a Rick Braddock who can recruit from the brick-and-mortar world folks who have 30 years' experience and the flexible mindset to manage this kind of growth. BW: Have you had any disappointments in this whole process? Any weaknesses you'd like to iron out? Walker: We have a lot of challenges. Our biggest challenge at priceline is to operate a business that's in hypergrowth and, at the same time, develop the new business products that know we can have. You're not used to having architects on the space shuttle. We have a whole part of the space shuttle filled with people planning for the next rocket ship while we're going at 15,000 miles an hour. It's been a serious challenge to have teams of people working on new product in a company that's growing 100% quarter-on-quarter. In terms of customer satisfaction, all businesses that grow at this speed have to constantly reinvent how they serve the customer. Now we get almost 40% of our first requests filled. The complaint that people have tried priceline and didn't get their bid rings a little hollow. It's like saying they tried eBay and didn't win the auction on the first bid. Did you try again? 98% of priceline customers say they'd use us again and recommend us to a friend. It's free. We give people answers in an hour. We treat people fairly. They come back. It's easy to criticize companies, especially ones growing at our speed. All I can say is that we're 15 months old. We're not done. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Movers & Shakers: "Jay Walker: The Priceline Mogul Races for New Markets" LVMH's Arnault: "I Don't Think E-Commerce Will Replace Traditional Shopping" Amazon's Bezos: Nurturing a New Species of Business Webvan's Louis Borders: "We're Building the Last Mile to the Consumer" AOL's Case: "At the Epicenter of the Revolution" Minority and Women Executives: Can E-Biz Become as Diverse as America? Morgan Stanley's Mary Meeker: "Playbooks for the Evolution of Internet Businesses" Priceline's Walker: "It's a Completely New Way of Buying"