Name your problem at priceline

Gas, grocery shutdown just latest woe for site

William Shatner's offbeat commercials for took the site where no online auctioneer had gone before, but the company's stock has fallen from a high of $165 to less than $6 per share - a cautionary tale for would-be electronic retailers, say analysts.

In the past month, Norwalk, Conn.-based Inc. has found itself kicked out of the Better Business Bureau of Connecticut for a failure to respond to customer complaints and under investigation by Connecticut's attorney general. The investigation is exploring whether Priceline has fully and accurately disclosed product terms, prices and conditions.

In the past four months, Priceline's stock has fallen from $40 per share to $5.81 on the Nasdaq ticker, as of yesterday. Also yesterday, Priceline announced it was shutting down its grocery and gasoline sales operations (See story).

Analysts fault the company for thinking low prices and glitzy packaging alone would pave the way to profitability.

Approximately 70% of Priceline's business comes from the sale of airline tickets. Airlines sell their difficult-to-move seats via Priceline at rates below their usual published fares. Yet Priceline often requires travelers to make multiple connections or fly at undesirable times to achieve those savings.

Customers must also agree to buy a ticket at a given price before they know the airline or time of departure.

"In the process, it's almost become a nefarious brand name," said Henry Harteveldt, an analyst at Forrester Research Inc. in Cambridge, Mass.

He said Priceline's focus on letting customers name their own price has neglected customer service. "You have to support what you sell, and Priceline's been weak in that area," Harteveldt said.

Krista Pappas, an analyst at Gomez Advisors Inc. in Lincoln, Mass., said Priceline may have capitalized on the first wave of Internet commerce, but it failed to keep up with the pace of innovation.

"New business models have come along, and now Priceline's sort of dated," she said. "You don't live long on the cutting edge these days."

One of those business models is San Francisco-based, a beta site due to launch by month's end.

Hotwire is owned by many of the airlines that have been selling via Priceline. Harteveldt said he believes those airlines will gradually reduce the number of seats they make available to Priceline, leaving it struggling to deliver products to its customers.

Priceline spokesman Brian Ek said the company still intends to expand into new markets, including business-to-business auctions and insurance. He also said the company believes it can retain a strong customer base because people surfing the Web for tickets will always stop at Priceline to see if it can beat their best price.

"Ultimately, what's going to carry the day is going to be brand, and who's got the brand?" Ek said.

Yet Fay Landes, an analyst at New York-based Sanford C. Bernstein & Co., said she thinks that Priceline's business model has it skating on very thin margins. "How are they ever going to make money off of cheapskates?" she asked.

Priceline went public in April of last year, and its stock was trading at $165 per share within a month. The company built its name on innovation and consumer-driven pricing. Yet, Harteveldt said, "their time in the sun is over."

He said Priceline can right itself and chart a course to profitability, but "the ongoing livelihood of the company is going to depend on the business decisions they make" over the next year.

Heath Terry, an analyst at Credit Suisse First Boston in San Francisco, said Priceline needs to redefine objectives when it makes quarterly earnings public Nov. 2.

"Investors need to know that management has plans. Are they going to focus on travel, or are they looking to expand?" he said. "But they'll need to see something more than what's there at the moment."

Copyright © 2000 IDG Communications, Inc.

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