[RealMoney.com] Priceline's Warning Predictable; Danger Ahead, Will Shatner!

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From: Linda (joelinda1@home.com)
Date: Wed Sep 27 2000 - 18:44:23 PDT

[Priceline's earnings warning brought all 'Net stocks down today,
CMGI of course included. The incubators in particular sold off on
high volume. If there is any bright side to this, Jeff, have a look
at the intraday chart for CMGI. You'll see huge volume buying of
CMGI stock in the last half hour. This most likely represents
institutional buying +/- short covering; regardless, this is a
positive sign. ICGE's intraday chart does not show this, and SFE's
does to a much lesser degree. If this represents institutional
buying, it should help to stop the bleed. No predictions, though;
I don't think any of us ever thought CMGI would get this low.

Priceline's stock closed at 10 3/4 today, a 43% drop. No doubt this
hasn't been the best news for Saudi Prince Alaweed bin Talal,
who just weeks ago agreed to an investment of $50 million in this
company plus a forward contract to buy 2 million shares of common
stock from founder Jay Walker, at $25/share. OTOH, since he ranks
5th on Forbes "World's Richest People List" with a net worth of
$20 billion, he's probably not losing a lot of sleep over this :)



Priceline's Warning Predictable; Danger Ahead, Will Shatner!
By Jim Seymour
Special to TheStreet.com
9/27/00 9:52 AM ET

The priceline (PCLN:Nasdaq - news - boards) blow-up
this morning is maybe the least surprising in this grim season of
endless warnings and bad quarterly reports.

My mail is full of complaints from priceline customers, who say that
(a) the service was once worthwhile, in the early days (especially
when it was partly subsidized by priceline, which would do things
like eat an unrevealed $25 further discount off an airline's low
bid for a seat, to build the business), but has gone to hell; or (b)
they aren't getting what they think they're buying.

To be sure, there are also notes about good experiences ... but
the bad outweigh the good by at least 10 to 1, maybe more.

And then there's the business model.

One of my worries about the future of the Web is that overall it
becomes not much more than another force toward devolution in product
and service quality -- that is, the cheap drives out the good in the
market, as people use the Web as a powerful tool for always finding
the lowest price, no matter what.

priceline pushes that along ... but that's inevitable: If they weren't
doing it, someone else would be, so I can't complain about that. And I
use shopping bots and other techniques for finding low prices on the
Web, so I don't want to come off as a hypocrite.

But for its shareholders, focusing entirely on the "low-low-LOWEST
price! Always!" also heads priceline down what looks like an
increasingly marginal path.

By expanding out of the discount airline seats market to other travel
needs, and to gasoline, groceries and more, priceline wants to be
seen as bringing its vaunted reverse-bidding process to a wide variety
of consumer needs. In fact, it seems to me that priceline is already
overextending itself, not only growing faster than both its capital
and market demand would reasonably allow, but also testing -- and
destroying -- its business model in areas very unlikely to produce
long-term success.

Now priceline says revenue from airline ticket sales will be off
$20 million to $25 million in the third quarter, from the second
quarter's results. And overall, gross revenues, generally forecast
at around $380 million, will be down to around $340 million to
$345 million. priceline says its nonairline sales will be up about
20% this quarter, but I'm skeptical of that number ... at least on
a quality-of-revenue basis.

While probably 85% of my reader mail complaining about priceline's
airline-ticket sales and service is negative, virtually all the
notes about its gasoline sales and grocery sales are sour. priceline
customers consistently tell me buying gas "the priceline way" is
inconvenient and produces only trivial savings. And the company's
grocery shoppers say they're tired of having to, in effect, pay
twice when they check out -- one time for the priceline-ordered
stuff, again for the additional items priceline doesn't offer and
for which they therefore have to pony-up at the store's regular

They also feel, in the words of one RealMoney.com reader who has
written me frequently about his priceline woes, like they're
"living in Generic City," since priceline grocery shoppers often
don't get to specify brands.

For a certain kind of customer -- no insult intended -- priceline
is probably just fine. But for the larger market, where PCLN must go
if it is to hit the kind of huge revenue numbers it needs to support
its stock price at nearly any level it has hit over the past year
-- from more than $100 to down in the midteens this morning, after
dropping 5-plus in overnight trading on Instinet -- priceline is
going to have a hard time, indeed, justifying a big market-cap by
selling in areas where its business model may not be well-suited to
market realities.

And only to customers in a relatively thin slice of the U.S.
demographic makeup.

Jay Walker's a smart guy, with a lot of great ideas and the chutzpah
to pull many of them off. And, despite the falling stock prices,
a nice bank account at CMGI (CMGI:Nasdaq - news - boards) and its
progeny. But even smart guys can miss, and I think Walker will be
eating a lot of crow before he can turn this one around.

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