The Priceline Model Is Right - Or Is It?

Priceline.com (Nasdaq: PCLN) has been working hard to improve its customer service and find the right product mix, but analysts still disagree about whether the "name-your-own-price" e-tailer has a business model that will succeed.

"I don't believe Priceline (Nasdaq: PCLN)has a long-term business model," Jupiter Media Metrix analyst Jared Blank told the E-Commerce Times. "I don't see them as a long-term player in the travel market."

On the other hand, Legg Mason analyst Tom Underwood, who used to work for Priceline, does not believe Priceline is going to drop out of the Internet travel game.

"I don't see any problems that would lead to their demise," Underwood told the E-Commerce Times.

Priceline spokesperson Brian Ek points to Priceline's first-quarter results as proof that the e-tailer is on the comeback trail. According to the company, Priceline's first quarter gross profits rose 23 percent compared to the fourth quarter of 2000, to $43.1 million. Additionally, the company's net loss of 3 cents per share beat analyst estimates of a loss of 5 to 7 cents per share.

Shaky Ground

Nonetheless, the debate over Priceline's long-term prospects persists. According to Blank, Priceline makes money because a certain percentage of customers overbid on airfare and pay more than they would through other sites.

"I don't believe relying on the naivete of customers is a long-term business model," Blank said.

According to Underwood, however, fewer than 5 percent of Priceline's customers overbid on airfare.

"There is an opportunity for consumers to make trade-offs, that's what Priceline relies on," Underwood said.

Information, Please

Underwood also pointed out that consumers making hotel reservations are told up front the average rate for the class of hotel they are bidding on.

"It would help if Priceline could find a way to help consumers not name prices higher than retail," Underwood said.

However, he classified the problem as a minor software glitch and not a fundamental flaw in Priceline's business model.

Not for Everyone

Despite their different assessments of the company, Blank and Underwood agree that Priceline's services are not for everyone. Priceline's tickets are nonrefundable, and moreover, consumers agreeing to purchase tickets through the site are locked into buying flights before they know the travel schedule, and often end up flying at inconvenient times with multiple transfers.

"They seem to have a core group of loyal users who like to use their services," Blank said.

Yet, Blank added, Priceline rival Hotwire.com offers customers similarly priced airfare (*correction).

Underwood agreed that not everyone can take advantage of Priceline's deals on airfare due to scheduling issues. However, Underwood pointed out, Priceline also offers discount hotel and rental car reservations that can be used even by people with "inflexible, busy schedules."

Rocky Relations

Priceline is also still recovering from what Blank called "unbelievable customer service problems."

The Connecticut Better Business Bureau (BBB) expelled Priceline in September, after reportedly receiving more than 300 complaints about the e-tailer, ranging from misrepresentation of services to failure to make promised refunds.

Although the BBB reinstated Priceline in December, consumer complaints also sparked an investigation by the Connecticut Attorney General Richard Blumenthal.

"I think the company has had customer problems to the extent that consumers don't understand the business model," Underwood said, adding that those problems will lessen as consumers come to understand how Priceline works.

Staying on Target

In addition to customer service problems, Priceline had to pull back significantly on planned expansions last year. The company scuttled plans to introduce its services to Australia and New Zealand and canceled a planned expansion project in Japan.

Priceline also postponed the launch of its life insurance and cellular phone services in order to concentrate on growing its core businesses.

When Priceline did try to change and branch out, the attempt did not meet with much success , according to Blank.

"They will forever be known as the 'name-your-own-price' e-tailer," Blank said.

Air Supply

Blank and Underwood agree that the online travel market is poised to explode, but the two disagree on how big a role Priceline will play in that explosion.

Underwood acknowledged that competition from Expedia (Nasdaq: EXPE) (Nasdaq: EXPE) and Travelocity (Nasdaq: TVLY) was a concern, but discounted Hotwire's threat. He said that even though Hotwire offers similar airfares, it does not have the "the same breadth of suppliers" as Priceline because it is not as supplier-friendly.

However, Blank believes that the crowded field of Travelocity, Expedia, Hotwire and Orbitz (NYSE: OWW) -- the recently launched travel mega-site -- spells trouble for Priceline, because all of its rivals offer a simpler way to buy airline tickets.

"As customers are getting wiser, fewer of them are willing to jump through the hoops that Priceline requires," Blank said.

*Editor's Correction Note: In the original version of this article, we reported that Priceline rival Hotwire.com allows customers to see their flight times and routes before paying for tickets. In fact, Hotwire does not allow customers to view flight times and routes before paying for tickets.