Analysis of Priceline

Priceline Inc. is an online travel booking site that helps customers worldwide purchase airfare, hotels, rental cars, and much more. The three categories I chose to analyze are business model and strategies, business finances, and expansion of the company through acquisitions. For Priceline to have success, I believe the business model and how the company builds its model is extremely important. Next, it is crucial that we look at the finances of the company to ensure it is profitable. The finances of the company are tied to the various acquisitions Priceline has acquired in the past few years.

By looking at the companies Priceline has acquired, I strongly recommend investing in Priceline based off of the record earnings posted by the company. Not only is Priceline profitable, the corporation also has an unique business strategy to make money. When assigned this paper, I began to use databases and Factiva to search for information about Priceline. I used the information found from databases and used them as research to support my report. I then researched Priceline’s marketing techniques as well as stock prices in order to elaborate on the company’s finances. Finally, I learned about the companies Priceline has acquired over the years to expand its market presence. To figure out the formatting and structure of this paper, I used other people’s reports as guidance.

Introduction

Priceline’s business model includes value proposition of connecting vendors and customers. It consists of a revenue model where there are transaction fees and spread earned by the company between vendor and customer price. Launched in 1998, Priceline Inc. does not directly supply travel services, but rather they bring buyers and sellers together to complete a transaction. Priceline saves consumers money by trading travel flexibility of brands and product features for sellers’ lower prices. Business Model and Strategies

Ever since the development of the internet, dot-com companies have been booming left and right. One of those companies founded during the dot-com boom was Priceline Inc., an online travel booking site that revolutionized the way consumers purchased air tickets, hotel rooms, rental cars, and much more. Priceline Inc. developed and innovated a new system of “Name your own price” for customers to finalize their travels. They were able to turn excess inventory otherwise not sold by the airlines to consumers while at the same time price discriminate in order to maximize profits. In the airline industry, it is estimated that only 65% of the seats on a plane are occupied on a daily basis.

Airlines definitely were looking a way to vend the rest of the inventory. However, they could not advertise these excess seats with special discount because in doing so, it would destroy its retail fare structure. Priceline was the solution to this as they are able to help shield airlines branding in two different ways. First, when consumers try to name your own price on Priceline, they must choose travels between two cities. In this case, the airlines’ branding and product configurations are protected as customers have no idea which airline they will be selecting. Only after a bid is accepted will they learn their exact flight information and itinerary. Secondly, Priceline protects those who are considered free riders. These are people who would receive the benefit of a discount but they are already willing to pay for an air ticket at a higher price (Eisenmann 47-48). Name Your Price Guarantee

Figure 1.1

Source: (Priceline.com)
Revenue Generation:
Priceline is able to effectively generate revenue one of two ways. First, it calculates a spread between the lowest prices offered by the Airline partner and the highest prices a customer is willing to pay. In this scenario, neither party the airline partner nor the customer have the option of knowing the asking price or the bid price. A customer has no idea what unpublished rate the airline is offering. Only Priceline would have this secret information. On the other hand, the airline does not get to see how much the consumers bid on the air ticket. For example, if a customer bids $300 on a ticket from LAX to JFK and the lowest unpublished rate for any given airline is $200, then the spread would be $100, which Priceline retains as its earnings. As seen from this model, profiting from the spread is highly successful given the economies of scale from customers (Eisenmann 47-48). Adaptive Marketing and Cross Subsidy:

Furthermore, Priceline also offers consumers to bump up their bids by participating in “adaptive marketing” and “cross-subsidy” promotional programs. For instance, Priceline could add $50 to an existing $100 bid to make it more likely that a ticket will be sold if one signs up for a credit card. If that is the case, the credit card company may pay Priceline $75 for every referral that signs up for the card. In this case, Priceline would simply pocket the difference. If the asking price for the ticket was already under $100, then Priceline would keep all of the money coming from credit card sponsorship (Eisenmann 48).

Business Finances
Early Stages of Priceline:
At the beginning of year 2000, Priceline had a market share of 3% of all airline tickets sold in the U.S. Attracting over 3.8 million unique visitors, Priceline sold tickets for all eight domestic airlines as well as 20 international carriers. One year after its establishment in 1998, Priceline’s revenue was $482 Million in 1999 and $1 Billion in 2000 (Eisenmann 48).

However, the dot-com bubble would halt Priceline’s success only temporarily. 1999 was a tough year for Priceline as it stated a $1.1 Billion loss on its financial statement. Stock prices plunged from $974 to $7 a share. According to Walker, “there was a credibility issue” within the organization and investors did not completely trust the dot-com industry. Priceline’s financials would improve slowly. In 2002, Priceline reported a net loss of $19 Million. When CEO Jeff Boyd took over the company in 2002, Priceline stocks had suffered one of the worst drops in its brief history. But soon enough, Priceline was able to make a turnaround when it introduced William Shatner as the negotiator character out of the blue to help consumers save money. Instantaneously, people remembered the advertisements put up by Priceline and associated with Shatner, a former Star-Trek star’s self-parody. William Shatner

Figure 1.2

Source: (Thepenaltyflagblog.com)
From Loss to Profit:
Priceline started making a profit in 2003, but it wasn’t until 2004 and 2005 when Boyd bought two European hotel reservation sites—the U.K.’s Active Hotels and Amsterdam-based Booking.com that Priceline hit a turning point. “Priceline’s earnings growth and stock market success since then have been attributable largely to those two acquisitions—Booking.com in particular. It would be tough to argue that there’s been a better acquisition in Internet history,” says Thomas White, an analyst at Macquarie Securities. “It’s why the stock has been such a home run,” says White.

Thomas White and Barclays’ DiClemente would agree that investors lack the knowledge that most of the revenue come from overseas. Since Europeans have many more vacation days as Americans, it is not surprising that more revenue is inflowing from Europe. Jeff Boyd, the CEO of Priceline, was smart about targeting such a market in Europe. “Moreover, the growth of discount airlines in Europe such as EasyJet and Ryanair have increased the popularity of “city breaks”—the European equivalent of a weekend getaway,” states Birger. Earnings Report in 2012:

In 2012, Priceline continued to post better than expected earnings reports. In the third quarter of 2012, Priceline reported third quarter revenues of $1.71 Billion, up 17.4% from a year ago in 2011. Also, Priceline beat the estimate of $1.65 Billion projected revenue determined previously by analysts. Non-GAAP profits stood at $12.40 a share, ahead of the estimate of $11.81 a share. Gross bookings came in at $7.8 billion, elevated 25.2% from a year ago. For quarter four in 2012, Eric Savitz of Forbes magazine states “Priceline projected revenues to be up 21-28% or 22%-29% in local currency; revenues are expected to improve 15%-22%, with non-GAAP profits of $6.12 to $6.57 a share. Consensus has been for $6.34 a share.”

Continuous Growth:
In the mean time, CEO Jeff Boyd continues to have high hopes for Priceline. “Globally our hotel business grew room nights by 36% over the same period last year, compared to 39% growth in the second quarter,” he said. “Our rental car business grew rental car days by 35% over last year, an acceleration from 29% in the second quarter, led by improving results
at Priceline.com and continued strong growth from Rentalcars.com. While we remain concerned about economic weakness across Europe, Asia and the U.S., the [company] intends to focus on solidifying its position as the world’s largest and most profitable online hotel reservation service by continuing to add hotels and other accommodations and better servicing our customers through constant innovation in our mobile and desktop sites.”

As promised by Boyd, Priceline continued to show tremendous growth. On November 1st, 2012, Priceline stock was up $12.22 in regular session trading and jumped another $52 a share in after-hours trading to close at $638.95 (Savitz). Since then, Priceline sustains its momentum by reporting record earnings in the preceding quarters. Today, stock price for Priceline is even higher than few years ago. It currently trades at over $1,000 a share and constantly out competes against their rivals Expedia and Orbitz (Birger).

10 Year Graph of Priceline (PCLN)
Figure 1.3

Source: (Yahoo Finance)
Acquisitions and Expansions
Booking.com:
Priceline is on track to make a very good move because it is believed that the online travel reservation market still has room for expansion in Europe. Priceline typically takes 15% of every transaction done on Booking.com; in return, the hotels have a much better chance to market and advertise to potential customers. After Priceline’s acquisition of Booking.com in July 2005 for $135 Million, its profits skyrocketed from $10 million in 2003 to $1.1 billion in 2011. No other acquisition has proven to be that successful in the 2000’s (O’Neill). Agoda and TraveljigSaw:

In addition, Priceline is increasing its brand in Asia via its Agoda brand and it is growing its rental cars division as well, aided by a 2010 acquisition of global car-rental site TravelJigsaw. Ever since these acquisitions of smaller travel companies, Priceline is able to expand its market cap while its stock prices surged over 500% in the following five years (Birger). Kayak:

In 2012, Priceline Inc. continues its acquisition practice with the purchase of Kayak for $1.8 Billion. Shareholders of Kayak received $40 per share. Kayak is successful in that it raised $91 Million in the July 2012 IPO through selling of 3.5 Million shares at $26 apiece. It has processed 302 million queries across its web. Kayak and Priceline are “two of the largest online-travel companies and it makes sense that these two companies would want to work together, of course, because they do have different strengths and different objectives,” said Dan Marcec, an analyst at Emarketer. With the acquisition of Kayak, Jeff Boyd states that “Priceline’s intention is for Kayak to be operated independently under the leadership of existing management, as with our other hands, with a primary focus on building value for its customers and advertising partners” (Levy).

Conclusion
Priceline Inc. operates as one of the biggest travel booking sites in the world. Its global presence in Europe and Asia as well in the Americas cannot be ignored. Priceline Inc. should be a company that is to be heavily invested in because of its revenue and profit posted by the corporation. Its record breaking earnings in the billions should easily attract the eyes of a savvy investor. Priceline will continue to post earnings through the way it does business by matching consumers with vendors and earning the difference in prices. With its continuous acquisitions of smaller booking sites, Priceline is set on par to be the dominant and primary go to website when it comes to travel bookings. Without a doubt, its stock prices will continue to soar as it expands its presence in Asia.