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Priceline I

Priceline I. Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY 10012 Tel. (212) 998-0022 Fax (212) 995-4230 jlivnat@stern.nyu.edu Web page: www.stern.nyu.edu/~jlivnat. Priceline.com. A reverse auction site

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Priceline I

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  1. Priceline I Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY 10012 Tel. (212) 998-0022 Fax (212) 995-4230 jlivnat@stern.nyu.edu Web page: www.stern.nyu.edu/~jlivnat

  2. Priceline.com • A reverse auction site • The “name your price” concept can beadopted to many industries. • B to C with a twist • Providing travel and other services to individuals • Commission revenues

  3. The Business Model • A customer makes an offer (the customer “names a price”). • The customer agrees to lose flexibility: • Exact departure times • Connections • A specific airline. • The customer is bound if the offer is accepted. Credit card is charged for transaction upon fulfillment. • Priceline matches a seller willing to sell at that price.

  4. The Logic • Customers obtain lower prices at the cost of flexibility -- market segmentation. • Sellers can sell excess capacity without eroding current markets. • Sellers do not divulge discounts until a transaction is consummated. • Ideal for perishable goods. • Use customers’ power. • Enjoy transaction fees.

  5. Potential Weaknesses • Consumers with bad experiences may deter others. • Sellers may decide to do it alone, or extract benefits (see warrant costs later). • Others may begin similar businesses. • Patents. Actions against the patents. • Governmental regulations may place restrictions on the business model: • mortgages. • automobile dealers.

  6. Facts about Priceline.com • Began sales on April 1998 • Leisure airline tickets. • Expanded into other areas: • Hotel rooms • Mortgages • Car rentals • New automobiles • Groceries • Through licensee - garage sales

  7. Facts about Priceline.com • April 1999 - IPO - sold 10 million shares for net proceeds of $144.3 million. • August 1999 - secondary of 1 million shares for net proceeds of $62.5 million. • 3.8 million unique customers on 12/31/99. • 3 million made initial purchase in 1999. • Reasonable (at least 70% of lowest fare) offers by customers in 1999 were 57% of all offers. • In 1999, Priceline fulfilled 43.6% of reasonable offers.

  8. Opportunities • Ancillary revenues • Customers sign up for other services (credit card, car rental, etc.) • Exploiting other markets: • Telephone calls • Expanding into other areas: • New/Zealand and Australia

  9. 1999 Results

  10. Priceline.com 1999 10-K • Unqualified audit opinion. • Cash and s.t. investments $172 million on 12/31/99. • Accumulated deficit of $1.18 billion. • Revenues of $482 million. • Product costs $423 million. • Gross margin of about $60 million. • Should revenues be $482 million or the commission revenues of $60 million?

  11. Priceline.com 1999 10-K • Split expenses into: • Sales and marketing $80 million. • General and administrative $28 million. • Systems and business development $14 million. • The gross margin of about $60 million is substantially less than the marketing, G&A and R&D expenses. • The business is still consuming resources. This is typical to businesses in their initial stages.

  12. Priceline.com 1999 10-K • The most significant expense is the warrant costs of $999 million !!! • Priceline wanted to strengthen its relationships with airlines, who supply the leisure airline tickets (85% of 1999 revenues). • It offered airlines warrants (stock options) to purchase 20 million shares at an exercise price of $52-60/share.

  13. Priceline.com 1999 10-K • The market value of one warrant is estimated at $55 (consistent with stock options to employees, see Black-Scholes assumptions). • Warrants are vested immediately. No restrictions on airlines. • Whose expense is it? • Shareholders transfer a portion of the firm to airlines (20 million over 164 million outstanding shares). • Market value of Priceline (using a price of $50/share is about $8.2 billion.

  14. Priceline.com 1999 10-K • Options granted to employees, officers, directors and consultants in 1999 were 6.5 million. • No expense appears on the income statement for these options. • Barter transactions are immaterial. • Cash used in 1999 operations $63 million. • Capital expenditures in 1999 $27 million, probably in excess of typical needs.

  15. Financial Data

  16. Income Statement Ratios

  17. Other Unique Accounting Aspects • Gross or net revenues • Record commission revenues or total revenues • Are Priceline’s 1999 revenues $60 million or $480 million? • Rebates for complementary service • 36 months Internet connection • Shipping and handling expenses included in revenues (and selling expenses). • Free or introductory offer is recorded as revenue and selling expense.

  18. Other Unique Accounting Aspects • How is self-developed software accounted for? Over what period is it amortized? • When can an auction site recognize revenues? • Sometimes needs to list an item for a specified period. • How should rewards be accounted for? • Current expenses or capitalized acquisition costs?

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