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No 2001/1 - Wednesday, January 23, 2001

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  The reversed auction business model is facing great difficulties  

Launched in 1998 on the Internet, the concept first proved to be a success in the eTourism sector as it mainly concentrated on selling airline tickets in the USA.

At that time, the eTourism sector was only just starting and competition coming from other bargain huntering sites was still very small.

It is consequently easy to understand how the novelty of this concept, that was mainly made possible by the Internet, managed to seduce potential customers as well as… the press that ensured them a free coverage for months on end as new products were being launched and investigations were incessantly carried out.

To this respect, let me remind you that the "name-your-price" concept was filed and patented in the USA as being Walker Digital's property, the company created by founder, Jay Walker.

Since used to be nearly the only one that could use such patent on the Internet, it managed to go public and its share traded as high as $165 at one point. But on December 29th, Priceline shares were only trading at $1.3.

How can we explain such a drop? First of all, as I mentioned above, the bargain huntering market has grown and structured itself since then, but time also proven that the patent legal value did not weight much compared to economic realities. was among the first sites to contest its legal value as it launched its own "name your price" service for hotel room bookings. An investigation is presently being carried out but the issue will also depend on Walker Digital financial abilities to put up costly proceedings.

And finally, the launching of, which offers nearly the same services as but was created by airline companies themselves, was the last straw which put an end to's commercial future in the eTourism sector.

As Priceline no doubt realized that it was getting weaker in this sector, it decided to expand its concept to many other sectors going from the sale of petrol to the sale of cars, including phone services and bank loans.

But in the past several months, five firms established by Jay Walker and that were based on the same principle of reversed auctions have shut down, including Webhouse Club, an internet gasoline and grocery bidding service that licensed the Priceline concept.

But the most spectacular development happened on December 28th when it was announced that Jay Walker was stepping down from its position as vice chairman of

Officially, Mr Walker is now supposed to focus on business challenges facing his firm Walker Digital, the company that owns his patents. The firm is presently facing great difficulties, since it failed to raise capital. After he laid off 100 of its 125 employees, Mr Walker will try and save what can still be saved.



At the same time, Priceline was cutting 16% of its work force.

Behind all these difficulties, what we should really ask ourselves is whether this concept of reversed auctions, despite the fact that it is both intellectually and economically attracting, is able to generate a viable business model on its own.

When taken over among other general activities, as it is the case with Expedia for instance, there is no doubt that this concept does attract a specific type of customers to the site, as classical auctions and other promotional methods would.

But living on its sole concept, once the fashion trend wears off, seems rather difficult. It will no doubt be very interesting to keep an eye on the European sites that have chosen this type of business model, like the German site for instance.

Indeed, if many American sites have not yet dared attacking the patents filed by Walker Digital, the value of these patents is not recognized in Europe (as these patents are no more than "idea" patents which cannot be recognized on this side of the Atlantic) and yet
many Internet sites have dived into the European legal breach that was opened by Priceline.

My feeling is that, if Priceline did not manage to convince and establish its market on the American level, it will be even more difficult for a European or French actor to achieve similar attempt.

With the difficulties faced by Priceline, it is a whole new concept, purely web-centred, which is now being confronted to the economic reality.

The biggest mistake Priceline made was to fail to set a decent price for its reversed auction patent for the sites that were showing interest.

If Walker Digital had merely been a patent provider, the situation would have proven much easier for the company and it might even have managed to add all the technology liked to this specific process to it.

To cut it short, an all-ready package of reversed auctions would no doubt have proven more profitable in the long term.

Source : New York Times - eCommerce Times
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