MTB130 - Case Study - Reflective Questions 1

1. What are the core components of Priceline’s business model?

Technology, Marketing, Sales, Purchasing, Human Resources & Legal are core components of the Priceline business model.

Technology

Due to its pure existence on the Internet, technology plays a key role in all aspects of the business and is central to all associated business functions. Technology refers to both infrastructure and operational technologies such as Data Centres, High-Speed data links, workstations and E-Commerce systems development.

Marketing

Priceline needs to market itself to potential consumers. Such marketing activities needs to be carried out in both Internet based and traditional mediums. It is important to promote Priceline's value point over its competitors to attract consumers.

Sales

Sales component of the business model drives revenue for the organisation. While Priceline's patented "Name Your Own Price" reverse auction model is exclusive, there are other key players already established in the market segment Priceline operates. Therefore Sales component of the business model constantly challenged and needs to be reviewed regularly.

Purchasing

Priceline requires to maintain strong relationships with suppliers to negotiate discounted prices. To support its purchasing activities through acquisitions, Priceline bought Amsterdam-based Bookings B.V. in July 2005, following its purchase of UK-based Active Hotels the year before.

Human Resources

Currently Priceline employs over 1300 individuals. With a sizeable work force it is imperitive to manage the asset of human resources to ensure continued growth and sustainablity.

Legal

Priceline operates in multiple economies. Each economy has its own jurisdiction that Priceline needs to operate within. Therefore it is vital for Priceline to understand each economy it operates in, to legally exploit preferential business associations and employ effective sales & marketing activities.


2. Do you think Priceline will ultimately succeed or fail and why?

Ultimate success can only be predicted with multiple assumptions such as corporate governance, global financial market conditions and including the time period ultimate success is measured.

Assuming we are considering medium to long term operations (5 - 10 Years), I believe the business model can be successful if short term sustainability is maintained. I believe the performance of next 12 to 18 months period would be a crucial indicator for Priceline's medium to long term success.

Priceline's shares have tumbled from a high of $144.00 to a low of $45.00 in the last 12 months, and currently trading around $65.00. It is important to note that primary reason for share value fluctuations does have a direct correlation to current global economic crisis. Global markets analysts predict a slow down in business and leasure travel due to current economic conditions, and this would have further negative effects in the short term.

On the positive side, on November 06, 2008, priceline.com Inc reported 3rd quarter 2008 earnings of $2.39 per share. This result exceeded the $2.10 consensus of the 14 analysts covering the company and exceeded last year's 3rd quarter results by 51.27%. (Market Data Companies Reserarch, 2008)

Priceline’s expansion in to Europe and Asia would protect the business from volatility on its home (US) market. Therefore it is also important to strike the right balance between organic growths in each of its operational economies as well drive market share through acquisitions.

Assuming the strategic and operational management checks and balances in core business areas are maintained and the major market space Priceline operates is not negatively affected by Global financial, political and security issues outside control of the Company, I believe Priceline will succeed in the long term.


3. How has Priceline and similar online services (provide an example) impacted the travel services industry?

Online travel services are continuing to have considerable impact in many segments of the travel industry, especially in the air travel.

Increased competition and low cost of air travel has opened up new markets for both the airline industry and consumers. Birth of ‘no-frills’ air travel concept, online ticket auctions, self serve reservations and reverse auctions (pioneered by Priceline Inc) have impacted on low cost travel for consumers.

Web based self serve phenomenon has developed especially for domestic travel needs. Consumers are provided with powerful Web tools to select their own travel schedules, prices and service levels.

Competition and demand of both domestic and international air travel has contributed to introduction of new budget carriers such as Jet Blue in USA, Tiger Airways in Asia and Virgin Blue in Australia and also has directly impacted on creating travel industry related jobs.

For the travel industry operators, the online services have opened up new avenues to dispose their rapidly ‘perishable’ inventory such as airline seats & hotel rooms. Online business models such as Hotel Club (www.hotelclub.com) and Last Minute (www.lastminute.com) provide worldwide hotel room booking services at discounted rates. Zuji (www.zuji.com) and Web Jet (www.webjet.com.au) offer international airfares, hotel rooms, cruises and car hire bookings all from a single web site.

I think it is also worth considering the impact that has had on the travel agents. Before the introduction of online booking services, all travel agents serviced domestic routes. Full service airline tickets are still sold by travel agents; however ‘no frills’ type tickets are usually not sold. Travel agents use IT systems developed by companies such as SITA (www.sita.aero) which connects to 'back end' booking systems of major full service airlines, allowing agents comprehensive access that is not available to consumers. However, with budget carriers, Travel Agents are not provided with such mechanism, rather use the standard interface available to consumers, making it unviable to sell tickets on budget carriers.

However, noticeably many travel agents are taking advantage of low fares and bundle them with exclusive accommodation offers, site seeing and other tourism related activities and continue to attract consumers.

There has been another major noticeable impact on customer services with introduction of Budget carriers selling their seats direct to consumers without middlemen. However ‘consumers beware’ policy applies with most ‘cheap’ fares. Airlines tend to slug consumers with significant charges (and sometimes forefeiting fares paid) when changes are required, such as route changes, change of flights or cancellations.

Airlines that sell tickets direct to consumer also enjoy better financial gain since consumers pay the airline prior to travel. Traditional booking systems involving travel agents may take up to 45 days for funds transaction.




4. Has Priceline’s business model changed since 2007? And if so how? Who are its strongest competitors? Is it profitable or operating at a loss?

Priceline’s business model has changed since 2007.

Emphasis has been focused on full service offering in the USA, growth through acquisitions in Europe and Asia while maintaining ‘lean’ operating costs including human resources.

Priceline recognised the decrease in growth in USA in 2007, and commenced building its brand in Europe. A growing European customer base allowed Priceline to lift guidance for 2007 and announce a tripled fourth-quarter profit. The strong quarter was heavily driven by Booking.com, Priceline's European business. The site's travel bookings increased of 101% from the previous year to $319.1 million. (Farrell, 2007)

In Asia, Priceline acquired Bangkok- and Singapore-based Agoda Company, an online travel company specializing in hotel discount bookings throughout Asia, in a transaction that includes an initial cash payment and a multi-year, performance-based earn-out. Priceline said it intends to retain Agoda's current management team, who will continue to manage Agoda's operations independently as part of priceline.com's international business. (Business Wire, 2007)

In the Asia Pacific region, Agoda offers hotel properties in Australia, China, Japan, India, Thailand, South Korea, Singapore, Indonesia, the Philippines, New Zealand and several other countries. In addition, Agoda offers hotels in Europe, the Americas, the Middle East and Africa. Agoda's services are offered in 12 languages. In addition to its transactional offerings, Agoda maintains a broad suite of content features, including customer hotel reviews, travel tips, journals and other user-generated content. (Business Wire, 2007)

Priceline’s strongest competitors are Expedia and Orbitz Worldwide, including Pricelines these three companies make the top three publically traded online travel agencies.

According to latest full context quarter ending 2008/2009, Expedia has recorded a gross profit margin of 83% while Orbitz Worldwide reported 80.7%. Operating income for Expedia has being in the ‘black’ for last four consecutive quarters while Orbitz Worldwide has reported a net loss in quarters 09/2008 and 03/2008. (Markets, 2008)

Based on currently available data, Expedia is currently operating on profitable grounds with operating income of $199 Mio while Orbitz Worldwide has reported a loss of $276 Mio.

Works Cited

Business Wire. (2007, November 9). Retrieved December 13, 2008, from Yahoo!: http://au.biz.yahoo.com/071108/43/1h9tf.html

Farrell, A. (2007, February 13). Priceline Capitalizes On European Wanderlust. Retrieved December 13, 2008, from Forbes.com: http://www.forbes.com/markets/2007/02/13/priceline-booking-travel-markets-equity-cx_af_0213markets06.html

Market Data Companies Reserarch. (2008, December 12). Retrieved December 13, 2008, from Financial Times: http://markets.ft.com/tearsheets/analysis.asp?s=US%3APCLN

Markets. (2008, December). Retrieved December 13, 2008, from Forbes.com: http://finapps.forbes.com/finapps/jsp/finance/compinfo/IncomeStatement.jsp?tkr=OWW&period=qtr