Start-up wins e-commerce patent

Priceline.com, known for its "name your price" e-commerce system, is awarded a patent that it says covers its technology and business model.

4 min read
Start-up Priceline.com, known for its "name your price" e-commerce system, has been awarded a patent that it says covers its technology as well as its business model.

The Stamford, Connecticut-based firm, which launched in April, allows consumers to name the price they are willing to pay for a given product. It began with airline tickets and has since added cars--though the latter so far is available only in New York. Priceline.com plans to add other products to its roster that "have a short shelf life," such as home mortgages, hotel rooms, and insurance, according to spokesman Brian Ek.

Patent No. 5,794,207, to be issued by the U.S. Patent and Trademark Office tomorrow, "covers both the broad concepts and key functionality components of buyer-driven commerce," according to a statement issued by Priceline.com.

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Under Priceline.com's system, customers looking for airline tickets for leisure travel, for example, enter their dates, destination, and conditions, such as whether or not a layover is acceptable. They also submit the price they are willing to pay. Priceline.com then offers the bid to its participating airlines, and the first one to accept gets the sale.

The advantage for the airlines, according to Priceline.com, is that roughly 500,000 airline seats fly empty every day, and the service offers them a way to fill those seats without underselling themselves for other seats.

The concept was developed by Walker Digital, an intellectual property lab in Stamford that was founded by Priceline.com chairman and chief executive Jay Walker. Walker Digital, which owns a stake in Priceline.com, sold the technology to the firm after filing for the patent in 1996. Priceline.com is privately held.

"The biggest challenge for the team [that conceived of buyer-driven e-commerce] was the need to create a sustainable, compelling consumer benefit for new types of buyer-seller relationships in the Internet age," James Jorasch, a Net technology expert who helped create the system, said in a statement.

"When we began our work to conceptualize profitable models of Internet commerce in the mid '90s, e-commerce hadn't even reached its infancy," he added. "Even today, successful Internet commerce models are still few and far between. Our e-commerce system will benefit consumers for years to come as Priceline.com continues to introduce new name-your-own-price services across a variety of product and service lines."

Julia Pickar, an analyst with Zona Research, applauded the company's patent strategy.

"Getting a patent for this technology is good news for [Priceline.com]," she said. "They built a proprietary technology, and they're betting a lot on it."

Patent attorney Craig Opperman of Cooley Godward agreed.

"Patents are tremendously powerful," he noted, adding that "venture capitalists and underwriters at the time of an [initial public offering] really pay attention to a patent portfolio."

Opperman pointed out, however, that the breadth of a patent is what determines its value. Because the patent will not be issued until tomorrow, he couldn't comment specifically about the implications for Priceline.com or potential competitors. He said he expects it to be challenged, though.

"I suspect that once this patent is issued, we will hear a lot of noise about it being invalid," he said.

Pickar said: "I'm sure there's plenty of loopholes where other companies could create something just different enough the keep them out of legal hot water. [Priceline.com] won't be solely alone in this space."

But Ek said it wasn't Priceline.com's goal to lock out others. He noted that although the company is looking to expand to other products and services and is not out to create a significant revenue stream by licensing its technology, it is "not attempting to close off this space on the Internet."

Indeed, Opperman pointed out that licensing proprietary technology to others is much more practical for patent holders than cracking down on infringers.

He said the average legal fees for a patent infringement case in the United States run to roughly $2.5 million, and "before a company goes around beating people on the head with its patent, they need to be prepared to spend that kind of money."

He also noted, however, that "patents are presumed valid" by the courts, and "they cannot merely be ignored just because industry 'experts' say they're too broad or invalid."

Although Priceline.com has the patent resources and expertise of Walker Digital at its disposal, "we would be perfectly willing to explore licensing," Ek said.

Opperman also said that although it may not be Priceline.com's intention to make significant revenue with licensing, a smart strategy for companies in general is to "license their technology inexpensively and make it ubiquitous," as Microsoft did with its operating system.

Priceline.com is not the first e-commerce firm to win a patent for its technology. In March, for example, e-commerce software vendor Open Market was awarded three wide-ranging patents for its technology covering Internet marketing, order management, and payments.

Opperman said that as more and more e-commerce firms seek patents and e-commerce itself takes off, patents will become increasingly important.

Patents tend to beget patents. As competition heats up, companies increasingly enter cross-licensing arrangements, such as in the semiconductor industry, Opperman said. "If you don't have a patent, you have nothing to cross-license," he said. "You're standing there naked with the arrows coming in at you."

Priceline.com has sold more than 40,000 airline tickets since its launch, and it receives an average of $15 million in guaranteed offers per week, the company said.