Jay Walker became an instant billionaire with a novel way to broker
cheap airline tickets. He's got a lot more clever ideas where that one
came from—and he wants a monopoly on all of them.
An Edison for a new age?
By Dyan Machan
If I offered you a billion dollars for your left arm, would you sell
it?" asks Jay Walker, the hyperactive founder of Priceline.com. "Of
course not," his guest replies.
"Then you're a billionaire on paper," he says defiantly. "You have a
billion-dollar asset. I have a billion-dollar asset. It's a bunch of
paper."
That's an imaginative way to think about value. But then Jay Walker
makes a living with his imagination. His idea factory, Walker Digital,
has 12 patents on business methods, including two that underlie
Priceline.com. He has patents pending on 240 other ideas.
In March Priceline, the name-your-price Internet business that sells
airline tickets, cars, hotel rooms and home mortgages, went public at
$16 a share, soared during its first trading day to $88 and kept going.
At a recent $130 a share, it's worth $18.5 billion and Walker's 49%
(including shares owned indirectly through Walker Digital) is worth $9
billion. The company is only a year old.
Leisure travelers like this idea. In the first quarter of 1999
Priceline sold 195,100 tickets, half again as many as it sold in the
first nine months of operation.
Here's how Priceline works. You put in a lowball offer for an airline
ticket, and if an airline has seats that will otherwise go empty, it may
just hit your offer. The typical roundtrip fares between New York and
Los Angeles fall in the $300-to-$350 range. For business travelers
there's a fair amount of inconvenience to using Priceline. To win your
cheap seat, you have to risk uncertain conditions that might include a
layover or change of planes.
Who'd have thought this idea would be worth $18.5 billion? Walker,
43, professes to be more interested in the idea than the money: "You
want to be recognized for your intellectual achievement, not for the
fact that a bunch of day traders took your stock to a price that may or
may not represent the real value of the firm."
Fine. We are not having lunch in his Stamford, Conn. office to just
talk about Priceline (or to sell a left arm). We're here to learn about
Walker Digital, 90% owned by its namesake. Priceline is based in part on
a patent issued to Walker Digital for an innovative business process,
buyer-driven commerce, that is fleshed out by some specific software
design. The software lets prospective buyers communicate a binding
purchase offer to potential sellers. It's much like the over-the-counter
stock market every day.
In fact, Priceline uses parts of 19 Walker Digital patents. Walker
was a coinventor of all of them. In return for assignment of
intellectual property rights to Priceline, and a $500,000 investment,
Walker Digital received 7.5 million Priceline shares, now worth $980
million.
Get a patent, start a business. The process sets Walker apart from
fellow Web billionaires Jerry Yang and Jeffrey Bezos, whose fortunes are
built on being first, not being exclusive.
So what exactly is a business process patent? Must it incorporate
high technology? Not necessarily, although Walker does use some nifty
encryption along with its off-the-shelf Oracle database. To get its
patents, Walker Digital needed to prove that its ideas added to the
publicly available pool of knowledge in a novel way. In the lawyer's
phrase, Walker had to advance the state of the art.
The very idea that anyone can get a patent on a business process
found more backing last summer (see "Barbed wire on the Internet"). Actually, process
patents are not new. Alexander Graham Bell received one in 1876 for a
process to transmit sounds; countless patents have been issued for
chemical processes.
But a business process? A way of treating customers? The notion of
putting buyers and sellers together anonymously? It is not so obvious that "processes" like these are entitled to patents.
Walker, his boyish hair flopping with evangelical zeal, says that inventors of Web businesses are every bit as entitled to patents as inventors of microphones and chemical processes.
"Walker Digital is about reengineering the DNA of the future of
business," he declares. "What we hope is that a group of thoughtful
people can together reinvent whole sectors of the global economy. And
not only can we reinvent them, we can own those inventions."
Walker Digital's idea lab is modeled after Thomas A. Edison's famed
laboratory in Menlo Park, N.J. According to Walker, Edison's proudest
achievement wasn't the lightbulb, but his lab, where he put together a
team of scientists to solve a problem. Prior to Edison, scientific
discovery was the domain of the solitary inventor. "Edison created a
methodology to solve all kinds of problems," says Walker.
Walker Digital has 25 employees. Half are inventors, most in their
early 30s with master's degrees in a variety of disciplines. (Ph.D.s are
too educated to be as worthwhile for his business, Walker notes.) No
surprise, the other half are lawyers with patent experience. They
brainstorm once a week to identify Internet-oriented solutions to
problems that can be patented, then licensed or turned into businesses.
"Edison's world was electromechanical," Walker says. "We're in a bits
world."
As some chicken curry is placed atop patent applications scattered on
his desk (which is near a 7-foot character from Star Wars, the bounty
hunter, fully armed, and a wall on which hang flags that made trips to
the moon), Walker flies into his own hyperspace, using multiple
metaphors involving 747s, Star Trek and prehistoric biology to discuss
the future of his lab. The only way to ask a question is to raise a
hand. Walker finishes his thought, and calls on me.
Isn't patenting a business process a bit unconventional? His
response: It was once unconventional to drill for oil in the ocean.
"Look, there are two possible choices: Either I'm eccentric, that's when
you're right and ahead of the curve, or wacky, that's when you're
wrong!"
Walker built his premise for Walker Digital in 1991 after reading a
trade journal article on how the banking system moves a trillion dollars
securely around the world using public key cryptography. This system
finesses an age-old problem in cryptography, that the sender and
receiver of confidential messages have to keep the encoding key locked
up. That's because the decoding key is readily discernible from the
encoding key. (Example of exaggerated simplicity: If the encoding key is
to move all the letters forward two spaces in the alphabet, shifting
MONEY into OQPGA, then the decoding key is to move them backwards two.)
In public key cryptography, there is no way to discern the decoding
key from the encoding key. So the intended receiver of a secret message
(say, a bank wire-transfer department) can safely publish the encrypting
key for all the world to see.
On this breakthrough in cryptography hangs much of the world's high-security electronic commerce. The three mathematicians who came upon the
algorithm behind this system won a patent and created RSA Data Security
from it (now part of Security Dynamics). In a sense, they were patenting
an abstraction, a mathematical formula; but to implement the formula
requires some software, and software is patentable.
The lightbulb went on in Walker's head when he read about this. The
patent law, indeed, could protect an idea, or an application of an idea,
not just a physical thing like a gearshift or a microphone. "It is
constitutionally mandated," he says, waving his hands in the air.
But not anybody could turn an abstraction—like putting buyers and
sellers together—into an instant $18.5 billion.
"I've always been an entrepreneur," Walker says. "I start businesses
for a living." A native of Queens, N.Y., he is the son of a successful
real estate developer. He takes an impatient breath, bored talking about
his background: "If you're going to trace my life, we'll be here a week.
I was a Boy Scout. Okay?!"
Not your average Boy Scout. He was a Monopoly player who figured out
how to win consistently, and published a book on his techniques. "My dad
just can't understand why I didn't go into real estate after Monopoly,"
sighs Walker. His mother, who died when he was 18, was a champion bridge
player who escaped from the Nazis when she was 6. "I get my
competitiveness from my mom," he says. Both parents encouraged him to
take risks.
He did. At age 9, he started a newspaper. At age 10, he traveled to
Europe on his own. At summer camp, at age 13, he would bring candy in
bulk and sell it at prices below what the camp charged. "I was a black
marketer," he grins. "I was serving customers. I simply bypassed the
monopoly."
Oh yes, Monopoly. "In college [Cornell], I realized Monopoly was a
game of skill and, despite the dice, a skillful player always won. So I
wrote down the mechanism by which the Monopoly player would never lose.
I called Parker Brothers and said: 'I've got good news for you.
Monopoly's a game of skill and I could write a book telling everybody
how to play better.' They said, 'If you do, we will sue your ass.'"
Parker sued him to prevent publication of 1000 Ways to Win Monopoly
Games, banned him from further competition in Parker-sponsored
tournaments, and later dropped the suit. His legal fees ate up all of
the $50,000 profit he received from selling 100,000-plus copies.
Still, he stuck to publishing. He started a weekly paper in Ithaca,
N.Y., which Gannett squished, leaving him $250,000 in debt after
college; a company that pushed catalog sales through retail outlets (it
died when the glue on his price tags came unstuck); a marketing company
that placed ads in catalogs (it just didn't work); and a business that
sold light sculptures (why didn't Edison think of that?).
Then he hit on something. In Europe, it is not uncommon for a
magazine publisher to get indefinite renewals with a sort of negative
option; the subscriber's bank account is automatically debited every
year for the subscription price until he cancels. Could something like
that be implemented here?
In 1992 Walker teamed with Michael Loeb (son of former Fortune editor
Marshall Loeb) to offer automatically renewed magazine subscriptions
tied to a credit card. Loeb had the publishing ties, Walker the ability
to set the system up on a computer. He has a patent pending on it.
NewSub Services was a hit. Today it has 30 million subscribers and
$300 million in sales. No one ever really tried to duplicate the system,
and NewSub is considering a public offering.
Walker, restless, wanted to try out another idea. He sold a third of
his 50% stake in NewSub to raise $25 million and put that money into
starting Priceline.com. Some of his money, boosted with outside capital
(see "Bouncing around"), went into an expensive and very successful ad campaign
featuring Star Trek's William Shatner. In this regard, Priceline is no
different from Amazon: If you want to win on the Web, you have to spend
early and lavishly on marketing.
What's up Walker's sleeve next? Like a magician, he picks up a stack
of papers: "Pick a patent, any patent!"
No. 5,862,223 (issued Jan. 19, 1999) establishes a market mechanism
to connect users of professional services (like medical advice) to a
worldwide database of professionals who can dispense advice over the
Web. No. 5,884,272 (issued Mar. 16, 1999) creates a system for anonymous
communication between people. This could be used for police hotlines.
Patent No. 5,797,127 (issued Aug. 18, 1998) describes the selling of
options on airline seats. "Wouldn't you like to lock in a low airfare
without tying up money and without risking the loss of the ticket if
travel plans change?" Walker asks.
Walker doesn't have to invent a new business to prosper. Eight
pending patents, he says, will reinvent fast food retailing. He'd like
to get McDonald's Corp. to sign up. "Everybody will have a PDA [personal
digital assistant]," he says. "In the information revolution,
everybody's going to be able to get on line at McDonald's from their
car, desktop, wherever."
A new company, Digital Quickserve, will license the idea to food
franchisers, taking a piece of their sales. Royalties. Intellectual
patents. It sure beats selling hourly advice.
Priceline will get a piece of the action wherever it can. It just
brokered a deal with First USA, the leading Visa card issuer, for
Priceline credit cards, which offer users discounts on Priceline
services. Walker hopes to see revenues of $200 million over the next
five years from the deal.
Monopolies are nice, but let us not forget patents can be challenged.
If the Sabre Group, the global ticketing service, took a mind to copycat
Priceline.com, then Priceline might sue Sabre for infringement and Sabre
might countersue.
In his best Jim Carrey routine, Walker starts flailing his arms
sarcastically exclaiming, "You mean, I get to go to the courts?! When do
I begin this opportunity to fight really big companies? And, after years
of battle, I know the better person will always win, right?"
For now, Priceline is winning. Through March of this year its ticket
volume came to $45 million, up from $35 million in nine months of
operation last year. It is no longer subsidizing sales in order to prime
the pump. In its first three months of business it paid airlines $1.13
for every dollar's worth of tickets sold. In the fourth quarter of 1998
it paid 88 cents.
Throw in marketing and other costs, and Priceline is still losing
money—what Web upstart is not?—but not as much per dollar of sales as it
did early on. Walker plans to keep beaming William Shatner at
prospective customers. The marketing budget will rise from $24 million
last year to $64 million this year. Analysts estimate the company will
break even in 2001 on revenue of half a billion dollars.
With lunch almost over, we let Walker riff, geek-like, on the future.
"Computing is becoming universal. Mips [millions of instructions per
second of processing power] will be free and ubiquitous. Mips trend to
zero [cost] and bandwidth trends to infinite. Network access trends to
continuous. What we do at Walker is ask, How will business be
reinvented, given that reality? It's a question most businesses are not
working on."
Will there be more Pricelines? Walker responds: "Hopefully, very few.
Pricelines take a lot of work." He expects to license certain patents to
established companies. He turns to biology to explain. "If you invented
a new strain of corn, would you rather be a farmer or Monsanto? Life is
short, be Monsanto!"
Wacky or eccentric? Will Walker Digital be the Menlo Park of the
digital age? Will Walker's paper billions become real money? Be careful
about betting real dollars against Jay Walker.
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