September 30, 1999    

 

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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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May 17, 1999
Table of Contents:
Forbes

ON THE COVER:
The Forbes Lunch
An Edison for a new age?

Dot.com power

The Priceline is right

Military Machine
Dumb smart bombs

War victims

The Funds
Loony tune markets

EXECUTIVE COMPENSATION:
A king's pay

In the spotlight

Damn Yankees

Option pitfalls

Payoff time

Corporate Resumes

MANAGEMENT, STRATEGIES, TRENDS:
Industry
Gender Motors

Wall Street
No gold here

Merchandising
Star bucks

Companies
Ma Bell calling

Technology
Patent terrorist

Marketing
Sing it again-"Now"

Sodbusting gets real

Three men and a . . .

Birth of a supercar

Hurray, Hillsdale

Car crash

Science for sale

Military Machine
Bomb expert

ENTREPRENEURS:
Up & Comers
Bidding on big iron

Growing pains/Startup Clinic
Wired hires

Up & Comers
Food for thought

Rewriting the law

Starting Your Own Business
Greek geek

TECHNOLOGY:
Northern light

Rx for success

School daze

Tampon hysteria

Computers
The database wars

A quantum leap

Drugs
Guinea pig shortage

The Internet
Spy.com

Digital Tools
Ports to nowhere

INTERNATIONAL:
Battle of bean hill

CHARTICLE:
Sis, boom, bah!

DEPARTMENTS:
Side Lines

Readers Say

Follow-Through

Flashbacks

On My Mind
Feminism, power and hapiness

Fact And Comment

Other Comments

Commentary
Reflections On The Anglo-American Relationship

Digital Rules
Nine Paths To Net Riches

Transparent Eyeball

Economic Forecast

Forbes Index

Thoughts

COLUMNISTS:
Observations
Social dogmas and pseudoscience

Insights
The end of crime?

INVESTMENT COLUMNISTS:
Portfolio Strategy
Not your average Joe

Market Trends
Dow 10,000-in 2005

Capital Markets
Sink that bond!

MONEY AND INVESTMENTS:
Streetwalker

The Forbes/Barra Wall Street Review

Commodities Review

Statistical Spotlight
Armchair arbs

Insurance
Old but kicking

THE FORBES LIFE:
Time for a sonnet?

Colllecting
Magic mirrors

Napkin Notes
Eat and be noticed

iPlanet. Run with it.

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