Among the Internet’s many wonders is the speed with which it has overturned long-held assumptions about business. Look at Priceline, for example. Though its Web site has been operating for less than two years, it has already changed the way many people shop for airline tickets, hotels, mortgages, and even cars. Rather than passively comparing prices from different companies, a consumer can use Priceline to offer the exact price he or she wants to pay. Jay Walker, founder and vice chairman of Priceline and chairman of Walker Digital, the company that invented the Priceline shopping system, is recognized as one of the architects of the information economy. HBR senior editor Nicholas G. Carr recently talked with him about Priceline’s unique business model and the revolutionary nature of electronic commerce. I’ve seen Priceline refer to its business as a “demand collection system.” What does that mean? In the traditional model of commerce, a seller advertises a unit of supply in the marketplace at a specified price, and a buyer takes it or leaves it. Priceline turns that model around. We allow a buyer to advertise a unit of demand to a group of sellers. The sellers can then decide whether to fill that demand or not. In effect, we provide a mechanism for collecting and forwarding units of demand to interested sellers—a demand collection system. It’s easy to see why such a system would attract buyers—they have the potential to get a lower price than they would otherwise pay. But what’s in it for the sellers? When a customer makes an offer for, say, an airline ticket through Priceline, he’s announcing the price he’ll pay for a generic service—getting from point A to point B on a given day. He can’t specify the airline; he can’t specify the precise route; he can’t specify the particular departure or arrival times. The Priceline system thus enables sellers to see, for the first time really, the latent demand in the marketplace—the demand that exists beneath the established price of the product or service. And because the customer’s offer is irrevocable, guaranteed with a credit card, it’s real demand—the seller can count on it. Because the seller is anonymous through the buying process, it gets two clear benefits in addition to the incremental sales. First, it gets a brand shield. If it had publicly advertised a lower price for its product or service, it would have eroded its brand. But since it can accept the unit of demand without letting the buyer know the brand in advance, it suffers no such erosion. Second, the seller gets a price shield. It can maintain the integrity of its established prices because it never advertises that a lower price is being filled. The seller avoids the problem of free riders—people who take a discounted price even though they would have been willing to pay the full price. But is there also a danger for the sellers? Does the information that Priceline supplies—its categorization of hotels by quality, for example—supplant the traditional role played by brands? I wouldn’t draw that conclusion. What we’re really seeing here is an essential truth about the marketplace: most consumers don’t have brand loyalty; they simply have brand preference. At some price, they’ll sacrifice that preference and switch brands. Priceline recognizes that truth by allowing customers to disclose the price at which they’ll trade off their brand preference—to reveal their personal elasticity curve for a particular product. That doesn’t say anything bad about brands; it simply acknowledges that while you may prefer, say, Duracell batteries, you’ll take Eveready for 50 cents less. I think the people who say that the Internet will somehow negate the power of brands are missing the point. What about prices? In the past, a product and its price came as a single, indivisible unit. But Priceline seems to be separating the price from the physical product. Is this something we should expect to see more of? You’ll see it everywhere. We’ve already announced that we intend to extend our pricing model to hundreds if not thousands of products and services. It’s hard, in fact, to think of any product or service for which a customer won’t accept a degree of flexibility along some dimension for a lower price. You may want to buy your new car at a dealer located ten miles from your house, but to save $ 500, you’ll drive an extra 30 miles. There isn’t anything new in that. What is new is that the Internet provides a great mechanism for making those trade-offs, for reconfiguring products—and resetting prices—in ways that meet the needs of both buyers and sellers. The Priceline business model was developed by Walker Digital, a company that you head. What is Walker Digital? It’s a laboratory that is focused entirely on inventing business methods. For the past six years, a group of about 50 of us has been creating what we think will be the core business methods of the information-based economy. Our plan is not only to create the inventions but also to protect them under the patent law and, ultimately, to spin them off into new companies like Priceline. Or we could license them to other companies or joint ventures. That’s the Walker Digital business model. Implicit in that model is the assumption that business methods will change dramatically. That’s a scary thought for companies built on the old methods. Traditional companies are a lot like traditional farmers. For a thousand years, farmers followed the same model: they took the seeds that their crops supplied, they planted them, and they grew new crops. They developed all their farming methods to support that model, and they continually refined those methods. Everything worked beautifully. Then, all of a sudden, genetic engineers came along and said, “I can change the nature of corn, the nature of soybeans, the nature of an orange tree. I can increase yields by 300 % . I can increase resistance to disease. I can make the products taste better. I can do all these things at the genetic level by manipulating the information within the products.” Now, a farmer can ignore the genetic engineers and go on using all the old, established methods, but that farmer won’t stand much of a chance in the marketplace. The benefits of genetic engineering are too great, too revolutionary. I would argue that all aspects of business—all products, all activities, all methods—have an information structure at their core that has long been hidden, just like the genetic codes of plants. We’re now starting to decode that information and manipulate its structure. And that will change everything. The good news is that businesspeople have become increasingly comfortable with change. Our economy wouldn’t be leading the world today had our businesses not responded to the changes and challenges of the 1980s and early 1990s. The new challenge is that executives will have to create new genetic structures for their businesses. Or they’ll have to buy or rent new structures from a company like Walker Digital. I would argue, in fact, that the greatest value in business will ultimately reside in the information within business methods rather than their outputs. There is, after all, more value in manipulating the information structure of the gene than there is in being a farmer. There is more value in being a user of electricity than in being a producer of electricity. There is more value in Microsoft’s intellectual property than in its products. Any business that thinks it is somehow insulated from the information revolution isn’t likely to succeed in tomorrow’s economy. Do you think that it will be possible, in the end, for traditional companies with well-entrenched business methods to adopt new ones? The best companies can do anything they put their minds to. They are adaptive, they are motivated, and they are well financed. They are in touch with their customers, suppliers, and stakeholders. The best can always morph, as they have during the past 20 years. The real issue here is, Can the majority of companies do that? Look at the industrial revolution. How many companies survived industrialization? How many companies survived electrification? Too few. Most didn’t grasp that industrialization and electrification were going to change the essential processes for making and selling things. And so they couldn’t make the transition. I suspect we’ll see a similar pattern of success and failure once again.
