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Inktomi Corporation Essay

Priceline.com issued the following statement as its business summary: “Priceline.com has pioneered a unique new type of e-commerce known as a “demand collection system” that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition–“Name Your Own Price,” we collect consumer demand (in the form of individual customer offers guaranteed by a credit card) for a particular product or service at a price set by the customer and communicate that demand directly to participating sellers or to their private databases.”

This is the underlying business plan that Priceline.com came to the equity market with on 3/30/99. Priceline became a public company with 10 million shares being offered at an initial price of $16/share. Priceline’s stock closed that day at $69, making the company worth $9.82 billion. In 1998, Priceline had $35.2 million in revenue. Company executives became instant billionaires and William Shatner, spokesperson for Priceline, became worth an additional $10 million on that day alone.

Priceline had a higher market capitalization than K-Mart, Nabisco, Delta, Northwest, and Marriott as well as many other companies that had been in business for decades.

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Even on the first day, many analysts became quickly concerned with its extremely high valuations. Many analysts cited concerns relating to the number of years that it would take Priceline to become profitable, let alone justify current valuations.

The business model was quickly analyzed to get a better idea of the kind of company Priceline was. Basically, Priceline sold airline tickets and hotel rooms. These expiring assets fit well within the business plan as the suppliers in such high-fixed cost, low variable cost industry’s like these would surely rather get some profit rather than no profit on unused capacity. Priceline made a profit on the difference between the selling price the customer paid and the price at which Priceline bought from the supplier. The vast majority of Priceline sales are generated through airline tickets. On 3/30/99, Priceline was able to fill 24% of all “reasonable” offers for airline tickets. A “reasonable” offer is defined as a bid that is no more than 30% below the lowest advance-purchase fare.

Priceline reported 1 million people used their website in the previous year. It’s stock soared 37% to $120.75. What was noticeably missing from the press release was how many of these 1 million customers actually bought something. Priceline also declared they were going to expand into various new markets like mortgages and cars. Priceline would be paid a fee for each sale of a new car or home loan. In these markets, Priceline was simply an online retailer much like any other company on the Internet selling material goods.

A survey revealed that the average Priceline customer told 18 people about their experience. This was considered extraordinary word of mouth advertising and the company was prospering. A main challenge at this point was for Priceline to simply keep its business running smoothly in the face of extreme exponential growth. 18 major airlines were now partnered and offering vacant seats for sale. Priceline was now able to fill 35% of reasonable offers. Priceline also admits that many ticket sales are being made at a loss to the company in an effort to build name recognition and boost sales.

Founder and Vice-Chairman, Jay Walker, defines Priceline as a pricing system. He believes many products/services are incorrectly priced and feels Priceline can remove some of the inefficiencies. Priceline is now partnered with 25 airlines, whom combined own approximately 11% of the company. Walker adds that any company with excess capacity would want to work with us. At this point, nearly 85% of tickets sold are sold at a profit. Walker expects profitability by mid 2001. His main objective is to cut losses, not expenses. Essentially, the best way to do this is to add customers and increase sales. Advertising costs alone are expected to be $50-$60 million for 1999, nearly 10% of total expected sales for the year.

At this time I would not invest in Priceline. I see more downside risk than upside as the company is currently restructuring its entire business. I still feel that Priceline is not focusing on the right markets even though they are more focused now than they were 6 months ago. I would continue to watch the company and look for more changes in the markets and services it offers. If Priceline continues to focus itself and develops new ways to expand its abilities within the industries it has the most inherent potential; my outlook may change. In contrast to Priceline, Inktomi existed solely because of the Internet. This was the reason I chose Inktomi as the second company to study.

Inktomi went public just as the boom of the Internet got underway. I agree with CEO Peterschmidt’s comment that Inktomi could be the poster child for the Internet Era. Few other companies were rewarded as richly and punished as severely as Inktomi. Despite that fact, I find Inktomi’s business model to be right on track. The Internet promised many things to many different types of companies.

Determining how to use the Internet to make money or how to best use the Internet is a very difficult proposition. Recognizing that many different companies far into the foreseeable future will use the Internet is a much safer business model in which to build. Inktomi knew the Internet was going to revolutionize the ways companies did business, but it did not know how. It knew that the Internet was going to have to be fast, efficient, and useful in order for it to truly help companies. Inktomi’s goal was to help companies make the Internet work well for them.

The reason for the downfall of Inktomi, which was the exact opposite of Priceline, was simply the fact that the industry had changed. Its business model has barely changed over the years. Inktomi did identify several new markets to enter; however, I did not see these moves as changes in its inherent business plan. Inktomi was simply reacting to the demands of companies in the marketplace that wanted to use the Internet in different ways.

There are several likely reasons for the downfall of Inktomi. Decreased corporate IT spending certainly has hurt the company more recently. The extremely high valuation for Inktomi’s stock was based on the fact that more and more companies were going to utilize Inktomi’s software. For several reasons, this ended up not happening as fast as Inktomi had planned. This was due largely in part to rising interest rates. This made it more difficult for companies to raise cash so they were forced to conserve assets and therefore cut spending. In addition, inflation fears gripped the economy and hinted that tough times may lie ahead.

The entire economy has been slowing down over the past 12 months and this has been extremely painful for bursting technology companies like Inktomi. Blaming the economy for their downfall is easy for Inktomi to do; but whether or not Inktomi will be able to regain its growth position once the economy turns around is a more difficult task. Most of the growth at Inktomi was at the onset of the Internet boom. Certainly more and more people will be flocking to the Internet in the future, but exactly how much will this change Inktomi’s business? Inktomi’s growth stemmed from many companies getting established and creating their websites. Will that still hold true if the economy turned around now?

Figuring out where future growth will come from is something even Peterschmidt is questioning right now. Inktomi is now focusing on streaming video and media to continue its company growth. This aspect of the Internet is very underdeveloped and will continue to be exposed, as more bandwidth becomes available at a cheaper cost. I think that if Inktomi develops a niche in this market it will continue to be a successful infrastructure company. It is very difficult to make suggestions regarding how Inktomi can continue to develop, as the future for Inktomi is more of an unknown than for Priceline. For Inktomi, its challenges will lie in its ability to adapt to the changing demand of the marketplace and the ways companies decide to utilize the Internet.

There are many questions regarding Inktomi and the entire Internet industry at this point. The issues are very complex and there are no easy answers as to which Internet infrastructure companies will continue to be successful. I do feel that Inktomi has a committed management team with a proven track record. After all, they were one of the first profitable Internet companies in a time when profits were a long way away for most firms.

I think its business model is sound and will be able to afford the company profitability in the future. My outlook for the company is very positive. I think Inktomi will be able to accurately assess the marketplace and react quickly enough to return to profitability. I consider Inktomi a good long-term stock to hold as the aggressive portion of a portfolio. In the last week alone, Inktomi’s stock has jumped almost 100% to approximately $8 on renewed optimism and general market sentiment. Although my outlook remains the same, my entry point for the stock is around $5.

To some extent, I think it can be helpful to analyze the past and see what you can learn from it to help make decisions regarding the future. Despite all of the promises their respective industries had to offer, success still came down to the same qualities that every company must possess to be successful. Qualities such as maintaining an excellent management team, executing on a solid business plan and the ability to obtain a sustainable competitive advantage. These are traits that all companies need regardless of the industry in which they participate. It is for these reasons that I think Inktomi is a long-term buy and Priceline is unattractive unless several conditions change.

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