Priceline.com: Patent-Protected Investment?

Yesterday, Priceline.com filed a patent infringement suit in US District
Court against Expedia, which is a major travel site owned by Microsoft.

In the complaint, Priceline.com wants not only a restraining order, but of
course, actual and punitive damages, which Microsoft can definitely pay.

In the Web world, it is difficult to create barriers to entry. But there
are some strategies. One is to be the first-mover, in which a company
locks-up exclusive agreements and also creates tremendous mindshare. Or, a
company can protect its own technology via the patent law.

In fact, there is a trend towards patenting Web technology. In early
September, DoubleClick was granted a patent for its so-called DART
technology, which delivers ads (patent 5,948,061, entitled “Method of
Delivery, Targeting, and Measuring Advertising Over Networks”).

In essence, a patent is a right that gives the holder the ability to exclude others from making, using or selling an invention, usually between 17
or 18 years. In a way, a patent is a government-sanctioned monopoly. The
government does this so as to encourage innovation.

However, because the Web is a recent phenomena, it is not clear if these
patents are enforceable.

As for Priceline.com, it holds patent 5,794,207, which is entitled “Method
and Apparatus for a Cryptographically Assisted Network System Designed to
Facilitate Buyer-Driven Conditional Purchase Offers.”

If you want to see
the patent, you can visit the Patent and Trademark Office database .

Basically, the patent protects Priceline.com’s technology called the
“demand collection system.” That is, a consumer will name a price for a
good or service. Priceline.com then transmits the order to sellers, who
will then determine whether to fulfill the order or not.

Consumers agree
to keep their offer open for a certain period of time, and also must be
flexible on such matters as brand and product features. As for the
sellers, they have a way to sell excess inventory without alienating their
existing sales channels. It’s a win-win.

Interestingly enough, Priceline.com claims that it gave access to its
technology to Microsoft when there were talks about a possible investment
or partnership. By Expedia then using the Priceline.com technology, this
may show bad faith on the part of Microsoft.

Despite this, the response to the Priceline.com suit has been fairly
negative. The argument is that it is a high-risk strategy, especially when
challenging Microsoft.

But what is the purpose of a patent if a company does not enforce it? It
sounds really dumb to spend lots of money on a patent and not enforce
it.

Let’s take a look at the possibilities facing Priceline.com:

  1. Priceline.com loses the case: True, Priceline.com will have a black
    eye. But then again, the company showed strength by defending its
    intellectual property assets aggressively. Also, by the time the case is
    decided, years will have likely gone by and Priceline.com will have
    penetrated many more lines of business. What’s more, it is likely that
    Priceline.com will nonetheless have licensed its technology to many other
    companies. For example, Priceline.com has already signed several licensing
    deals, such as with Alliance Mortgage and Budget Rent-A-Car.

  2. Settlement, or Priceline.com wins in court: The result is really the
    same, but settlement will be much more cost-effective, as there will not be
    a need to engage in costly litigation.

But the lawsuit serves another purpose. Microsoft announced that it will
be taking Expedia public. Lobbing a lawsuit against a competitor before an
IPO is always a good strategy. It creates uncertainty for investors. This
could impel Microsoft to settle.


Conclusion

What has made Priceline.com such a great company is its “take-no-prisoners”
attitude. It was aggressive in its marketing, such as by using William
Shatner; it was aggressive in having a fast IPO; it was aggressive in
hiring top-notch talent; it was aggressive in rapidly adding new product
lines. In other words, this company is more than just about a patent.

By pursing a full-scale attack against Microsoft, Priceline.com is once
again showing that it is serious about being a leader. If anything, the
lawsuit should instill confidence in investors. Ironically enough, it is
the same type of attitude that made Microsoft a great company.


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