Transcript of Jay Walker, founder of Priceline.com

JAY WALKER, Vice Chairman and Founder, Priceline.com

from Kellogg School of Business Cyber Symposium, Feb 2000

MODERATOR: I'd like to introduce Mr. Jay Walker, the founder and vice chairman of Priceline.com. (applause)

WALKER: Thank you very much. Priceline may be the largest customer of American Airlines, but that doesn't help us get here any faster, so I apologize, and I did sit in coach, if you're wondering.

I want to thank you all for inviting me here this evening. I understand there's quite a large crowd here, and I'm going to do my best to keep my remarks very relevant and very specific about what I've learned that I think might be of help to you as students, and I know there's quite a few members of the community as well here. But I'm going to focus primarily my remarks on the larger theory of e-commerce.

Because there's a lot of hullabaloo obviously about e-commerce and about what's coming, and what's next and how it's going to develop, but very rarely do practitioners from the field come back and talk about the theory of what is happening in e-commerce.

And I think a lot of that is because many of the practitioners in the field are so busy running so fast that they don't have a lot of time for the theory of the business, and that may be one of the big differences at Priceline than many other e-commerce companies, and that we were invented as a company in a room much like a classroom, on a white board much like the kind of white boards you work on.

In another company called Walker Digital, that I run, where the business was literally invented as a series of business method concepts to solve a set of problems. And I'm going to come back and maybe in the Q&A, I'll answer some more questions about how we did that, but I'm going to keep my remarks very much about theory.

So in this century, or the century just completed actually, there have been four major changes that have affected all of commerce. And we don't spend a lot of time thinking about those four major changes, because they, for many of us happened before we were born.

But the first major change was electricity.

Literally there were businesses before and after electricity, and the electric grid, the power grid, the one that surrounds us in this room, suddenly became the dominant force in all of society. And the power grid changed every business in the world pre- and post-electricity.

Now, of course, we don't think about the power grid. We don't think about our business as being on the power grid, but of course, we're all on the power grid, thank you Y2K.

So the second big change of the century was the highway grid. The transportation grid came, and suddenly every business was completely changed by where we lived, how we moved, and literally our capacity, both in cars and trucks to collapse distance. And so the transportation grid was the second great grid of the century. And of course we don't think of ourselves as on or off the transportation grid.

The third great change was the phone grid. The communication grid in the century.

There was a time where a long-distance phone call was a big deal. There was a time where phones has these little round things on them that you like put your fingers in and turned them around.

Now, of course the phone is on our waist. It seems to ring every 32 seconds, and everybody is on the telecommunications grid pretty much all the time. And we don't think about business as being on the phone grid or off the phone grid.

The fourth great grid was the one was the one that's in the air around, it's the entertainment grid.

We don't think much about it, but it's the television, if you will, that changed every business in the world.

It changed in the way we deal with our taste, it changed in the way we deal with our fashion and our world, the way we related to others, and the entertainment grid can be thought of as the television, movies, radio – became this surround experience that enveloped our world. And really all businesses in the world, at least those that do any form of advertising, and really that's everything, are on the entertainment grid.

And what's happening today is the fifth grid is being created, and the firth grid is the grid of the information grid. Sometimes called the Internet, but the Internet is really a subset of the information grid.

The information grid includes the Internet, any intranet, all online services. It includes the subsuming of the telecom grid, the subsuming of the entertainment grid, eventually it will subsume a lot of the need to travel, and so much of the highway grid will change, and of course, it's powered by the electrical grid, so it is in many ways, the grid of grids.

And if we look at it in biological terms, it's a lot like the cerebral cortex. It's the thin layer on top of our brain that separates us from the animals. It is the interconnection layer. It's apparently the seat of our consciences. It's certainly the seat of our higher reasoning powers, it's what separates us from all other creatures, it is the very thinnest layer of the brain, and it is all of what we are. It is our ability to remember and manage memories, it is our ability to process information.

And so in many ways, what the excitement is about, is that we are living in the age of the wiring of the cerebral cortex of all of society. And that's what the fuss is about.

And though most of you are too young to have children, I can tell you that when you do, you will watch and marvel as a child age one, and two and three essentially wires up his or her brain, and you can literally watch it every day.

You can watch a young child beginning to make the millions of interconnections from every neuron to every other neuron in the brain, learning to speak, learning to think, learning to become a person that you and I would recognize and know, and as a society, that is exactly what is happening.

A wiring up is taking place of all businesses to all other businesses, of every desktop, think of that as the neuron, to every other desktop. And properties are emerging from that wiring that were totally and completely unanticipated. Properties that don't look anything like examining the neurons.

For those of you who haven't read Kevin Kelley's book "Out of Control" I highly recommend it. Kevin Kelley talks about sort of neo-biologic intelligence, and he blends in the notion of a beehive and how a beehive learns, where each unit, the bee, has no intelligence, to the hive intelligence that emerges from all of the units of individual bees. And it's an amazing metaphor and an accurate one, and Kevin is off the charts smart on this stuff in describing how the world of business will be in the future. It is this wiring were are living through.

Well, if that wiring is taking place, what is happening in commerce? Well, what's happening in commerce is that the commercial information layer is being totally re-understood and reinvented.

What do I mean by the commercial information layer? Well, what I mean is that in all of commerce, there is a component of business that is information related. And that that is information related will be moved to the Net.

So if it's about information, it goes on the information grid, just like if it's about electricity, it goes on the electrical grid, and if it's about highways, it goes on the highway grid.

Now, that doesn't mean we won't have storage batteries, little places where we store power that is off the grid. Of course we will, but batteries are a tiny piece of the energy that we use. The vast majority of the energy we use, of course, comes right off the grid.

So what is in the commercial information layer? To examine it at a theory level is fairly easy. Things like product information are in the commercial information layer. Information about the product.

Availability of the product. Is it available or not is in the information layer. How you merchandise a product is information.

When you walk into a store and you experience good merchandising, what you experience is an information architecture that the store merchants have designed for you to attract, entertain, get you to buy.

That's all about the information. It's not about the product, per se, though that will come, it's about the information that's surrounds the display of the product.

Price is in the information layer. And since price is in the information layer, guess where price is going. It's, of course, going to the information grid.

In the good old days, they use to print prices right on the products. You use to be able to pick up a can of coffee, and the price was right on it, in the same days where they had those round phones.

And so now, the idea of the price being on the product is absurd. The price has already migrated in the store in many cases to an LCD display. And the LCD display gives you the price d'jour d'moment.

We know that the price of a stock or a bond or a commercial instrument changes a million times a day. Price in airlines has moved to the computer reservation system. There is no price for an airline seat, there's a market for airline seats, and it changes just about as fast as you can make a reservation for one.

So price, of course, along with the rets of the information about business is moving to the Net.

Transaction-related data moves to the Net. Financing choices move to the Net. How do you want to pay for this is information. The idea that you might pay with a credit card, a debit card, a check, who knows how, all those financing choices literally move to the Net.

Customer history moves to the Net. All the information about you as a customer moves to the Net.

Now here's something interesting that moves to the Net. Your attitude moves to the Net.

What you're thinking at that moment. Your attitude about the store is information. Information is the representation of am I happy with this site right now? Am I happy with this store, am I happy with this product they're showing me. Is this the right color? Is this place boring me? Is this person not being helpful? Is this agent not doing a good job? Information to the Net.

Intentionally moves to the Net. What do you intend to do? How can I help you. When a clerk walks up to you in a store and says, "Can I help you today?" And your usual answer is, "No, thank you, I'm just looking," because the clerk has no capacity to help you. OK. (laughter) Go away. That's intentionality.

Your intentions are knowledge or information, and you will see the ability to capture intentionality. The information of intentionality is an incredibly valuable commercial knowledge. Are you here too buy? Are you here to browse? Are you ready to buy right now. Those things are intentionality and they move to the Net.

Here's something else that's information, the opinions of others. For those of you who have ever shopped in a group, you know, how do you think this looks. You ask your friend, your mother, your neighbor, the person you're shopping with.

Opinions are information. Opinions shape the commerce experience, whether it's the opinion of an expert, a trusted friend, or whomever, even the opinion of a clerk, opinions are part of the information environment that all commerce takes place in.

So as a changing thought here, think of opinions suddenly becoming visible, moving to the information capturable layer, and being put to the Net.

Which brings us to a simple thought. If all of this information is moving to the Net, in all of its various forms, and there are other forms I haven't listed here due to time, how do we create value, if you will, or how do we create a business based on this restructuring of information?

And it turns out that on the Internet there are four ways to create value that I've been able to find, and only four, and all businesses take these four ways, and they blend them in some proportion. So here they are.

The first way you create value is to entertain. Entertainment is a very high value equation in our society. We live in an entertainment culture. If you can entertain people, you will be paid in some form for that entertainment.

People are willing to pay generally, whether it's with their attention or with their wallets, they will pay to be entertained. And they have an infinite capacity to be entertained. In our society, entertainment is an insatiable need.

So in as much as entertainment creates value, we can look at a e-commerce business, and we can measure it's entertainment component.

Some sites can be pure entertainment. A gambling site, or a sex site are examples of sites that provide nothing but entertainment, and they can be businesses.

The second element of value is convenience. This is the most over-rated of all the values, because the early adopters on the Net tend to be white men, they tend to be affluent, and they tend, all the early adopters, tended to have plenty of money.

So they tended to think that world shopped at 7-11. They had never been to a Wal-Mart store, and so they think that convenience drives the world. But convenience is an important dimension of value.

Convenience allows you to buy your time back, to shop in your slippers, to do something faster, easier, more conveniently than you did before. Which is not to say convenience is a power force. It is a very power force. It is just not the dominant force.

However, early on, convenience was a very powerful force. One could think of Amazon as a company really that scores very highly in convenience. It has all of the books if you want in stock. It has convenient reviews. You can't, of course, browse the books. For that you're going to have to go to a bookstore, but it's convenient to shop on a Web site once you know what book you might or might not want.

EBay, interestingly, is a convenience-driven company. It's very difficult to visit every flea market in America overnight. It's a lot of work. If you need those Furbies, you've got to go everywhere. Ebay has essentially accumulated in one phenomenal place every flea market ever recorded. It's like a Robert Klein record.

Every flea market in one place, and it's done it entertainingly. Why? Auctions are entertaining. So in as much as you're bidding, that's entertaining. Of course, bidding is not a way to save money, needless to say. It a way to pay more. But it's very entertaining, and convenience of all the flea markets.

And Travelocity might be a good example of a company also driven by convenience.

The third way to create value on the Internet is information. This is the least of the four, the least valuable of the four. People typically don't pay for information in our society as a general rule. They don't like to buy information, and when they do, it's called a newspaper, and they pay about 40 cents for it.

Most people don't aspire to be research librarians for a very good reason, research librarians don't make a lot of money, because not a lot of people want to hire them.

So, on the other hand, information is valuable, and when you are looking for information, if you are a business executive, you will often pay quite a bit for other information, especially if it's distilled well. So information is sort of the third component.

The fourth component is value itself, typically thought of as price, but value is probably the highest factor of all commercial components, and by value, we can summarize that as give me more for my dollar. I want, I have a budget, I have a certain amount of money to spend, and I'm trying to get as much from my dollar as I can.

People ask me about how people buy cars in America, and for those of who that don't, here's how we buy a car in America. No Americans buy cars as a general rule, everybody buys payment in America. We all buy payments. How much car can I get for $270 a month is how this country buys cars. They don't buy cars. They buy payments.

Why? Because the vast majority of people in America, have an amount of money they can spend for a car each month, and no more, and they're trying to get as much car as they can for that money, which by the way, when you go to a car dealer, is no secret to any car dealer in America. But it's a secret to most other people.

The beauty here is that value is driving the world, which is why Wal-Mart is the largest store in America, and it's why Sears is not. Wal-Mart is all about price. Value. National brands.

Now it does have convenience, in the sense that all the products are there. But it's inconvenient. It's on the outskirts of town. It's not downtown where it would like to be.

If we look at the warehouse club business, we find a $60 billion industry built entirely on price. They sell national brands, but they're delivering value.

So if we look at the Net businesses in the world and we say how is the Internet going to restructure businesses, what I would argue is that there are four dimensions to every e-commerce business: how does it entertain, how does it deliver convenience, how does it deliver information, and how does it deliver value.

Now, when you analyze companies, or opportunities on that grid, what you find is that the Net is very unbalanced. You find that the Internet, which is only 2,000 days old –that's it, 2,000 days old, the whole Internet – is very unbalanced for entertainment and convenience.

Information, which has very low value to begin with, really got given away. Literally the information sites, which were search engines, said look, we can't make any money selling you this stuff. Who are we kidding? The best we can get is about a penny every time you want something, and we'll do that with an indirect advertising model, and those pennies will add up because we have no variable costs.

But ultimately, information has very little in the way or marketability unless you have very proprietary information, in which case, it's very hard to protect that information once it gets out, it gets replicated on the Net. So be it.

So the challenge for you, as business school students is really to say to yourself, if I'm going to do something in e-commerce, how am I going to juggle the four dimensions of total value to create a business?

Now here's where we come to our next key thought. It isn't anything to put a business on the Internet. there is no idea there. To take a business and put it on the Internet is nothing. It's no different than putting a business and putting it on the electric grid, or taking a business and making sure that cars can get to it, or taking a business and putting phones in the office. That is not a business. Simply taking something from the physical world and putting it on the Net is worthless.

The reason it's worthless is it's missing the one ingredient that all businesses need to survive and thrive. And that is a sustainable competitive advantage.

If you don't have a sustainable competitive advantage, give up now and save yourself a lot of heartache, because somebody will come along with a sustainable competitive advantage to solve whatever problem you think you just solved, and you will no longer have a business.

So the challenge of the Net is how to create sustainable competitive advantage, and it appears that the Net is not very friendly to sustainable competitive advantage.

And the reason the Net isn't friendly to sustainable competitive advantage, is because everybody is very busy as a general rule, taking things from the real world and planting them on the Net. We call them transported forms in our workshops internally.

They take a plant that grows in Australia and they put it in the Antarctic, and then they wonder why the plant doesn't thrive. Because the plant has no sustainable advantage from Australia if you plant it in Antarctica.

The challenge of the Net is to reinvent what it means to deliver the four dimensions of value. And if you can't reinvent that, then essentially, you almost have no chance.

Now you do have some chance, because you can sell your business that has no sustainable competitive advantage to somebody else who does, in sort of a greater musical deck chairs on the Titanic approach, and literally, you can sell out soon before the music stops. And there have been many companies that have made great "fortunes" in doing that, but that is not a business you want to work on.

A business you want to work on is one where you can explain the sustainable competitive advantage to your mother in 30 seconds. And if you can't, you don't have one. Because your mom can understand a sustainable competitive advantage when she hears it. And if she's confused, then you are too. (laughter)

So, what are the realities? Well, the realities are it's going to take real thinking to create a sustainable competitive advantage. You're going to have to get together with others, or yourself, and you're going to have to say what can I do that nobody else can do? And what you're going to find is not much. (laughter)

Which is why it's not so easy. You're going to have to come up with answers that, you know what, I have one here. If we did it this way instead of that way, maybe we could have a sustainable advantage.

Let me give you an example. We just launched at Priceline an affiliated company called the Web House Club where you can name your own price for groceries in New York.

OK, now you might say, who wants to name their own price for groceries? I want my groceries delivered. Oh, no, we don't deliver groceries. You have to pick them up at your local supermarket.

You might say, let me see if I get this straight, because I know WebVan's coming, and they're a great company. They're about convenience. They're about delivering my groceries to my home.

And we said, well, if we could save people 30 to 50 percent on their groceries, would they be willing to go online for 10 minutes to 15 minutes, name their own price for groceries and pick them up at their local store.

We said, of course they would, if we could save people 30 to 50 percent on their groceries, they'd wear shorts to their store in the winter.

We knew that was an advantage, the question is how do we make that sustainable.

So we said, well, the way we're going to make that sustainable, is that we're going to let the customer pick multiple brands. They're going to have to tell us the two brands they like the most. Two or more. Glad or Hefty trash bags. I don't know about you, but that's not a big decision in my life. (laughter) Eveready or Duracell batteries? They both look pretty fine to me.

So we say to the consumer, give us your favorite brands when you have more than one, and we will pick the brand.

Now why? Because we knew if we could collect demand from consumers that was multiple brand, we could go to manufacturers who would pay us to choose their brand, would essentially direct the customer to their brand.

And we also knew that that had never been done before. We were the inventors of a new business method. And so we patented the method of name your own price for multiple brands of groceries for which you're charged online, you pick them up at the store, where a POS system at the store ultimately settles the transaction in the evening to make sure you picked up the right thing. We invented a new way to buy groceries.

Here's what's happened. In 80 days, we're 80 days old now, two percent of all of the households in the New York metropolitan area are now naming their own price for groceries. Two percent.

That's 150,000 households are naming their own price for groceries. They're going to any one of 1,100 local supermarkets that have all signed up with this system because we pay the supermarket the full price.

Every one of those customers have a debit card, when they go to the store, they just use the card, pick up their groceries and walk out. Whatever it says on the cash register they just laugh and leave.

The power of that idea is the power of delivering value to consumers using the information power of the Net. We don't ship groceries, we don't have inventory, we don't have warehouses, not that any of those things are bad. They're all fine, if that's what your business is, but this is an example of reinventing how you might price in a grocery store.

And you might sit there and say, "Gee, I don't know if that's going to work." Well, I have good news, it works. 150,000 people now use it every week, and we're 80 days old.

Why? Because if you deliver people real value, you can create enormous scale in new ideas, and if your idea has enough wow in it, you can get the average customer to tell 15 other customers.

The great success of eBay was not a great advertising success. It was all viral. It was all word of mouth.

Now Priceline chose to advertising aggressively to build our demand, but the reality is great businesses on the Net that deliver value can grow virally. It's one of the most unusual things about the Net.

It's like telling one neuron in your brain that the stove is hot. You don't have to tell every other neuron in the brain. They're all connected.

Very quickly, the speed at which information moves through our society is staggering.

Think of the movie "Titanic." One day we've never heard of the movie "Titanic," the next day everybody in America knows the movie of "Titanic." It's a brand created literally in a matter of weeks through word of mouth.

That is the speed of a connected society, and that same speed works when your business on the Net is right. And when your business on the Net isn't right, it's dead.

There's really only two groups on the Net, the very big and the very dead. That's it.

You're one or the other, and if you try to go from the dead to the very big, it's very hard, and even if your name is Citibank, and you spend $400 million launching eCity, the market doesn't care if you spend $400 million, if you don't have a value proposition, you're in the very dead group.

It doesn't really matter how big you are. It's doesn't matter how important you are. It doesn't matter that your name is General Motors. It doesn't matter what your name is. If you can deliver real value, convenience, entertainment, information in some right proportion, then you have a chance at sustainable competitive advantage, and by the way, that's just the entry point.

Sustainable competitive advantage does not guarantee profitability. It just means you have an advantage. An advantage is the beginning of the process. Profitability comes when the competitive advantage is worth more to the buyers than it is to the sellers, so ultimately the buyers will pay you more than the sellers could afford to do otherwise, and of course, that is the basis for all business.

If that is where we're heading, let's take a look at what makes the Net so incredibly different. What are the tools we can work with?

Now, I know every one of you are on the Net. That isn't the issue. I'm going to talk to you about it in ways perhaps you haven't thought about it before.

So I'm going to give you how we at Walker Digital, which is the laboratory that invented Priceline, and there's about 75 of us at Walker Digital, has spent the last six to seven years thinking about inventing new business methods that we believe are new and novel, that create sustainable competitive advantage, and it's the reason why, for example, at Priceline, we've hired 300 people.

It's the reason why Web House is going to hire another 200 people this year. And you'll see this year now that patents are starting to issue, six new companies starting up, and we'll hire 500 people.

It's all about understanding these dimensions. It's understanding and putting them together, much like the base pairs in DNA where you genetically engineer a plant or a lifeform by going into the DNA and reengineering these base pairs. So here we go.

Number one, biggest change of all, free communication.

The Net has no variable cost of communication. Never in the history of commerce has there been no variable cost of communication. It has always had a cost. There's always been somebody on one end of the communication that was paid. Suddenly, the Net allows you to send a million, 10 million, a billion e-mails a day, and there is zero variable cost.

Imagine if the Post Office were free. Imagine what that would do to our society. If the Post Office were free, instantaneous, and allowed two-way communications, how much would there be in Postal work? It would be enormous. The Net is free communication. That is unheard of in the history of commerce.

And so whole businesses that couldn't exist when the cost of communication was too high, can suddenly exist because now the cost of the communication is zero.

Next change, access from anywhere. The total collapse of geography.

The total collapse of geography means that any market that use to be a niche market for which geography didn't allow for an aggregation of critical mass disappears. It means that if the critical mass for your business exists anywhere in the total aggregate of society, currently perhaps the wired world of the US, fairly soon the wired world of planet, literally, if there is a market that you can aggregate on the planet that's wired, you can create your sustainable competitive advantage.

That means that ornithologists in theory, could create a sustainable competitive advantage. He could find or she could find the 200 people willing to pay the ornithologist $10 a week to help identify birds in your backyard.

That business was never practical, which is why most ornithologists are starving to death. However, that's going to change. We're going to have at least very happy ornithologists.

Next thing, access any time. The collapse of store hours. The collapse of when you're open.

It use to be you had a store, it was a commerce system, it was open, it was closed. Uh-uh. That's done. While we stand here there are tens of thousands of people on tens of millions of Web sites or vice versa. The beauty here is it never closes, it's always open.

So if the business couldn't afford the labor costs of keeping open, suddenly the business can be 24x7x365. That's a big change in the world.

Next change, new capability. Instant adaptability.

I once talked to the chairman of McDonalds about this issue. And it was very interesting.

The question I posed – it's Jack Greenburg, and he's a wonderful guy, I know he's here in Chicago. If you ever get a chance to talk with McDonalds people, these people are very thoughtful about their business.

And I said, when you go to bed every night, do you believe McDonalds is a better company than when you woke up in the morning. Has McDonalds adapted in some way everyday? Has it learned as a company every day?

And he said, "Quite honestly, I don't think so. Though we work very hard to deliver quality products, our organization doesn't learn much, because our low wage labor base is very difficult to train, and it's high turn over, and our store managers aren't paid as highly as we would like, because the market is so competitive."

That's all going to change. The notion of adaptability, where you can adapt your business, literally on the fly. Where businesses will not only adapt but evolve, is very much a future of the commercial world.

Evolution will come to commerce within a few years. And by that I mean, every business in the world will be better at the end of the day than it was at the beginning of the day. It may be only .02 percent better, but it will be better. And since half of you are in finance, you know the power of compounding is like the power of nothing else in the world.

If your business could be 200ths of a percent better everyday, that's a big deal, because at the end of the year, it's five percent better, and at the end of five years, it's 100 percent better. I'm not talking about bigger. I'm talking about better. I'm talking about learning.

And so one of the things that changes, one of the capabilities that's new about the Internet, is the fact that businesses can start to learn.