Have the media found more Dead Sea Scrolls? Perhaps a new epistle from St. Paul? No, instead, it was the second-quarter income statement from Priceline.com, treated as nearly divine confirmation that dot-com companies can have a future. Hungry for encouragement from a battered sector, media reports two weeks ago latched onto Priceline’s Big News: The online travel company had made a profit.

On the surface, it was hard to argue with the numbers. Without counting one-time charges, Priceline made a nickel per diluted share, compared to a loss of a penny the year before. Those earnings came on revenues of nearly $365 million, 4% better than last year. And even accounting for one-time charges, the name-your-own-price service earned a penny a share, compared to a 7-cent loss last year.

Scratching the surface, however, experts from the Wharton School say that Princeline still faces significant challenges. A lagging economy may have worked in the company’s favor. The professors also disagree over the best use of Priceline’s marketing dollars, and they warn that future growth for this reseller of so-called “distressed inventory” may be hard to come by – particularly as the airlines get into that business themselves.

First, the Good News

Priceline’s stock-in-trade is its patented database service that allows customers to “name their own price” for airline tickets, hotel rooms, rental cars and a number of smaller-ticket items. Priceline buys inventory from 34 airlines, 50 hotel chains and five rental car companies – all eager to find an outlet for unsold inventory. If Priceline can match its inventory with the customer’s price, the deal is done.

“The basic model makes sense,” says Jerry Wind, who teaches marketing at Wharton. “But Priceline tried to expand into too many areas.” Marketing department colleague Peter Fader puts it another way: “The company tried to run before it could walk,” with big infrastructure needs and rapid expansion into areas that didn’t fit the business model.

“Priceline’s management is a lot lower-profile than it was under (company founder) Jay Walker, which is a good thing,” Fader says. Indeed, Walker left in December, when Priceline stock hit its 52-week low of a $1.06.

That marked the beginning of the company’s management turnaround: Priceline laid off more than 70 people. Walker left, after leading Priceline into disastrous efforts to sell cut-rate gasoline and groceries. The company axed those services and in May, it replaced CEO Daniel H. Schulman with Chairman Richard S. Braddock, taking a $5.8 million hit to second-quarter earnings.

“Priceline obviously has worked on getting costs down,” says David J. Reibstein, a marketing professor at Wharton.

Priceline also claims success at attracting repeat business, noting that the percentage of customer bids from repeat customers climbed from 36% to 61% in the past six quarters. In addition, the company reports “bind rates” – the consummated transactions divided by total customer bids. That number has climbed from 44% to 57% for airline tickets, suggesting greater familiarity with the system and more likelihood to follow through. Trends are similar for hotels and rental cars.

Some Serious Concerns

Marketing, management and growth continue to be grave concerns for Priceline, Wharton experts say, particularly when the economy turns around. Priceline “is still very dependent on this unused inventory,” Reibstein says. “The downturn in the economy has helped the company.”

Some, but not all, agree. Wind says price-sensitive consumers will always be around; as the economy cycles, the numbers may grow or shrink, but they’ll always be there. The bigger concern may be who serves them.

“I worry about the extent to which Priceline is competing with its partners,” says Robert E. Mittelstaedt Jr., vice dean of the Aresty Institute of Executive Education at Wharton. The airlines themselves have banded together in online enterprises such as Orbitz and Hotwire, which are designed to pair consumers with unused inventory in models similar to Priceline’s. The company itself acknowledges the concern in its SEC filings and notes “similar steps may be under consideration by certain hotel companies and travel services.” For example, Priceline this year agreed to let Expedia, now owned by USA Networks, use its name-your-own-price model in return for a royalty payment.

Airlines have found the Internet a powerful tool for their own use – particularly when the economy is bad and the leisure travel market is soft. Mittelstaedt himself saw the fruits of that trend last month, booking a $150 round-trip from Philadelphia to New Orleans – a deal only available on USAirways’ web site. It is worth noting that Delta Air Lines, an initial investor in Priceline, sold $75 million worth of Priceline’s stock on Aug. 8, cutting its share of the company from 10.2% to 7%. Priceline’s stock dropped 6%.

Though Priceline has found an audience with price-sensitive people willing to work for their savings, “the question remains: Will it become a trusted agent so you feel you’ve gotten the lowest price?” Mittelstaedt asks. “The answer is probably not, because there are so many other channels.”

For Fader, all of this – the external threats, the expectation for return customers, the economy – points to a need for Priceline to better focus its marketing efforts. Mittelstaedt and Fader call the club-crooning, beat-poetic William Shatner commercials a disastrous waste of money. And Fader doesn’t see much improvement.

“Priceline should forget about trying to broaden its brand and choose spokesmen and messages that aim at tightwads,” Fader says. That seems unlikely, based on Priceline’s statements. The company’s existing spots feature the voice of actor/director Quentin Tarantino. New spots will feature Tony Randall and Billy Idol. And in its latest radio campaign? Shatner’s back.

Marketing is a huge issue for Priceline, which has built “probably one of the best known brands” since its launch in April 1998, Wind says. When the company subtracts the raw cost of airline tickets, hotel rooms and rental cars from its revenues, its second-quarter gross profits were $60 million. Of that, Priceline spent 54% on sales and marketing. Wharton experts differ on how to interpret that.

The $33 million spent on marketing is down 19% from a year ago, but Fader says “they should be 20% of the year-ago numbers, not just 20% less.” Mittelstaedt, too, advocates spending less and notes Priceline is moving in the right direction; the percentage of gross profits spent on marketing was 83% last year.

Expedia.com and Travelocity.com spent higher shares on marketing, according to their SEC filings, and both Wind and Reibstein agree that’s not unusual for service-oriented companies with little more to build than a brand.

Looking Ahead

Though Priceline executives have publicly says they expect the company to remain profitable going forward, growth may be hard to come by and finding new markets – even at the expense of profits – may be a worthwhile investment.

“If I were in their shoes, I’d want to see where we are going to invest and demonstrate to the Street that certain segments of my business are profitable,” Wind says. For example, airline, hotel and rental cars may go forward as profitable business lines. If Priceline can sustain that and break it down for investors, the company may be free to take losses as it tries new product lines – delivering their service on wireless devices or via telephone, for example.

Priceline’s product lines may be hard to expand as well. After failing to deliver on tangible goods such as groceries and gasoline, experts and the markets have lauded the company’s focus on intangible goods like airfares and car rentals. Mittelstaedt and Wind note Priceline’s model works well on goods without a physical deliverable, with fairly undifferentiated suppliers (price-sensitive customers don’t care which airline they fly, for example). The notion of “expiring inventory” has also been key to the company’s success. What’s next?

“We cannot predict whether the Priceline.com business model can be successfully applied to (non-expiring) products and services,” the company says in its SEC filings. That’s a theme observers like Reibstein seem to be unanimous about: “Priceline is going to have some difficulty looking for growth,” he says.