You don’t have to be a couch potato to catch the commercials with Star Trek’s William Shatner hamming it up as a lounge lizard and beat poet. The ads are all over the tube, making Priceline one of the best-known shopping sites on the Internet.

Priceline, indeed, is a growing concern. Since its launch in April 1998, it has moved beyond its initial business of selling cheap airline tickets, hotel rooms and rental cars to include groceries, gasoline, new cars, mortgages and phone service. In its report for the second financial quarter, ended June 30, it said its customer base had grown to 6.8 million through the addition of 1.5 million people in each of the first two quarters. While still losing money, losses are shrinking.

“We believe we are rounding the final turn and on the homestretch towards profitability,” Priceline President Daniel H. Schulman said in announcing the quarter’s results. “We continue to attract record new customers, but even more importantly, our loyalty among existing customers is accelerating.”

But all is not as perfect as these numbers, statements and cheery commercials suggest. Pessimistic investors have driven Priceline’s stock way down from its highs of $104 in March and $165 in the spring of 1999. On Wednesday, Sept. 27, Priceline plunged more than $7, or 41%, in early trading to about $10 a share, after the company warned that poor sales of airline tickets would cause third-quarter revenues to fall short of analysts’ expectations.

In August, Priceline founder Jay S. Walker agreed to sell $190 million of his own Priceline shares to raise desperately-needed cash for the company’s WebHouse Club affiliate. Many once-admiring analysts have downgraded the stock, acknowledging serious questions about the Norwalk, Ct. company’s viability.

“People are finally looking up and noticing that the emperor is naked,” says Wharton marketing professor Peter S. Fader. He believes Priceline’s enormously expensive marketing campaign is wasted, because the company’s services do not have long-term appeal to a mass market. Instead, he believes Priceline can attract and keep only a niche group of customers, those willing to go to considerable trouble for small savings.

Wharton marketing professor David J. Reibstein is less pessimistic, believing that there may be enough customers willing to trade time for savings to make Priceline succeed. “Most of what’s going on online is appealing to the time-sensitive customer, and in that way Priceline is very different,” Reibstein says. But he, too, acknowledges Priceline faces many obstacles and is not a sure winner.

Priceline says in filings with the Securities and Exchange Commission that it offers a unique though unproven service and “may never achieve profitability” if it must continually expand its marketing campaign to draw new customers.

Priceline describes its business as a “demand collection system” in which the website serves as an auctioneer bringing airlines or other product and service providers together with consumers. For buyers, Priceline offers the prospect of low prices. For sellers, it provides an inexpensive outlet for goods and services which otherwise might not sell at all. Like any retailer, Priceline seeks to profit primarily on the difference between what it charges customers and what it pays suppliers, although it charges a variety of fees as well.

Its biggest revenue source is airline ticket sales, which serve as a model for most of its operations. The goal is to offer customers deep discounts, and to provide airlines some revenue on seats that would become worthless if left empty. To bid for a seat, the customer first submits a credit card number and irrevocable authorization to charge the card if the bid is accepted. The customer must be flexible on airlines, flight schedules and intermediate stops. If the customer’s bid is accepted, the transaction is final. If it is rejected, the customer must wait seven days to place a new bid for the same itinerary.

Grocery purchases are similar, except that the waiting period to change a rejected bid is 24 hours instead of a week. Customers are not sure which brand of apple juice, shampoo or other product they will receive. And, although they pay online before going to the supermarket to get their purchases, there is no guarantee the products will be in stock. If not, the customer can go to another store or return later. The purchase order is good for 90 days.

Whether it is air tickets, groceries or other products, purchases through Priceline can involve considerable inconvenience. With groceries, for instance, there is the online shopping time that can easily take an hour or more, and then the trip to the store, where the Priceline purchases must be handed to the cashier separately from the non-Priceline items.

Grocery customers may find that they are indeed getting deep discounts from the prices marked on store shelves, only to discover that comparable products can be bought on sale just as cheaply and with far less hassle.

Critics such as Fader doubt that the savings will be sufficient to create enough loyal customers who will keep coming back on their own despite the headaches. Thus Priceline would have to continue its expensive advertising campaign to lure new customers, making profitability ever elusive.

In its report for the quarter ended June 30, Priceline said its advertising, sales and marketing expenses had more than doubled in the quarter compared to the year-earlier period. It noted that that 39% of the online bids came from repeat customers. An analysis by Credit Suisse First Boston Corp. pointed out that does much better, with 70% of its orders coming from repeaters.

While this suggests Priceline is not generating great customer loyalty, Credit Suisse said two-year-old Priceline could match five-year-old Amazon in time. But, of course, Amazon also is a money-losing company with an uncertain future. Moreover, Fader argues that focusing on the number of orders coming from repeat customers overlooks a far more valuable figure, were it available – the number of customers who tried a site and never returned.

On the other hand, Reibstein notes that retailers have long served customers who will go to the trouble to clip coupons or hunt around for sales. Nonetheless, Priceline does seem to be swimming against the current, he admits. “Is this happening right at a time when people are becoming more and more pressed for time?” he asks. “It may be a great concept at the wrong time. But I actually believe that’s something of an elitist view.”

Priceline’s strategy is in some respects the opposite of Amazon’s, he says. Amazon goes after customers who want convenience, even though they might get books, CDs and other products cheaper elsewhere. “Priceline is going after the price-sensitive customer who is not time-sensitive,” he says.

In a true auction, the buyer whose offer is rejected can immediately offer more. This enables buyers to start with unreasonably low offers and repeatedly probe with small increases to find the lowest price the seller will accept. By incorporating a waiting period for the submission of new bids, Priceline discourages this approach. Eager for an airline ticket or basket of groceries, the customer may be reluctant to waste time on low bids that are likely to be rejected. As a result, the customer may pay more than Priceline would actually have required. While this can increase Priceline’s revenue in the short run, critics think it can backfire if customers discover they didn’t’ get such great deals after all. “A lot of people have said that what ends up happening is that people put down higher prices than necessary,” says Reibstein.

Like many online retailers, Priceline is betting its big marketing expenses will eventually pay off with a loyal group of customers who will come back repeatedly without prompting. But it is not at all certain that online shoppers will ever develop such loyalty, and it’s not hard for competitors to enter the business.

Indeed, six major airlines have formed, a site that sells “distressed inventory” – seats likely to go empty – in a system similar to Priceline’s. As with Priceline, the hotwire customer is not told the airline or exact departure time until after the purchase is final. But Hotwire does not require a non-refundable upfront payment as Priceline does; the customer has 30 minutes to accept or reject Hotwire’s offer.

Some analysts also worry that Priceline’s newer offerings, such as gasoline, don’t have the discounting potential of airline tickets. An air ticket worth hundreds of dollars one minute is worth nothing the moment the gate is closed, so airlines have good reason to slash prices as the departure time approaches. But a gallon of gasoline can sit in a tank indefinitely; the seller has lots of time to tinker with prices or find other ways to lure customers. And profit margins on gasoline are very slim, giving sellers less incentive to cut prices.

If customers find they cannot make deep savings, they must be lured to a site some other way, says Fader. “You don’t emphasize price, you emphasize service, selection, quality, convenience. These are four attributes that nobody associates with the way Priceline does business.”