(FORTUNE Magazine) – For more than a year now, Star Trek's William Shatner has been beamed down over America's radio airwaves, proclaiming that Priceline.com is going to be "big--really big." If that sounds boastful, well, it's sheer modesty compared with the way Jay Walker, Priceline's 43-year-old founder, describes his company in person. Priceline, he says, "will reinvent the environmental DNA" of global business. In creating it, Walker declares, he tore a page out of the "Lewis and Clark story" and produced "a totally different form of energy."

And you thought Priceline just sold cheap airline tickets.

For Walker and his company, these are heady times. After just 16 months in business, Priceline is a sensation, at least by the yardsticks of the Internet age. It's built around an idea--Walker calls it buyer-driven commerce--that has been widely portrayed as the kind of paradigm-bending innovation that can happen only on the Net. Reported revenues have been growing at a triple-digit pace (although, as with other Internet startups, Priceline's bottom line shows nothing but losses--$157 million at last count). And despite the recent Net-stock correction, the Stamford, Conn., company's market cap is still more than $10 billion--bigger than that of any U.S. airline.

All this has brought Walker riches (his stake in the business is worth about $4.7 billion) and personal acclaim. Though at least a decade older than the typical Gen X Internet tycoon, Walker has become a guru of the Digital Age. Forbes magazine went so far as to pose Walker on its cover with a light bulb and anoint him the "New Age Edison."

Walker, characteristically, seems comfortable with the comparison. Buyer-driven commerce--where customers can "name their price" for airline tickets, hotel rooms, or other goods--is "absolutely revolutionary," he says. It will "restructure the P&L of the airline industry," for starters, and ultimately transform transactions worldwide in travel, retail goods, telecommunications, and financial services. "A significant amount of the global economy will be priced this way," he promises.

Or maybe not. The clear-eyed truth is that buyer-driven commerce has so far proven to be more a marketing gimmick than the centerpiece of a revolution. As a business model, it remains unproven in the travel industry, much less the half-dozen other industries Priceline plans to enter. As for the company's prospects, Priceline hasn't a penny of profit anywhere in sight, and it faces competition at every turn from, among others, its own suppliers. There's even a dispute as to whether Walker invented his patented form of commerce or simply recast another firm's earlier concept.

In the brave new world of the Internet, rhetoric--like stock valuations--has a tendency to get inflated. It's not unusual to find a considerable chasm between hype and reality, between promise and results. But even in this murky realm, no company raises more questions than Priceline. What follows is a skeptic's guide. You might even call it "Everything You Always Wanted to Know About Priceline (But Were Making Too Much Money to Ask)."

A fast-talking, gesticulating native New Yorker, Jay Walker has followed a roundabout route to his new role as Internet visionary. During the past 20 years he has launched more than a dozen companies, usually based on some kind of low-tech, cross-marketing scheme. He has tried to sell mail-order catalogs in bookstores and ad space in catalogs. He has used catalogs to distribute coupons for discount airfares. He has developed programs to use airline frequent-flier miles to sell magazine subscriptions. His ideas ranged mostly from outright failures to modest successes, although one--using credit cards to renew magazine subscriptions automatically--eventually turned into a solidly profitable business.

In important respects Priceline is like most of Walker's earlier creations. For all the consumer empowerment implied in its "name your price" format, Priceline is really about solving a vendor's problem: in this case, how to make money from the 500,000 airline seats that go unsold daily. Most businesses with excess merchandise cut prices over time. But airlines can't because they depend heavily on socking it to last-minute business travelers. Besides, many of those empty seats are on early or late flights, when no one wants to fly.

In pitching his "name your own price" model to airlines beginning in 1997, Walker argued that his novel format could fill those unattractive seats with price-conscious leisure travelers. To assure the airlines that Priceline wouldn't poach their full-fare business travelers, Walker agreed to impose draconian restrictions on whatever discount tickets the airlines made available to him. For example, customers submitting bids must guarantee their offer up-front with a credit card. They have to agree to accept a departure anytime between 6 A.M. and 10 P.M. They can't specify an airline. They can't get frequent-flier miles, switch flights, or get refunds. And in most cases they have to change planes or make at least one stop. In short, the airlines could put the warm bodies wherever they needed them. Says Walker: "We called it consumer freight, because the consumer is behaving like freight."

While private investor groups were sold enough to pitch in some $50 million in equity capital, the airlines were less enthusiastic. As Priceline's April 1998 launch date approached, only two of the smaller "major" domestic carriers, TWA and America West, had signed on. Walker knew that he'd have no way to fill much demand from such skimpy inventory. Gambling, he decided to launch anyway.

The key to luring consumers was a $15 million radio blitz featuring Star Trek star William Shatner. Walker wangled his first meeting with the actor (in the bar at Manhattan's St. Regis Hotel) after offering to pay him for his time. Once recruited, Shatner agreed to take his $500,000 fee mostly in stock--100,000 shares, now worth about $7.5 million. ("Wasn't that a good move," chortles the actor.) In April, Priceline opened for business, with Shatner reading scripts Walker had written himself, urging consumers to "name your own price" for airline tickets.

When more than a million customers tried to do just that, of course, the vast majority got nowhere. During 1998 just 7% of Priceline bidders--one in 14--got tickets. To satisfy even that sliver of its client base, the company had to buy some tickets on the open market at published fares--just like an old-fashioned travel agency--and subsidize thousands of bids. During its first several months, Priceline lost about $30 on each ticket it sold. By late summer, Priceline was running out of cash, and Walker's gamble looked like a disaster.

Then Walker's luck began to turn. In August he hired onetime Citicorp president Richard Braddock as chairman and CEO. The price was steep--10% of Priceline's stock, now worth about $1 billion--but it brought Priceline valuable credibility. (This June Braddock was joined by Dan Schulman, who had managed AT&T's $22 billion consumer-markets division, as president and COO.) Taking himself out of direct management responsibility, Walker assumed the title of vice chairman.

Even more important, days later Walker finally enlisted a big carrier, Delta. Again, it took a sweetheart deal. In return for providing Walker with discounted tickets, Delta got the right to veto new participants in Priceline; to block competitors from providing tickets on certain routes; and to keep a piece of any gross profits over 12% on the Delta seats. Indeed, the deal gives Delta so much control that Priceline, in SEC documents, disclosed it might even run afoul of government antitrust regulations. Most valuable of all, Delta received warrants for 18.6 million shares--about 12% of Priceline--at 93 cents each. The warrants, which Delta is now free to exercise, are worth almost $1.4 billion. Delta recently unloaded 1.5 million shares, netting more than $100 million.

But Priceline got plenty out of the deal as well. With Delta onboard, Northwest soon followed, and Continental signed on this July. (Both have received warrants for smaller blocks of stock.) The Delta breakthrough also helped attract another $55 million in private capital from, among others, financier George Soros and Microsoft co-founder Paul Allen. (Priceline's board now includes former FORTUNE managing editor Marshall Loeb and N.J. Nicholas Jr., former co-CEO of Time Warner, FORTUNE's parent.)

All that, in turn, set the stage for the real bonanza: Priceline's IPO. Walker persuaded Morgan Stanley to take the company public, assuring the support of Mary Meeker, its religiously followed Internet analyst. The March 30 offering still stands as the most eye-popping Net IPO of 1999: Opening at $16 a share, Priceline stock stood at $69 by the closing bell--and hit $162 a month later. Walker's money-losing startup had been transformed overnight into a billion-dollar market phenomenon--and its founder was reborn as an Internet icon. In a rare understatement, Walker concludes: "It's an example of the power of promotion."

If Priceline's blockbuster launch proves the power of promotion, the "name your own price" pitch is all about the power of suggestion. It's a seductive appeal, one that hints at both consumer empowerment and great prices. The company labors to maintain the mystique. Its Website speaks of how Priceline will "take your offer to our participating airlines," as if there were a clerk in a basement room at Delta saying yea or nay as each bid arrives. In the same vein, Walker insists, "The pricing is not us. The consumer prices at Priceline."

Well, not exactly. Here's how it really works: Priceline negotiates with participating carriers for access to unsold seats at special prices. Those prices, which the airlines may revise as often as several times a day, are entered into Priceline's private computer database before any bid arrives. When one does come in, computers check whether a match is available; the bidder is then notified by e-mail. In other words, a bid is filled only if it meets (or exceeds) a price previously named by one of Priceline's airlines. Sure, consumers can "name" prices at Priceline, but it remains the airlines that set them. Indeed, because Priceline keeps the prices of its available tickets secret, the company offers consumers what is truly a revolutionary opportunity: the chance to pay more than the asking price.

In truth, Priceline acquires its inventory much like the dozens of industry consolidators, who also negotiate private, discounted deals for airlines' hard-to-sell seats. And it's not at all clear that Priceline's deals are any better.

CEO Mike Hartley of the consolidator CheapTickets Inc., which has its own Website, says most of his fares for last-minute travelers are 5% to 10% off the price the airlines had previously charged for 21-day advance purchases. "The carriers are pretty open about what they're giving Priceline and what they're giving us," he says. "And it's the same deal." Tom Parsons, a much-quoted expert on airfares who operates his own travel club, called BestFares.com, agrees that consolidators and airline fare sales offer comparable prices. And unlike Priceline customers, a consolidator's clients may select their airline, routing, and time of departure, as well as collect frequent-flier miles.

On the issue of price, Priceline itself offers a fair bit of doublespeak, perhaps out of fear of angering the airlines. "It's never that we've got the best price," says Walker. "It's that it's your price." Walker says that customers should shop around and grab a "reasonable" published fare if they find one--but come to Priceline if they don't. He says Priceline often can't beat airline sales.

At the same time, Priceline vigorously insists that for last-minute travelers its tickets are often cheaper than those available elsewhere. It says an internally generated study shows savings of up to 44% over consolidators. Walker bristles at any comparison between his company and ordinary consolidators. "I'm selling a different product," he says. "We are quantum mechanics. They are Newtonian physics."

Be that as it may, an informal FORTUNE e-mail survey of travelers who bought tickets through Priceline found nothing revolutionary about Priceline's deals. According to Parsons, four of the seven customers could have paid less (in one case, $127 a ticket less) by using consolidators instead. Most of the Priceline clients nonetheless came away pleased with their perceived savings. Yet several--especially those who needed to call customer service--found the experience frustrating. One dubbed the service "Priceline.scam."

Like its ticket customers, Priceline shareholders might also benefit from a healthy skepticism.

Let's start with the company's top line. It's true that reported revenues are booming at Priceline. In the most recent quarter, sales doubled to $111.6 million. Yet there is less here than meets the eye. Priceline actually books as revenues what bigger Net competitors like Travelocity call "bookings" or "gross sales": the full price customers pay for airline tickets and hotel rooms. Priceline gets to keep only a fraction of that--namely, the tiny spread, if any, between the accepted bid amount and the price it paid for the merchandise. (Priceline explains that it books revenue this way because it serves as the "merchant of record" for airline and hotel transactions.) In the second quarter, this spread--plus fees from fledgling auto-sales and home-loan services and a Website credit-card solicitation--produced a "gross profit" of just $10.5 million. Of course, that's before the company's other costs, all of which netted out to a quarterly loss of $14.3 million.

Moreover, on close inspection, even the sharp sales growth looks far less impressive. Priceline sold 440,000 tickets and doubled revenues last quarter by filling a much greater percentage of bids (more on that in a moment), but the total number of offers for airline tickets actually grew by only about a third.

Indeed, while the founder boasts about Priceline's cosmic future, his senior managers are acting like men with serious concerns in the here and now. Both Braddock and Schulman say the company needs to make a lot of big moves fast and even fundamentally shift its business model. They're focusing first on Priceline's treatment of customers--Walker's "consumer freight." "You tell me a business that can satisfy 7% of its customers and live," says Braddock, citing the company's "fill" rate for 1998. That figure is now up to 24% of all offers and 42% of what the company calls "reasonable" offers (no more than 30% below the lowest published advance fare). Braddock says Priceline needs to satisfy at least half the "reasonable" bids. To that end, he has established a special phone bank to call customers whose bids fell just short and allow them to take another crack at it.

Both men believe Priceline needs to establish a new, broader brand identity that stands for something more than price. Schulman envisions a new marketing campaign--one produced professionally, not by Walker. It may not include Shatner. "To me," says Schulman, "a celebrity spokesman is one of the last things you do."

Both managers and founder agree that Priceline has to break its dependence on the travel business, now about 92% of revenues. In travel, Priceline faces not only gossamer-thin margins but scores of current and potential competitors--especially the airlines. If the carriers conclude they can selectively discount tickets themselves without cannibalizing revenues, they will cut Priceline off in a nanosecond. Indeed, carriers already widely offer special "Websaver" deals and last-minute discounts by e-mail. In a recent SEC filing, Priceline acknowledged that unless it expands its product line dramatically, it is "unlikely" to make "significant profits."

So the company is targeting multiple fronts. "Adaptive marketing" deals are in place or in the works with credit card issuers First USA and Discover, long-distance carrier Sprint, Internet provider EarthLink, and Net broker E*Trade. (In these arrangements, Priceline gets fees when its airline customers agree to sign up for a card or service in return for a small supplement on their bid.) Priceline is also preparing a nationwide rollout of its car-buying service, previously limited to New York; considering investing in an S&L to establish "priceline.mortgage" (it now markets another Website's home-loan service with the veneer of a name-your-price pitch); and may license new services where consumers can name a price for products sold by retailers or other consumers. Walker wants to get into business-to-business sales and telecommunications--and take everything Priceline does abroad.

Whether all this will make Priceline's bottom line "big"--much less "really big"--is anyone's guess. But the odds are steep. At its recent share price of $75, Priceline would have to net more than $206 million just to trade at a price-earnings multiple of...100! Jay Walker's revolution may be upon us, but its payoff in profits still seems light-years away.

Not so long ago a new business first began telling the world about its "new and exciting" travel service: It would allow consumers to submit bids for airline tickets, guaranteed with a credit card. The company would then try to fill the bids on airlines willing to accept discounted fares for seats that would otherwise remain unsold.

The idea had broad application, the inventor explained. It would work for hotel rooms, rental cars, even cruises--any such "perishable" inventory. Its founders boasted in their marketing materials that this revolutionary system was the first ever to let you "name your price" for consumer products and services.

No, this wasn't Priceline--and the inventor wasn't Jay Walker. It was a San Francisco company called Marketel--operating in 1991--and the man behind it was a Dartmouth MBA named Bill Perell. Perell, who had hit upon the bidding idea during a career as a commodities trader, called the travel service "BookIt!" He and his partner, a Berkeley law school graduate named Eric Martinez, had already been working on the project for four years.

But Marketel didn't get far. The Internet wasn't yet an option, so they took bids for airline tickets, their pilot product, by phone and fax. Marketel couldn't raise much capital; the patent office wasn't yet granting protection to business models (as opposed to products); and the airlines weren't particularly cooperative. Seven months after its launch, Marketel folded.

Until this year, that is. In January, after Priceline announced its plans to go public, Perell and Martinez sued in San Francisco federal court, claiming they were the real inventors of "buyer-driven commerce." Walker--who also faces an unrelated administrative challenge to his patent--has dismissed any suggestion that Priceline didn't build its business model from the ground up. "This is an entirely new concept," he has widely proclaimed.

Walker is apoplectic about the Marketel suit but declines to address details of the matter publicly. "We deny every allegation in the complaint vehemently," he says. Walker's San Francisco attorney, Raoul Kennedy, noting the claim's pre-IPO timing, calls it "Shakedown 101." To win such suits, plaintiffs generally need to prove that they possessed proprietary, nonpublic information or methods that the defendants misappropriated for their own business. But Kennedy points out that Marketel has yet to produce a single document suggesting it possessed any valuable trade secrets, much less that Priceline stole them.

Kennedy acknowledges, however, that Walker had crossed paths with Marketel. But the two sides bitterly dispute whether this has any significance.

Government records show that Walker's patent application for buyer-driven commerce (ultimately granted in 1998) explicitly disclosed Marketel as "prior art"--closely related technology--and that the submission was rewritten after a patent examiner concluded Marketel's work precluded some of his claims.

What's more, Walker had had direct contact with Marketel through Andre Jaeckle, a Cornell classmate and currently the CFO of CMC, a marketing company Walker founded. (In exchange for loaning Priceline $1 million during 1998, Jaeckle also received warrants for stock now worth about $4.7 million.) Jaeckle, it turns out, was a close high-school buddy of Perell's. Perell claims that after signing a nondisclosure agreement, Jaeckle had been given Marketel's confidential private-placement documents and in late 1988 proposed Walker to Perell as a potential investor.

Over the next 18 months, Perell says, he spoke to Walker on the phone more than a dozen times, discussing the proprietary details of the Marketel technology and business plan--including the notion of inviting consumers to "name your price" for unsold airline tickets and hotel rooms. Perell says he also presented the idea to Tim Brier, vice president for marketing programs and pricing at Continental Airlines, to seek the airline's participation in "BookIt!" Brier, who had known Walker since the mid-1980s, now serves as president of Priceline's travel division and owns company stock worth more than $225 million.

Marketel's suit names Brier, Jaeckle, and Walker personally as defendants in an alleged scheme to misappropriate its concept. "They milked us," claims Perell. Jaeckle has denied the charges in court papers. Brier said he didn't recall ever hearing from the California company while at Continental, though FORTUNE later obtained a letter he wrote Perell in 1991 stating that "we have reviewed your proposal." (Continental declined to participate.)

In early February, after a failed mediation attempt, the two sides discussed a settlement proposal that, FORTUNE has learned, would have allowed Marketel to purchase 375,000 shares of Priceline stock at the IPO price--shares that would now be worth about $28 million--and included a cash payment of $2.5 million. The settlement plan collapsed, however, and Perell and Martinez say they now expect the case to go to trial. Their revised view of the economic value of their claim against Priceline: about $1.5 billion. Given how much they have to prove, that's money they're a long way from getting. But Marketel has raised questions about Walker's status as a New Age Edison.

Whether or not Jay Walker really created "buyer-driven commerce," there's no question that he has spun the concept into gold. Even his competitors are grudging admirers. "Jay had a great scheme," says Tom Parsons. "When you think about it, they invested a hundred million dollars to make billions. That's pretty smart."

CheapTickets CEO Hartley agrees. He sells more airline tickets than Priceline and racks up comparable revenues, but his company carries a market cap of just $900 million. "My hat's off to Jay," says Hartley. "He's created a national brand in a very short period. I think I could've done the same if I spent the money he did on advertising. But then, we've got a policy here at CheapTickets: We need to make money.

"It's really hurt our valuation."