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VerticalNet: A Web pioneer in transition

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When VerticalNet Inc. launched its group of vertical industry portals in 1995, it was a content company competing with trade publishers, precious few of whom had Web sites.

Now Mark Walsh, president-CEO of the Horsham, Pa.-based company, sounds like he's taking on the whole dot-com universe. "I like to say we have the best of what trade publishers can do, the best of what Ariba can do, and the best of what FreeMarkets can do," he said.

Is the shift in VerticalNet's business model from Internet content player to e-commerce technology firm the mark of a company evolving at Internet speed? Or of one running scared?

What is clear is that more companies--including trade publishers, large corporations and dot-coms--are creating b-to-b online exchanges at a furious pace, and that the survival of pioneers like VerticalNet is by no means guaranteed.

"We definitely see a shakeout coming in the next year to two years," said Steven Kafka, an analyst with Cambridge, Mass.-based Forrester Research Inc. "Frankly, there isn't enough to go around for everybody who's out there today."

Despite the recent plunge of VerticalNet's share price--the company has shed nearly two-thirds of its market capitalization since Mar. 10--Wall Street analysts still see it as a winner. "Mark Walsh is the best CEO I've met," said Joe Garner, analyst at Emerald Research. "He's a dynamic visionary type."

It helped that VerticalNet handily beat most analysts' first quarter revenue projections--although at a net loss of $37.7 million, slightly wider than most analysts expected. It's quarterly revenues have been growing steadily. And the company can point to its alliance with Microsoft Corp., which will pay VerticalNet $100 million over three years in return for an equity stake in the company and 80,000 storefronts, which it will distribute to small businesses.

But trade publishers are wading into e-commerce and have set their sights on VerticalNet. Penton Media Inc. is building its B2BShowplace, a virtual trade show designed to facilitate e-commerce.

Penton and other publishers say their brands will trump VerticalNet because VerticalNet's content is weak and is failing to attract traffic. In 1999, VerticalNet generated $18.43 million in advertising and e-commerce revenues, which, spread out across 56 vertical communities, amounts to $329,000 per site. "That's what a strong magazine does in a few weeks," Robert Krakoff, Advanstar's chairman-CEO, quipped.

One frequent complaint against VerticalNet's sites is their lack of traffic, which some outside observers attribute to inferior content. "They're a mile wide and an inch deep," said Chris Silva, an analyst with International Data Corp.

He goes on to say branding poses a problem for the company. "[Branding] is something they should really focus on, building the Solid Waste Online brand rather than VerticalNet," Silva said.

Walsh defends his company, which is currently running full-page ads in The Wall Street Journal featuring a testimonial from 3M Corp., and says VerticalNet was forced into the strategy. "I find it incredible, but the trade publications are still refusing our ads," Walsh said.

Ed McCabe, an analyst for Merrill Lynch, New York, says VerticalNet generates high quality traffic with advertisers, and estimates it converts one out of every five leads. VerticalNet execs say traffic totals about 4 million user sessions a month.

"They may not have all the traffic, but you certainly get people [visiting the site] that you care about," said Andy McMillan, director of marketing at Think & Do Software Inc., which has a few VerticalNet storefronts to promote its e-manufacturing software.

With the Microsoft deal, VerticalNet will build a huge online b-to-b mall. But will customers come? Tim Getz, analyst with Prudential Volpe Technology Group, said, "When you think about the critical mass those storefronts will add, you have to like VerticalNet's chances."

Walsh says that any focus on traffic and advertising revenues ignores that VerticalNet's business model has evolved. "We have blended revenue streams," he said. Indeed, VerticalNet's slogan from from early has been "Content, community, commerce."

Beyond advertising, Walsh says, VerticalNet is beginning to create revenue in the manner of a company like Ariba, because it provides information technology consulting and software licensing to small and medium-sized companies looking to conduct e-commerce.

From content to commerce

VerticalNet has modified its approach to the market in more ways than one.

Through its acquisitions of technology and software companies, VericalNet created NECX.com, an online trading exchange for electronics components. NECX generated $14.6 million in revenue by taking a percentage on nearly $100 million worth of transactions in the first quarter.

But with NECX, VerticalNet has inventory and a real bricks-and-mortar business. In 1997, Walsh said that if VerticalNet moved into e-commerce, it wouldn't operate its own distribution channel but would work through a third-party vendor.

"What I meant when I said that is that we don't want to own warehouses or be in the distribution business," Walsh says today. He explains that NECX operates like a stock market and handles most inventory "for less than 24 hours."

Tim Klein, analyst with U.S. Bancorp Piper Jaffray, Minneapolis, approves of VerticalNet's move into clicks and mortar, saying, "I like it that they're not afraid to get their hands dirty."

VerticalNet plans to leverage its NECX experience to offer its technology capabilities to companies or groups of corporations building online trading exchanges. For instance, VerticalNet recently formed an alliance with Eastman Chemical Co. to relaunch paintandcoatings.com "We're going to go toe to toe with Ariba and CommerceOne," said Mike Hagan, VerticalNet's Exec VP-COO.

Ariba and CommerceOne have been leaders in creating online exchanges owned by consortiums of major corporations, such as the proposed automotive exchange to be operated by Ford Motor Co., General Motors Corp. and DaimlerChrysler.

Walsh says the advent of these vertical hubs owned by large players won't siphon transactions from VerticalNet. He says his company never planned for the contract buys of large companies to come through its hubs. Instead, he says, VerticalNet provides a place for small business to have access to other companies making spot and open source buys.

Even if one accepts this argument, VerticalNet has plenty of competition. In a recent report, AMR Research recently ranked the top 20 independent trading exchanges. VerticalNet made the list in 20th place, trailing Ventro, Commerx's PlasticsNet.com, and others.

Operations such as Thomas Regional Directory Co., which owns 18 catalogs listing 520,000 maintenance, repair and operations (MRO) suppliers, are also beginning to offer e-commerce for their customers. C.H. Bull Co., an MRO distributor, plans to use thomasregional.com as its e-commerce platform. "They have the technology and the resources as a small, independent business we do not have," says Andy Bull, president of the company.

There are many options for small businesses to generate e-commerce. In addition to VerticalNet, Think & Do's McMillan is using several traditional publication Web sites. He says he plans to continue using all of them until he finds the model that works best. It might be VerticalNet. It might not.

"I don't know which model is going to make it or if we've even seen it yet," he says.

What is clear is that companies--including trade publishers, large corporations and dot-coms--are creating b-to-b online exchanges at a furious pace, and that the survival of pioneers like VerticalNet is by no means guaranteed.

"We definitely see a shakeout coming in the next year to two years," said Steven Kafka, an analyst with Forrester Research Inc. "Frankly, there isn't enough to go around for everybody who's out there today."

Despite the recent plunge of VerticalNet's share price--the company has shed nearly two-thirds of its market capitalization since March 10--Wall Street analysts still see it as a winner. "Mark Walsh is the best CEO I've met," said Joe Garner, analyst at Emerald Research. "He's a dynamic, visionary type."

It helped that VerticalNet handily beat most analysts' first-quarter revenue projections--although at a net loss of $37.7 million, slightly wider than most analysts expected. It's quarterly revenues have been growing steadily. And the company can point to its alliance with Microsoft Corp., which will pay VerticalNet $100 million over three years in return for an equity stake in the company and 80,000 storefronts, which it will distribute to small businesses.

But VerticalNet's share price has been buffeted. After reaching a split-adjusted price of $148.38 on March 10, its share price tumbled to a low of $25.88 on b-to-b's Black Friday, April 14. Since then, the stock has bounced back, closing at $50.31 per share on May 4, but VerticalNet's market capitalization has plunged nearly two- thirds, from $10.89 billion on March 10 to $3.89 billion on May 4.

Meanwhile, trade publishers have set their sights on VerticalNet. Penton Media Inc. is building its B2BShowplace, a virtual trade show designed to facilitate e-commerce.

Penton and other publishers said their brands will trump VerticalNet because VerticalNet's content is weak and fails to attract traffic. In 1999, VerticalNet generated $18.43 million in advertising and e-commerce revenues, which, spread out across 56 vertical communities, amounts to $329,000 per site. "That's what a strong magazine does in a few weeks," Robert Krakoff, Advanstar's chairman-CEO, quipped.

One frequent complaint against VerticalNet's sites is the lack of traffic, which some outside observers attribute to inferior content. "They're a mile wide and an inch deep," said Chris Silva, an analyst with International Data Corp.

He also said branding poses a problem for the company. "[Branding] is something they should really focus on, building the Solid Waste Online brand rather than VerticalNet," Silva said.

Walsh defends his company, which is currently running full-page ads in The Wall Street Journal featuring a testimonial from 3M Corp., and said VerticalNet was forced into the strategy. "I find it incredible, but the trade publications are still refusing our ads," Walsh said.

Ed McCabe, an analyst for Merrill Lynch, said VerticalNet generates high-quality traffic with advertisers, and estimates it converts one out of every five leads. VerticalNet execs say traffic totals about 4 million user sessions a month.

"They may not have all the traffic, but you certainly get people [visiting the site] that you care about," said Andy McMillan, director of marketing at Think & Do Software Inc., which has a few VerticalNet storefronts to promote its e-manufacturing software.

With the Microsoft deal, VerticalNet will build a huge online b-to-b mall. But will customers come? Tim Getz, analyst with Prudential Volpe Technology Group, said, "When you think about the critical mass those storefronts will add, you have to like VerticalNet's chances."

Walsh said that any focus on traffic and advertising revenues ignores that VerticalNet's business model has evolved. "We have blended revenue streams," he said. Indeed, VerticalNet's slogan from early on has been "Content, community, commerce."

Beyond advertising, Walsh said, VerticalNet is beginning to create revenue in the manner of a company like Ariba, because it provides information technology consulting and software licensing to small and midsize companies looking to conduct e-commerce.

From content to commerce

VerticalNet has modified its approach to the market in more ways than one.

Through acquisitions of technology and software companies, VerticalNet created NECX.com, an online trading exchange for electronics components. NECX generated $14.6 million in revenue by taking a percentage on nearly $100 million worth of transactions in the first quarter.

But with NECX, VerticalNet has inventory and a real bricks-and-mortar business. In 1997, Walsh said that if VerticalNet moved into e-commerce, it wouldn't operate its own distribution channel but would work through a third-party vendor.

"What I meant when I said that is that we don't want to own warehouses or be in the distribution business," Walsh said. He explained that NECX operates like a stock market and handles most inventory "for less than 24 hours."

Tim Klein, an analyst with U.S. Bancorp Piper Jaffray, approves of VerticalNet's move into clicks and mortar, saying, "I like it that they're not afraid to get their hands dirty."

VerticalNet plans to leverage its NECX know-how to offer its technology to companies or groups of corporations building online trading exchanges. For instance, VerticalNet recently formed an alliance with Eastman Chemical Co. to relaunch paintandcoatings.com. "We're going to go toe to toe with Ariba and CommerceOne," said Mike Hagan, VerticalNet's Exec VP-COO.

Ariba and CommerceOne have been leaders in creating online exchanges owned by consortiums of major corporations, such as the proposed automotive exchange to be operated by Ford Motor Co., General Motors Corp. and DaimlerChrysler.

Walsh said the advent of vertical hubs owned by large players won't siphon transactions from VerticalNet. He said his company never figured on handling contract buys of large companies through its hubs. Instead, he said, VerticalNet provides a place for small business to have access to other companies making spot and open-source buys.

Even if one accepts this argument, VerticalNet has plenty of competition. AMR Research recently ranked the top 20 independent trading exchanges. VerticalNet made the list in 20th place, trailing Ventro, Commerx's PlasticsNet.com and others.

C.H. Bull Co., a maintenance, repair and operations (MRO) distributor, plans to use thomasregional.com as its e-commerce platform. The hub is run by Thomas Regional Directory Co., which owns 18 catalogs listing 520,000 (MRO suppliers). "They have the technology and the resources that we, as a small, independent business, do not have," said Andy Bull, president of C. H. Bull.

Small businesses have many options when it comes to e-commerce. In addition to VerticalNet, Think & Do's McMillan is using several traditional publication Web sites. He said he plans to continue using all of them until he finds the model that works best. It might be VerticalNet. It might not.

"I don't know which model is going to make it or if we've even seen it yet," he said.

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