VerticalNet Bets on the B2B Market

Few people who log on to the Internet have heard of Solidwaste.com.

Compared with portals like Yahoo or America Online, which lure tidal waves of users each day, Solidwaste.com barely draws a trickle of traffic. Still, for those in the business of treating solid waste, the site is a convenient source of information about their industry. It features news stories about landfill closings, auctions for products like carbon steel pulverizers, and reviews of the latest truck-weighing software. It may lack the sex appeal of Amazon or eBay, but to professionals in its highly specialized field, Solidwaste.com offers, well, solid value.

That, at least, is what Mark Walsh, CEO of VerticalNet, the Horsham, Pa. based company that created Solidwaste.com, hopes. Since its inception in 1995, VerticalNet has created 53 so-called vertical trade communities like Solidwaste.com, a site that "no one visits twice by mistake," jokes Walsh. VerticalNet’s communities include Adhesives and Sealants Online, Hydrocarbon Online and Paint and Coatings Online, among others. Unlike consumer-oriented websites like Amazon.com or CDNow.com, which aim at individual buyers of books or CDs, VerticalNet’s goal is to create virtual business-to-business bazaars, where participants can do everything from exchange basic information to finalize e-commerce deals.

The business-to-business (B2B) Internet market, as analysts have often pointed out, has vast potential. Forrester Research, a consulting firm in Boston, reckons that B2B Internet advertising will increase to $2.6 billion in 2002 (from $290 million in 1998), while B2B e-commerce will grow to $327 billion that year (from $17 billion in 1998). B2B online auctions are estimated to reach $52.6 billion by 2002 (from $8.7 billion in 1998). VerticalNet wants a piece of that action, and Walsh believes that building vertical trade communities is the way to get it.

Walsh explained VerticalNet’s goals and strategy in two presentations before the Wharton Forum on Electronic Commerce and Seminars for Business Journalists in December 1999. VerticalNet’s game-plan, he notes, is simple. "We create, acquire and operate sites on the Internet where businesses interact with each other, access vital information and recreate their industrial communities in the environment of the new media," Walsh says. "As we grow the number of VerticalNet communities, we will grow their value to members, which in turn will increase their value to advertisers and sponsors. This multi-phased growth will result in increasingly higher revenues for VerticalNet."

Walsh has good reason to emphasize revenue growth. So far, like most web-based businesses, VerticalNet’s revenues have grown much more slowly than expenses, despite its $5.4 billion market capitalization. In 1998 the company lost $13.5 million on revenues of $3.1 million, and in the first quarter of 1999, while revenues rose to $1.9 million from $1.3 million in the previous quarter, the quarterly loss increased to $5.6 million from $5.3 million in the previous quarter. Business picked up substantially in the third quarter of 1999, though, when revenues climbed to $5.18 million. Still, the company lost $10.6 million that quarter.

Most of VerticalNet’s revenues come from the sale of virtual storefronts, though Walsh believes that over time commissions on e-commerce deals will become a significant cash generator. By the end of the third quarter of 1999, VerticalNet had sold 2,676 storefronts to 1,683 advertisers. The storefronts, Walsh claims, generate thousands of sales leads for advertisers. "Leads are e-commerce," he says. "Some 20% of VerticalNet’s leads have resulted in sales." A recent internal survey found that the average sale on VerticalNet is worth $25,000. In half the cases where deals occurred on VerticalNet sites, the buyer and seller had never done business before.

Walsh points out that the B2B market is significantly different than the business-to-consumer (B2C) market. In the latter, the elimination of middlemen has been commonplace. The book-selling business, for example, was like a large dysfunctional family in which "editors hated publishers, publishers hated authors, authors hated all of them, and booksellers hated you," Walsh says. That supply chain was ripe for shattering, and Amazon.com stepped in to do just that. In contrast, in the B2B market, the opposite is true. Manufacturers not only see the need for distributors, but they also recognize the need for distributors to earn a fair profit. "In the B2B market, the web is not about disintermediation," Walsh says. "It is just a better selling and information channel. The Internet helps you find out fast who’s bad and who’s good."

Walsh says VerticalNet has been expanding through a combination of online and offline marketing efforts. The company’s online marketing strategy includes buying thousands of keywords from web portals like Alta Vista and Excite. Result: if someone searches for "reverse osmosis" on Alta Vista, for example, a banner ad for Pollution Online, one of VerticalNet’s communities, promptly appears. Clicking on the ad takes the user to VerticalNet’s site and to links about reverse osmosis and related issues. In addition, VerticalNet has 200 sales people, many of whom have been hired from trade publications or industry associations, who market storefronts to advertisers.

Another source of growth has been through acquisitions, deals in which VerticalNet has often used its stock as currency. On Jan. 4, the stock, which trades on NASDAQ, closed at $152.56. Last November the company took over NECX Exchange, a business-to-business service for the electronics industry, which had revenues of $350 million and profits of $37 million in 1998. "Adding NECX’s market leadership and domain expertise not only enriches our transaction and market making abilities, but also gives us a strategically vital user base in Europe and Asia," Walsh says. VerticalNet already operates globally; some 40% of its web traffic comes from outside the U.S.

Walsh continues to make deals with a vengeance. On Jan. 5 the company announced deals with Biosupplies.com, an e-commerce site for biomedical research, and with Community of Science, a web network for scientists. Walsh’s vision is that VerticalNet will become the "Internet’s leading industrial community for e-commerce and industry information services." That vision could fade if the Internet economy, which many observers fear has begun to exhibit bubble-like characteristics, bursts sometime in the future. Walsh, however, is unfazed by that prospect. VerticalNet gets its revenues from companies in several industries, and this diversification could stand it in good stead in a future downturn. Says Walsh: "VerticalNet is a portfolio play."

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