[CNET] Mark Walsh on B2B's

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From: Linda (joelinda1@home.com)
Date: Thu Jul 13 2000 - 20:22:35 PDT

Well, Guy Kawasaki might be right in his predictions. Yesterday
Ariba (ARBA) released excellent non-earnings for this quarter
(total revenues increased 578% over same quarter last year and 101%
sequentially, Network (recurring) revenue increased 150% sequentially,
net loss significantly less than expected.) It
appears that Market sentiment on B2B stocks is lifting.

In this interview, Mark Walsh, CEO of VerticalNet (VERT), has some
interesting thoughts on B2B companies. VERT uses a hybrid business
model which generates both off-line and on-line revenues.




VerticalNet CEO forges ahead despite B2B stock woes
   By Sandeep Junnarkar
   Staff Writer, CNET News.com
   July 5, 2000, 4:00 a.m. PT

Q&A Mark Walsh, the chief executive of business-to-business portal
VerticalNet, says he's made a career of joining companies well before
their time.

He worked at HBO before pay-TV went prime time. He joined direct
marketer CUC International when shopping from home had nothing but
a small following of shopping addicts. He was at General
Electric's Genie online service before most people had even heard
of the Internet. And he was plugging away during America Online's
dark days when the company was trying to cope with growing pains.

Now Walsh is at VerticalNet, which he joined just as the
business-to-business market blasted into Wall Street's lexicon
as one of the next big growth engines on the Internet.

 "To be on the right side of the fence, at the right time,
singin' the right tune, is absolute heaven," Walsh said

But who knew heaven was fraught with such uncertainty?

Within months of touting the business-to-business industry, the
same investors began pulling their support. Shares of Commerce
One and Ariba, whichmake specialized software to create online
industrial exchanges, have plummeted. Ariba, which has traded as
high as $183.31 in the past 52 weeks, is now hovering around $97,
and Commerce One, which hit a high of $165.50, is down around $45.

Even VerticalNet, which soared after a $100 million investment
from Microsoft, has slumped to about $37 after hitting a 52-week
high of $148.37. These dramatic examples don't concern the
energetic Walsh, however, who says he has been smitten by the
"B2B bug" since he "drank the Kool-Aid."

Walsh recently met with CNET News.com to discuss whether
business-to-business companies can live up to their promise,
the growing pressure of expectations placed on the sector driven
by venture capitalists, and whether the face of business is
really about to be revolutionized.

<CNET News.com: How do we know business-to-business isn't just the
next big Internet hype--the same way portals and e-commerce were

Walsh: What the Internet is good at is what businesses
want. What the Internet is good at isn't necessarily what
consumer businesses want. The Internet is breeding a whole sector
of consumers to be nothing but price animals. They're using the
Internet to surf--shop-bots and all this price-driven stuff
--especially for commodity-class products like tickets on airlines,
books and CDs. They have no loyalty to vendor A if vendor B has
a lower price.

Businesses believe in margins, reward vendors who are good to them,
maintain long-term vendor relationships, love it when the vendor
remembers what they bought, and suggests an upside and are global.

Which market would you choose? Of course you would choose the
business market, because the business market isn't a price-driven

<But e-business is also about reducing operational costs by cutting
costs of materials.>

Price is the last metric a lot of businesses
use to decide what to buy. So in some ways I think the hype was
over-prescribed for consumer businesses...and in business it may
be a little bit under-hyped, because if you look at how businesses
buy, the transaction process is so information-intensive, but the
information is so difficult to gather. Finding new vendors is so
hard because the sales channel is sort of turgid and thick--it's
trade shows, trade magazines, salesmen, brochures, golf games,
relationships. So finding new vendors is always exciting for

The process of buying is far more complex and of concern than the
price and delivery. It's functionality, it's applicability, it's
service and back end. Then it is price and deliverability. And
often it relates to other purchases the company may have made
from the guy in-between.

The Internet is the perfect platform for information to be gathered,
vendors to be found, of transactions to be initiated and sometimes
concluded on the Internet.

<How long until we can see VerticalNet become profitable?>

I'm proud to say that VerticalNet, according to what our analysts
tell us, will be the first profitable business-to-business Internet
company. We are expected to go profitable by Q2 of '01. So maybe
about a year from now; maybe a little bit longer.

If we can't prove that business-to-business Internet companies can
make money, then who can? Because we've been saying that
businesses are where all the money is. So if we can't get profitable
pretty rapidly, then there's a whole bigger problem here, which is
maybe Internet companies can't make a profit.

<AOL and Yahoo recently jumped into business-to-business. You were at
AOL working on such a strategy years ago. What do you feel this move
will do for the sector?>

I felt a mixture of excitement and some
sense of déjà vu in that. As you mentioned, I was at AOL for a
number of years and a lot of my sort of final couple of years there
I spent trying to build an AOL B2B business called AOL Enterprise.
I was trying to do this when AOL was having the "busies," as we used
to call them, the busy signal problem.

Timing is everything. Companies weren't prepared to bet on AOL as a
brand and AOL as a platform because it was effectively perceived to
be unreliable by the consumers who used it. My salespeople were
literally being thrown out of lobbies by businessmen who said,
"How dare you think that I would put my customers and me on
AOL for communications and interaction when I can't log on at home
at night."

Yahoo, to me, is maybe more interesting because Yahoo is really
focusing strictly on the auction side to start. If you poke around the
Yahoo B2B, it's really almost an agglomeration of auction listings.
It's almost as if they're the Reader's Digest of B2B auctions.

Each of these efforts is flattering in that it validates that B2B has
sort of "arrived" as a legitimate business for businesses to be
engaged in.

<How much of the business-to-business hype can be blamed on the
venture capitalists and investment banks?>

Investment banks stopped caring how good the business model was of
a business that they wanted to take public about 11 months ago.
So you saw a huge spasm of Internet IPOs, many of them B2B.

I think you saw a lot of venture capitalists and some of these
incubator VCs created because there's so much money entering the
market, and they all said, "Oh, we're going to focus strictly on B2B
companies. We're going to incubate and grow and fund B2B companies."
So even before the IPO spasm of products that came out of
Wall Street happened in the last nine months, you saw another
5 gazillion companies funded by VCs. My joke example is this
VulcanizedRubberTubing.com. You know, how thin can we slice this
bologna here?

<Well, there was an announcement about a B2B lingerie site. I don't
know if you saw that?>

I did not!

<We were trying to figure out if it was a joke...
Well, the sad thing is, if it's not, it should be, and if it is,
people still believe it because we've sort of come to that point.

<That number published by Forrester Research--the $1.7 trillion in
business-to-business e-commerce by 2003--keeps getting tossed around.
You think it's on target?>

I think it's irresponsible, the number that
Forrester uses. To me the essence of where the hype is coming from is
that people thought that businesses would stop buying products through
sales channels and trade shows, distributors and golf games and would
move all their transactions to the Internet. So suddenly people said,
"Wait aminute! All these guys are going to split up $1.7 trillion in
revenue? Yeah! Fantastic!"

What people should be analyzing is how many of those
dollars--whatever the number is--will move from a traditional sales
channel to a digital sales channel. How is the margin affected by that
move? How do players in the middle, like (VerticalNet) and some of the
others, actually participate and benefit in the shift of those sales
dollars from channel A to channel B? It's not that a whole new trillion
dollars of sales happened in the new world...It's that a trillion
shifted and here's how the vendors in the shift were affected.

If the shift has no new change in the margin and guys like us can't
make any money, then this is all, as Shakespeare would say, "A
celebration of sound and fury signifying nothing."

<Is the marketing frenzy that drained so many consumer Internet
companies going to begin to appear in the business sector too? Is
VerticalNet keeping marketing costs completely under control?>

I like to think they're always under control, but I do see marketing
becoming more of a component of our cost structure. Why? I may
live to regret this one, but I think it's a tragic outshoot of the
venture funding irresponsibility and the IPO funding irresponsibility in
the last year, year and a half that I talked about.

A lot of these standalone market-making companies raised $60 million,
and they've earmarked $30 million of it for branding marketing.

So sadly, guys like us and Ariba, we're forced to almost step up our
marketing efforts just to match this avalanche of spasm marketing
spending that VCs and the IPO market funded, which I think
will be gone in a year.

VerticalNet and guys like Ariba are going to have to do a lot of
spending in the next 12 to 18 months just to make sure that we stay
above the noise level of this irrational funding that's been going
on. And then business will get back to normal, and we'll be able to do a
lot more rational marketing expenditures based upon profit projections
and growth of market share that we would expect, like normal
companies used to do.

<Most technology firms are located in Silicon Valley or Boston or New
York. Why don't B2B firms need to be in those places? Why are you
someplace in Pennsylvania and not near one of the technology

Every day I thank God that we are not in Silicon Valley or Silicon
Alley. Three reasons. I find super-smart code jockeys who know the
Net as well as anybody living in Atherton at a salary, bonus
expectation and a personal net worth expectation 30 to 70 percent below
what Silicon Alley.

Number two, the loyalty that we're able to engender is palpable in
Horsham, Pennsylvania, which is only 12 miles from Philly, so it's
not out in the boondocks. But in Horsham, Pennsylvania, the folks we
have at VerticalNet don't go to the latte bar at 6 p.m. and meet
their buddy from Stanford who just joined a hot, new pre-IPO company
who needs a biz director and will give you 50,000 more shares
and you'll watch the post-IPO.

That sort of shark-tank swimming is creating a stunning amount of
disloyalty among employees--is something that our guys don't see
every day. (It's) the same thing in New York.

And lastly, when I leave VerticalNet's headquarters in Horsham,
Pennsylvania, there's literally a store about a half a mile away called
Dart World where you can buy darts and there's the Benevolent Order
of the Elk's Lodge--this is America.

This is not a high-end rich environment. So the idea of where
business actually happens is more in towns like Horsham. At least
where the business I care about is, where people make pumps and
valves for pollution control devices. Industrial America is in cities
where Silicon Valley and Silicon Alley are not typically engaged.

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