Too Horizontal, And Too Soon

Folio: The Magazine for Magazine Management, April 1, 2000 by Jennifer F. Steil

First-to-market companies like VerticalNet may be spread too thin and in too early to fully exploit the still-immature trading-exchange business, a report suggests.

A recent report on the e-commerce outlook for 2000 suggests that first-to-market online trading exchanges like VerticalNet will falter, and that their mistakes will serve as lessons for other companies. Presumably, this includes b-to-b print publishers who have moved more slowly in the vertical online community space, but who have rich non-financial assets including content and longstanding customer relationships.

"The Internet VOCs may have awakened a slumbering grizzly," says Penton Media CEO Thomas Kemp. "If we don't screw it up, we have a tremendous opportunity to leverage our core competencies into successful and robust b-to-b media and Internet businesses."

The e-commerce report, produced in December by the Boston based consulting company AMR Research, suggested that Horsham, Pennsylvania-based VerticalNet, a five-year-old company with 56 VOCs, is too horizontal--trying to be all things to all markets. Beyond that, it said, VerticalNet and other exchange sites are still too dependent on advertising, indicating that these sites have not yet convinced their served markets that their solution is essential.

In 1999, approximately 45 percent of VerticalNet's revenue came from storefront fees, which are paid to VerticalNet on an annual basis by companies whose storefront sites it hosts. Another 45 percent of VerticalNet's revenue came from traditional advertising, and the remaining 10 percent came from e-commerce, according to CEO Mark Walsh. But the company expects that approximately half its revenue will be derived from e-commerce in less than two years, he says.

And Walsh says that he doesn't expect all 56 of his company's verticals to be winners. "We group into 12 vertical sectors, and we're really going sector by sector and looking for the ones that are successful," he says. Walsh expects to have about the same number of verticals next year--but not necessarily the same verticals.

PennWell Publishing's Foster City, California-based PennNET has only 20 VOCs, including four exchange sites. "In the energy market we have 90 years of experience and relationships," says PennNET vice president of business development and marketing Paul Westervelt. "And that has allowed us to attract a number of transaction companies. We plan to add three major markets a year, but we plan to do a much slower rollout than VerticalNet does. Unlike the consumer markets, where the business model can be adopted to multiple products, b-to-b has complexities in each market," Westervelt says.

IndustryClick, Primedia's b-to-b online community company (currently with eight VOCs serving marketing, agriculture, promotions and other industries), also sees itself benefiting from not being first out of the gate. "One thing I've learned from competition is that you need to be very deep in an industry, to understand the supply chain and not present a superficial, top-line view of the industry," says Tim Andrews, CEO of Kansas City-based IndustryClick.

PennNET's Westervelt estimates that 75 percent of PennNET's revenue comes from e-commerce, with 25 percent coming from advertising. He estimates that it costs about $25 million per vertical to create a competitive exchange with rich content and full liquidity for participants. "It will be a major resource challenge for VerticalNet to fight on all those fronts," he says.

Still, with an investment from Microsoft in January of $100 million and a market capitalization of about $9.8 billion, VerticalNet has the resources to recover from whatever miscalculations it may have started with and adjust its model, says one b-to-b executive who requested anonymity. "They have the capital and time to modify their system," says the executive. "People should not be walking around assuming that they're just going to disappear. I don't see disaster around the corner for them."

And Scott Latham, the senior analyst who prepared AMR's report, concedes that he is now more optimistic about VerticalNet. "They were a little too spread out before, but now they are partnering with companies with strong vertical transaction capabilities, like NECX, an electronics components marketplace," he says. 'They are trying to move from content to commerce. And they got $100 million from Microsoft, which doesn't hurt."

Latham says that VerticalNet should whittle itself down to focus on 10 to 15 verticals. "They need to continue to increase their transactional liquidity through the site--and to scale down," Latham says. "The more specific marketplaces are just going to henpeck them to death, and they'll lose out to more specific sites."