BUSINESSWEEK ONLINE : JUNE 5, 2000 ISSUE
BUSINESS WEEK E.BIZ -- SPECIAL REPORT E-Marketplace: MetalSite More than almost any e-marketplace, MetalSite LP has shown both the value of an early start and the need to continually alter business plans to survive. Trading some $30 million worth of steel a month, it nonetheless fights a perception by others in the industry that it's biased toward its owners, such as founding partner Weirton Steel Corp. (WS) If it succeeds in becoming a truly neutral venue, it may show how even the most tarnished Rust Belt companies can use the Net to stage a comeback. Think e-business, and Weirton (W.Va.) is the last place that comes to mind. Tucked along the Ohio River, Weirton is a faded industrial town where people have been casting steel since Ernest T. Weir started his own mill in 1910. One after another, 18-wheelers still cart steel from Weir's legacy, Weirton Steel Corp. But today, the trucks rumble by vacant Rust Belt storefronts before hitting the Interstate. Behind its oxidized exterior, however, this town of 22,000 is showing the dot-com hotties a thing or two. Weirton is the birthplace of a pioneering electronic marketplace called MetalSite LP which has become a model for hundreds of other industries trying to plug into the Web. Not coincidentally, the startup is bringing Net-driven riches to Old Economy stalwarts. Last December, B2B e-commerce incubator Internet Capital Group paid Weirton $180 million for a stake in MetalSite, single-handedly putting the money-losing steelmaker in the black. As the founder of one of the oldest e-marketplaces, Weirton had to learn how to build a new kind of business the hard way--by trial and error. Its experience holds object lessons for other marketplaces struggling to get traction. At least initially, the instant commercial activity that Old Economy heavyweights bring to a Web site trumps the ingenuity and neutrality of independent startups. But they quickly have to move beyond just offering a place to do deals, and add services like logistics and financing. The idea for MetalSite goes back to a Knights of Columbus dinner in autumn, 1995--just months after Netscape Communication Corp.'s blockbuster initial public offering launched the Internet Age. Earlier, Richard K. Riederer, Weirton Steel's chief executive, had been brainstorming about how to streamline Weirton's sales system with the company's unofficial strategist, Chief Information Officer Patrick B. Stewart. Riederer wondered aloud: Why can't Weirton sell steel like airlines sell tickets, through their computerized reservations systems? The idea resonated. The next day in Riederer's office, Stewart recalls saying, ''You and I both got pretty excited about this last night. Do we really want to go do it?'' Riederer grinned. ''Let's go.'' It was up to Stewart to make it happen. An engineer, he had helped Weirton boost productivity inside the mills. But the 37-year-old son of a steelworker grew convinced that the company could make equally huge gains if it paid more attention to wringing out inefficiencies in logistics. He got the chance to prove his thesis on Oct. 3, 1996, when he converted Weirton's static Web site to an e-commerce venue--selling steel. Since nobody had ever sold steel online, Stewart was worried customers wouldn't show up. But he had primed the pump by meeting ahead of time with key buyers. So just six months after the first round of bids, Weirton's online bidders had doubled to 150. That's not all: Because the site drew many more bidders than the company had ever drummed up offline, Weirton actually got higher prices. Despite its early triumphs, Stewart knew Weirton--a second-tier company with $1.1 billion in annual sales and a market cap of just $130 million--lacked the size to go it alone. So with seed money from Weirton in mid-1997, Stewart rented offices in nearby Pittsburgh and began hiring a staff of outsiders. He toyed with the idea of a commodities exchange like the Chicago Board of Trade, but gave up after realizing steel is much more varied than corn. After months of testing ideas, Stewart brought his boss plans to establish a virtual-auction site on the Web, where producers would post their inventories for auction and pay the site a small percentage of the transaction value--the model of today's e-marketplaces. Now they needed the steel producers to join in. So in fall, 1997, Stewart and Riederer worked up a road show. The first people they called on were David H. Hoag, then CEO of LTV Corp. (LTV), and Keith E. Busse, CEO of Steel Dynamics Inc. Stewart's and Riederer's best sales tool turned out to be a short multimedia presentation they had produced, simulating how the site would work. Both prospects signed up within a month of each other, in early 1998. With their equity stake and promises to sell goods on a shared Web site, Stewart and Riederer got the O.K. from Weirton's board to break off as an independent company. Antitrust attorneys for all parties haggled back and forth, and by August, 1998, MetalSite was launched, with Stewart at the helm. Space shot. Just a few months later, in December, 1998, MetalSite.net bagged its first sale: Weirton sold seven coils of galvanized steel to Arrowhead Steel Co. MetalSite employees remember crowding around a computer terminal that day, praying a bid would come before Stewart met reporters at a trade show in Chicago. When it did, the office erupted in cheers. ''It was like the first U.S. space shot,'' recalls MetalSite spokesman L. Michael Kelly Jr. Even though sales continued to rise, MetalSite was still too small to make much of a dent in the industry at large. But Stewart got a break after a chance meeting in May, 1999, with Neil S. Novich, CEO of Ryerson Tull Inc. (RT), the nation's biggest metals distributor, and Duane R. Dunham, now CEO at Bethlehem Steel Corp. They were both intrigued. In September they joined MetalSite as equity partners--and, just as important, they pledged to steer a growing chunk of their sales to MetalSite. Together, the five steel companies now own 55% of the outfit. If Stewart thought he could now coast to victory, he had another think coming. Just as MetalSite was celebrating its expansion, Internet upstart e-Steel Corp. came out swinging. Based in New York and backed by venture capitalists, the new e-marketplace was launched as a neutral site where sellers and buyers can negotiate deals in private. E-Steel CEO Michael S. Levin slams MetalSite for hawking second-rate material and inflating its sales numbers by forcing customers of its equity partners to buy online. ''MetalSite is the child of Weirton and the stepchild of Bethlehem, LTV, and the others,'' he says, so it plays favorites. On the contrary, Stewart contends, MetalSite's ownership setup gives it unmatched heft. More than 50 companies offer steel on the site today, and it conducts nearly 6,000 transactions a month, for 100,000 tons of steel worth about $30 million. Moreover, other e-marketplaces are giving equity stakes to big players to jump-start activity. Even e-Steel sold small stakes earlier this year to USX-U.S. Steel Group, Ispat International, and Dofasco. But later, some analysts think, MetalSite's parentage could slow its growth. To avoid that, MetalSite has gone beyond simply hosting auctions. Today, customers can log on and see a regularly refreshed catalog of goods. If they like something, they can enter into private negotiations with the seller, just as at e-Steel--potentially dulling e-Steel's edge. MetalSite also is broadening its array of services by helping to arrange financing and transportation. The marketplace still represents only a quarter of 1% of U.S. steel sales of $200 billion. ''MetalSite is just scratching the surface,'' says US Bancorp Piper Jaffray (USB) analyst Jon M. Ekoniak. But participants have high hopes, not the least because they're continuing to get higher prices from their auctions as more buyers come online. Analysts think as much as 40% of steel trading will go online within three years. One question left is when MetalSite might go public. It could prove crucial for expansion, since MetalSite expects to spend $30 million this year. Earlier this year, the company had been preparing for an IPO, but the market's swoon put that on hold. ''The last thing we want our company in the middle of right now is this roller-coaster ride,'' says Stewart. What's the hurry? The ride from Weirton has been thrilling enough already. By Michael Arndt in Chicago _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Who Will Profit from the Internet Agora? TABLE: Internet Marketplaces CHART: E-Market Pace E-Marketplace: Covisint E-Marketplace: eLance E-Marketplace: MetalSite INTERACT E-Mail to Business Week Online

Copyright 2000-2009, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice