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Q: We've seen a lot of traditional companies try to set up their own exchanges. Will they leave room for an independent Amazon.com of B2B exchanges? A: Amazon disintermediated a dysfunctional commerce environment called the bookselling business. Writers hated editors, and editors hated publishers, and publishers hated bookstores and bookstores hated you. Nobody liked anybody in that supply chain. In major commerce environments in industrial and technological markets, the disintermediation play is going to be far more difficult, because in fact, people are not dysfunctional. The buyers and suppliers like doing business with each other. The only disintermediation you might see is in maintenance, repair, and operations products -- commodity goods like safety goggles, rubber mats, gloves. You may see some real price competition. But it sure isn't going to happen because of one company making a market. That's like saying that Sony is going to make a marketplace for the stereo business. When you buy a stereo, you don't go to the Sony store and the Magnavox store and the Panasonic store -- you go to the stereo store, where there are multiple vendors available. Q: It sounds like you don't think much of all these traditional companies forming their own e-marketplaces. A: When you hear of GM and Ford and Shell and DuPont [saying] they're going to set up marketplaces, what they're really talking about is setting up a procurement platform for themselves. GM got warrants for 20% of CommerceOne to agree to use CommerceOne as their procurement-software platform. They buy $89 billion worth of stuff every year at GM, from headlamps and bumpers to staplers and memo pads. They said, "If you want to sell to us, you're going to use the CommerceOne procurement platform." It's the old hub-and-spoke -- GM's the hub, suppliers are the spokes. This is EDI [electronic data interchange, an older commerce technology] in drag. It's better EDI because it's cheaper, it's more open, it's more flexible, it's more Net-centric. But they're forcing their vendors to sell to them on that platform -- just like Sterling, General Electric Information Systems, and Harbinger did a decade and a half ago [with EDI]. An exchange is very different from a procurement platform. GM is not setting up an exchange. An exchange is when buyers and sellers anonymously, and in a dynamic-pricing environment, put forth excess stuff they want to get rid of, or put forth demand they need filled. That's an exchange. GM is not setting that up. Nor is Shell, nor is DuPont. If you listen to press releases, it sounds like GM is going to change the way we buy everything. They're not. They just want to save money on how they buy hubcaps. The big companies create a company with a cutesy name. They just want to take the company public, and they want to have the IPO money and the yield on their equity go to their bottom line. Why would I, as a visitor to the DuPont site, feel that DuPont was giving me a good price, if it's their exchange? The answer is, they won't. Would they offer their competitors' products at reasonable prices on that marketplace? The only example of that I've ever seen is Sabre [the airline reservation system]. There have been no corollaries to that since then. Q: What about sites set up by powerful distributors, such as W.W. Grainger? A: Distributors could pull this off. They're handling multiple lines. The guys to watch are distributors, because they already offer multiple lines. And they know who's got excess because they have that stuff sitting on their shelves. But there's no manufacturer, even in a highly concentrated industry like autos or chemicals or any of these, that's motivated to help you the customer get a better price for both the stuff they sell or their competitors [products]. These press releases describe this nirvana where the Internet makes the customer always right. That's bull. What the Internet's doing for these big companies is saving them money on processing the smaller order from the schmuck like you that isn't a big customer to them. Small orders cost as much money as big orders, so they're trying to make all the small orders go to the Net. Q: If VerticalNet has 56 industry marketplaces, why aren't investors giving it a much higher market value than single-industry sites such as Neoforma.com Inc., or even companies such as Ventro Corp. that have only a few marketplaces so far? A: Investors are confusing the difference between exchanges and procurement software. They think there's going to be an Amazon in business-to-business e-commerce, and there isn't. They're also confusing the fact that in the consumer space, it seems like there's one winner and a whole bunch of also-rans. In B2B, that's not the case -- there's multiple winners in multiple sectors. Q: A lot of people think B2B marketplaces will be winner-take-most. You don't agree? A: I think there have to be multiple winners. Business-to-business e-commerce is a huge global enterprise with trillions of dollars at stake. The consumer space can naturally segment itself into ultimate category killers. There's contactlens.com. There's going to be dentalfloss.com. There's category killers for every minuscule sector of consumer spending. Businesses are not going to see that for quite some time. There's going to be multiple distributor winners, there will be multiple manufacturer winners, we think there will be multiple platform winners. Q: What will distinguish the winners and losers in the B2B e-marketplaces? A: I think profitability is going to be an important part of this beauty contest. It's important to show that you can actually run a real, profitable company. Q: Investors have clearly indicated that with e-tailers, but not with B2B companies so far -- even though events like interest-rate hikes seem to be affecting the companies involved in B2B e-commerce. Why is that? A: There's some less sophisticated investors who feel that they're witnessing the turnover from the Old Economy to the New Economy, and that you want to be in stocks in the New Economy. I happen to believe those people are right. If you believe that the economy is going from old to new, even things like interest-rate hikes aren't going to change your enthusiasm. If you believe you're at the point where they stopped using horses and started using cars, the type of leather in the saddle won't matter to you at that point. This is like an earthquake in slow motion. Nothing is going to be the same after all this happens. This is an alteration of how the economic structure of industrial nations works. Q: So you see the current spate of initial public offerings continuing? A: There's a whole lot of folks, the E*Trade account holders, who know that there are 50 IPO planes circling LaGuardia now, most of them in B2B. They're saying, "Let's not close the party tent yet. There are a lot of cool companies out there whose stock I want to own." You'll see companies like ours with meaningful valuations continue to pick off those private companies and acquire them. You'll see a lot of mergers and acquisitions in the next couple of years, and I think investors are also banking on that. Q: Will VerticalNet pick off those companies before they go public, or after? A: There will be some that we pick up pre-IPO and some that we pick up post-IPO. We've already bought 15 companies. I have now witnessed a great number of business plans where on the last few pages, it includes the paragraph, "Sell out to VerticalNet." M&A will accelerate rapidly in the second quarter. You're seeing the most forgiving financing environment in the history of mankind, and these transaction junkies called investment banks are just running from meeting to meeting. Back when we went public, banks actually looked at our plans and said, "Oh, we think you're early, we're not going to do a deal with you." Those are the same banks that are now coming back and begging us to do business with them. But they're also taking companies public which, if you get them privately in their office, they say, "This company's far too early, but what can we do? The market wants 'em." Everyone's smoking crack. You see companies that are going to go public, and their revenues in 1999 were zero, zero, zero. They may do great, but people will see underneath their business plans pretty rapidly. They'll do great because the IPO market is still robust. Q: Doesn't that say that B2B is way overheated, just like e-tail stocks were? A: The IPO sector is overheated, yeah. But there are a lot of forces -- investment bankers, analysts, and traders -- that want it to stay overheated. I tell my guys, snap up the good ones that haven't gotten drunk with valuation, and then wait a couple of quarters, and I think you'll see some real bargains. All it's going to take is for a couple of guys to miss a quarter. That's all it took in e-tailing. It's kind of a car wreck there now. Q: Ventro CEO David Perry recently announced that his company would expand into a host of new industries beyond his original life-sciences focus. That sounds like a direct hit on VerticalNet. A: Chemdex has been saying since they went public that deep domain expertise in single markets is what matters. And we said that in fact, buying behavior is very similar across the vertical marketplaces that we're launching. This is exactly what we were telling him. When Chemdex comes out and says it's going to be a portfolio, when PurchasePro announces it's going to be a portfolio, and when Ariba and CommerceOne say they're building a bunch of vertical markets on their platform, no one seems to give us the credit that we were saying exactly what everybody is now agreeing with. We've been singing the exact same tune for five years: Go broad early, add features as you broaden your audience, and do what the audience wants you to do. Q: Perry says it's tough to go deep. What are you doing to go deep? A: Give me a break. Business buying is similar across a whole lot of markets. We have added premium content, we've added auctions, we've added e-commerce centers where you can actually do transactions on our storefronts. We're announcing deals with all kinds of procurement platform software companies. We're integrating all the processes of how buyers and suppliers trade products and find new customers. And then we went out and found that Microsoft wanted to write the largest single check they've ever invested in an Internet company in VerticalNet -- $100 million, double what they put in WebMD. Microsoft is financing 80,000 storefronts [on VerticalNet's sites]. And we didn't have to give 20% of our company away, like CommerceOne did to GM. We have done everything right, and no one seems to notice. Our research shows that anywhere from 30,000 to 50,000 sales leads per month come through our storefronts. About 20% of those sales leads turn into transactions: The buyer leaving the sales lead buys the product from the storefront where they left the sales lead. And the average price of these sales-lead transactions is about $25,000. So it's real money. But here's the secret sauce: About half the time, the buyer and supplier have never done business together before. So we're the poster child for the Internet increasing vendor networks. We get paid 3% to 5% of all the transactions that happen through our e-commerce centers. Hundreds of millions of dollars of e-commerce has been flowing through VerticalNet every quarter, but we've never demanded our piece. Why? Because we thought that was a little presumptive. So we've built a real sense of community, added tools like auctions and customer service and returns, and then we launched e-commerce centers -- and that's where we get the cut. It's not about moving revenue from pipe A to pipe B, it's how much sticks to the side of the pipe. Q: You're located in Horsham, Pa. Do you think it's harder to get your message across outside of Silicon Valley? A: The Valley is the exact wrong place for B2B commerce to erupt. There's no commerce there. We have thousands and thousands of companies with storefronts on our site. They're in places like Paducah [Ky.] and Valdosta, Ga., and Kansas City. I mean, industry is not in the Valley, with all due respect. So I always find it amusing that some of these companies based in the Valley are supposedly e-commerce companies. It's not about software. It's not about code. It's about understanding how companies buy and sell. And the companies that buy and sell are all over the U.S., in Europe, and in Japan. It's not a Valley event. |
