SMARTMONEY.COM: How Fast Can A Leader Run?
By Ian Mount
Smartmoney.com
NEW YORK (Dow Jones)--One can only surmise that immediately after David felled Goliath, the rest of the Big Mean Giants
got together to discuss what strategy would be most effective in holding off the midget hoard. In the lively world of technology,
satellite-telephone flop Iridium World Communications (IRID) was Goliath, felled by little consumers who rebelled against bad
products and high rates. In the aftermath, you can be sure that the rest of the Big Tech First Movers are scratching their heads
and conjuring up ways to ward off the big stumble.
VerticalNet (VERT), for one, has lots to lose if it trips up. By far the first business-to-business, or B2B, e-commerce market
maker - think eBay for industrial pumps and rolled steel - it dwarfs its competition, has a recognizable brand name in an
anonymous industry and receives much love from analysts.
And guarding its Big Kahuna status is a worthy goal, to say the least. Compared to the also-rapidly expanding
business-to-consumer, or B2C, market - the last darling of Internet investors - B2B e-commerce is exploding. According to
numbers from market-research firm International Data Corp., $80.4 billion will be spent on B2B e-commerce this year,
compared to $31 billion in B2C sales. The B2B numbers are expected to increase to $1.1 trillion by 2003, a 1,418% increase;
B2C commerce, on the other hand, is expected to grow by a mere 574%, to $177.7 billion.
To cash in on this, the Horsham, Pa.-based company, which operates 43 industry-specific "vertical communities," is spending
substantial funds to acquire software companies and trading communities. The idea is to lessen its dependence on advertising
and related services, which now account for 95% of the company's income, and expand its e-commerce revenue streams. Within
the next four to five years, the company hopes to derive fully half its revenue from fees on e-commerce transactions that take
place on its sites, CFO Gene Godick said in an interview with SmartMoney.com.
But VerticalNet's transformation will be difficult, and its much-vaunted first-mover status won't automatically translate into
invincibility. Some of the company's advantage, according to conventional wisdom, comes from its size, which gives buyers
what some think is the important ability to search outside their industry without leaving VerticalNet. But size could mean little
unless VerticalNet moves quickly to make its communities uniquely attractive to buyers before its competition does the sa me.
And size could in fact hurt by slowing down its transformation. Just being first and big will no longer be enough.
First, a quick run through VerticalNet's business.
Right now, VerticalNet essentially works as cross between a trade-magazine publisher and a matchmaker, taking advertising and
linking buyers and sellers who, quite often, did not know of each other's existence - and, more importantly, of each other's
products - before the Web.
But the company gets no revenue from the deals that go through, at least not yet.
Now the company is rolling out "transactional' storefronts (price: about $15,000) that let vendors close sales online, and it has
also recently started running auctions.
So far, about 30 of VerticalNet's 2,100 vendors have bought transactional sites, and Godick says the company hopes to collect
5% of the value of transactions conducted through these sites. Also, beginning in early 2000, VerticalNet plans to use
technology that came with its recent acquisition of Isadra (for $3 million and 500,000 shares of stock) to create a search engine
that will allow buyers to run "parametric" searches on the vendor catalogs in the various communities in order to find and
compare products quickly.
If VerticalNet is going to remain ahead, moves like the Isadra deal will have to be made quickly to create a more buyer-friendly
site, says Varda Lief, an analyst at Forrester. According to Lief, who put out a brief titled "VerticalNet's eCommerce Wake-Up
Call" after a recent meeting with company CEO Mark Walsh, VerticalNet is too "supplier-centric" right now: It allows sellers to
list their wares, but doesn't give buyers a convenient way to find those wares. Some vertical communities, such as Chemdex
(CMDX) and e-STEEL, already have search engines and transactional capabilities.
Another difficulty VerticalNet faces, in Lief's eyes, is the "generic" nature of its services, in which each community is roughly
the same. According to Lief, VerticalNet should take a cue from start-up market makers like ChemConnect, which is finely tuned
for its industry. "Their goal is to be a destination, and I don't think that's going to happen unless they offer industry-specific
services," she says. "The idea that they can expand these verticals with generic services is not going to cut it in the future."
But for Joseph Garner, an analyst with Emerald Research, a Lancaster, Pa., brokerage, VerticalNet is moving in the right
direction. "If you take the lump of acquisitions and put them in context, I think what they have done is they've been working on
their technology infrastructure to make it easy for buyers and sellers to transact over their Web site," he says. And for Garner,
VerticalNet has created a monolith that is difficult, if not impossible, for aspiring competitors to match. "Since VerticalNet now
has scale, with 43 Web sites, they can invest in Isadra, they can buy technology from webMethods [which links buyers' and
sellers' computer systems]," he says. "It would be much more difficult to start up and make those investments."
In an otherwise positive research note, Garner lowered his earnings expectations because of acquisition and ramp-up expenses.
For next year, Garner hiked his loss estimate to $2.16 a share from $1.47 a share, and for 2001 his expected loss widened from
$1.12 to $1.19. (The company's consensus losses, excluding goodwill on acquisitions, which is how its numbers are often
framed, are $1.24 a share for 2000 and 47 cents for 2001.) In the last quarter, VerticalNet lost $6.8 million, or 40 cents a share,
on $3.6 million in revenue.
"While we have significantly lowered our EPS estimates, it is important to distinguish that our estimate reductions do not reflect
a deterioration of fundamentals, but rather key investments aimed at widening the company's first-mover advantage and
capitalizing on the lucrative business-to-business market," Garner wrote. Garner says the company could pull in $50 million
annually in advertising revenue alone within three years .
VerticalNet looks fully stocked with cash to withstand these losses until some time in 2001, but if losses widen further, or if the
B2B e-commerce market doesn't rise to meet expectations, the company may have to raise more money in the equity markets,
which could prove difficult as Internet investors grow more skeptical. As of its most recent quarterly report, filed Aug. 3, the
company had $47.1 million in cash and marketable securities, which it referred to as its "primary source of liquidity" for
operating purposes. Its consensus estimated losses through 2001 come to a similar amount.
For Forrester's Lief, VerticalNet's sheer size is not quite the advantage that Garner sees it as. "A company doesn't buy in 43
verticals. They buy in a few, two to five, so they might have two to five favorite sites. They don't have to go to VerticalNet,"
she says. "[VerticalNet is] going to have more competition from boutique verticals."
New B2B market makers are coming along with increasing f requency. Boutique vertical communities which serve one or a
handful of industries, like Chemdex, e-STEEL and Builder SupplyNet, have moved in, and major publishers of industry trade
journals, such as Primedia (PRM) and McGraw-Hill (MHP), are working on plans of their own. With lots of small, nimble
competition crowding into its once-lonely arena, VerticalNet will have to move quickly, and perhaps find deep-pocketed
investors, to retain that vaunted first-mover advantage. And if VerticalNet does not prudently use its advantage of size to leave
the little guys in the dirt? Well, we've heard that there might be another first-mover for sale, some satellite telephone company
called Iridium. Interested? |
