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VerticalNet CEO forges ahead despite B2B stock woes

Mark Walsh meets with CNET to discuss whether business-to-business companies can live up to their promise.

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 recently

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, which make 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 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 How do we know business-to-business isn't just the next big Internet hype--the same way portals and e-commerce were hyped?
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 animal.

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 companies.

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 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 a minute! 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 epicenters?
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.