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TMF Interview With VerticalNet President & CEO Mark Walsh

June 28, 1999

With Dave Marino-Nachison (TMF Braden)

Horsham, Pennsylvania-based VerticalNet (Nasdaq: VERT) is an operator of 41 online "vertical communities," Web-based business-to-business news, information, interaction, and commerce sites.

TMF: First of all, taking a look at your sites and reading over what you guys do, on it's face it reads a lot like a magazine, but that's not really where you're trying to go. It's more business-to-business commerce, is that right?

Walsh: Right. In fact the news hole in the center with the picture of the editor -- we typically hire editors from the number-one trade journal in the specific industrial sector so that Nick Basta, he's the editor of chemicalonline.com, he comes from 17 years of McGraw-Hill and chemical publishing -- the news hole is sort of the validator and it's hot stuff that happens today and some archive stuff, but the action is kind of on either side.

"40% of our traffic is non-U.S. today [and] we've done nothing to promote that."
The nav bar on the left has things like auctions, chats, and forums that are focused on industry issues. It has vendor profiles. It has store fronts where you can leave a sales lead for a specific manufacturer or supplier. It has virtual trade shows. In some cases, it has request for proposal (RFP) and request for quotation (RFQ) posting. So, a lot more interactivity and community tools aimed at solely at what the buyer and supplier usually want to know from each other.

And what you're going to see more and more from us besides auctions, which are obviously transaction places, you'll see a lot more of the software that we recently purchased. We purchased a software company called Isadra and some other stuff. Adding "buy me now" buttons to the bottom of the vendor presentations or storefronts is specific vertical.

So, a chemical company that sells chemical processing pumps and valves today presents its products in the store fronts and you find those products through the news, through product announcements, or through forms that are related, or through RFPs and RFQs. They can go back to the manufacturer or visit the store front and actually leave a lead for a specific type of valve and the manufacturer can answer them with a quote. But you'll see more of the store fronts having a button where you can physically scroll down and purchase a specific industrial product on the site.

TMF: That was actually going to be my next question. I know that some of the options that you're talking about offering are online now and some are yet to come. Can you tell me a little bit about the timeline?

Walsh: Yeah, we purchased a company called Isadra... Isadra is one of three tech commitments we made. Another is an investment in a company called Tradex, which does industrial procurement purchasing software, and the third is a company called webMethods, which is XML conversion. And I'd say in the next quarter you'll see us launch a catalog specifically for a given manufacturer, industrial sector.

Sometimes those manufacturers are in multiple verticals. We have storefronts from manufacturers that are usually in more than one vertical, so any given company will typically buy on average two storefronts, one in pollution and one in chemical or fluid and hydrocarbon or something. The larger a company is, the more of their products are in multiple lines. But I'd say in a quarter or two you'll see the transactive component become more and more present in the storefronts and how manufacturers show you information.

TMF: When you have everything up and running, which aspect of your interactive services do you expect will be the biggest revenue generator?

Walsh: Well, the interesting thing about running 41 specific industries is that it's kind of a horse race and we have wildly divergent acceptance rates of technology by industry. So the manufacturers, suppliers who sell at solidwaste.com will adopt e-commerce at a different rate than people on the site photonicsonline.com -- which is a study of lasers. And usually in the larger or sometimes older industries like process industries and environmental industries, e-commerce does not mean actually buying something online. What it means is electronic connecting buyers and suppliers. So, today we generate sales and leads for manufacturers and for most of those manufacturers that is e-commerce. So, I'm kind of dodging your question, but not really.

"Stay tuned for some more big portal deals."
Today we do thousands and thousands and thousands of sales leads each month through our store fronts to manufacturers and those are e-commerce. They represent hundreds of millions of dollars of purchases. So, moving those sales leads into a transaction environment where the person is leaving and suddenly he says, "Oh, by the way you have it right here. I'll buy it right now on line," that's a goal, but... unlike the consumer space where a book is a book is a book, or a share of stock is the same, I mean fungible goods.

In industrial markets there are many if not most or I'd even say all of the products are much more different from each other. Clearly some products are fungible, but industrial purchasing is not as price sensitive, so there's a lot more information content or information components of the purchase, which means the sales leads or information about the product will, we believe, in many verticals remain an important way that people buy. But we do expect in the given next bunch of quarters or year or two that a larger percentage of our revenue will be from commissions made or percentages of dollars transacted from industrial buyers actually transacting or purchasing from suppliers who are advertisers of ours.

TMF: Whereas of right now it's primarily advertising?

Walsh: Yeah, I'd say about 95% is sponsorships, buttons and banners and store front fees. We charge about six grand a year for a given store front in a given vertical and those store fronts generate lots of leads obviously, but there's no fee per lead. But, that ratio of 95-5 or so of buttons, banners and storefront fees at 5% at e-commerce -- we sell text books and professional papers and hard hats and stuff -- you'll see that probably grow to a much larger component of the pie.

TMF: OK. You said you have 41 communities going, working now. How do you go about selecting industries you're going to chose?

Walsh: We have revenue ramp rates and there's clearly a robust business for the share shift from ad budgets and industrial advertising commitments from trends, trade shows and elsewhere to cyberspace. There's no question that the share shift is going to occur and there's tens of billions of dollars committed in those sectors. But a lot of where a revenue ramp is going to be coming from obviously the other types of events.

And your question is, "How do we chose markets?" We look at a whole bunch of dials and some of those dials are gross revenue transacted per year in that sector, so we'd like to see ten billion dollars or more domestically spent. We love markets that have at least 40,000 buyers or buying influences in them -- people that say, "I am a photonics design engineer."

We like markets that have at least 3,000 vendors in them because fragmented markets are most easily applied, or they have the most cyber-centric value delivery a lot of times. And a whole bunch of other things about globality, because 40% of our traffic is non-U.S. today. We've done nothing to promote that. Which shows how global these markets are. So we love global markets as well.

TMF: That was going to be one of my questions. What sort of idea you had about your international reach and opportunities to expand that.

Walsh: We announced a deal today -- it hit the wires about an hour ago -- with a South African company called Metropolis. It's an Internet spinoff of one of the major trade publishers down there and Metropolis is spending multiple millions of dollars to license our template to launch chemicalonline and other verticals in Africa.

TMF: Companies that establish store fronts with you, is that done in lieu of setting up e-commerce on their own sites? I wonder as more companies go online they may decide to do that instead of using your service or if you think it's complimentary?

Walsh: There are really three answers to your question, which is "will companies use the 'Net directly instead of using us." I think, sure, many companies, particularly larger ones, are wrestling with whether they should just abandon their current sales channel efforts, abandon their current sales forces, abandon their relationships with distributors, and abandon their advertising and promotional efforts to get buyers to understand what they make and use their own website as the place for promotion for audience agglomeration then ultimately for transactions and suck cost out of the sales channel.

You'll see some of that, but I don't think the Internet is as much of an earthshaking change as some would say in that I don't think the actual demand curve -- we don't see it, at least in the 41 and soon to be 50 verticals that we have. The demand curve isn't necessarily shifting as much as one might believe thinking of consumer e-commerce. It's not like Borders (NYSE: BGP) is going out of business and there's an Amazon.com (Nasdaq: AMZN) in every corner.

Industrial purchasing has so many features besides price that are important to the buyer. We still see pretty general channel maintenance, there will be distributions, print catalogs and there'll be other traditional channels elements that will survive. What we are going to see though, what we think we are seeing clearly is that unlike trade pubs that supposedly present multiple suppliers in an advertising friendly environment, the Internet will be a place where you'll be able to search for a typical pipe or valve or chipset and can pit multiple vendors against each other. And you won't find most vendors able to compare themselves to other players.

If somebody wants to sell on their own site and you go to Shmeggeggypump.com, you're there to buy Shmeggeggy pumps. Places like us will survive and thrive we believe because most buyers want multivendor sourcing. And the more the Internet liberates the buyer to find about more products from places and more suppliers the more that buyer's going to want to have a multi-vendored comparison or a catalog in essence where you can look at pinch valves, or butterfly valves from three, five, ten companies, find the two he cares about, source them and establish a relationship.

We did a survey on the leads that were left on us about six months ago. We called back many of those leads and we found that about 15% to 20% actually bought the product. They left the lead for the manufacturer, they put the lead through the store front on and half those purchases were with companies that they've never done business with before. So that sort of expansion of your buying universe is something that a given company setting up e-commerce on their site doesn't really satisfy the buyers need for it.

TMF: So, I guess direct marketing is probably not going to be as big a threat to your business as it might appear. Who are your competitors?

Walsh: I think the companies we're most conscious of are clearly any software company that has lots of reach on industrial desks. And those are companies like SAP (NYSE: SAP), Oracle (Nasdaq: ORCL), Microsoft (Nasdaq: MSFT), and IBM (NYSE: IBM).

The second bin of companies we're extremely conscious of are the large multibrand, multimarket distributors. You'll see some distributors in multiple markets; most of the time they focus on one industrial market and they rep a lot of manufacturers. But some of the distributors are creating some places where this multivendor comparison service that I was talking about can occur. Some of them are waking up nicely and I think you'll us doing some deals with more and more of those.

And the third bin of companies are trade publishers that get it and kind of arise and deal with the Internet and its impact on their traditional print publishing.

The fourth bin and one that -- tomorrow we're announcing three more acquisitions, we're buying individual verticals, two in the energy and one in the middle finishing space that'll be on the wire -- there are stand along verticals that have sometimes unique appeal to a given market and we think those are either competitors or acquisition opportunities or partnerships. But those are the four bins that we think we're most conscious of in the day-to-day basis.

TMF: Can you talk a little bit about your marketing efforts? I would assume it would have to be done basically on an individual basis with each of your communities.

Walsh: Well there's some cross-pollination. That's one of the reasons I think investors have liked our company so far and just real economies that scale on our business. Forty of our forty-one verticals have a common user interface and all of them have a common hosting and a lot of the similarities in the technologies served so that the profit and loss for a given vertical can be very, very appealing versus some of our stand alone competition.

But we have some other economies to scale in marketing. I buy thousands and thousands and thousands of keywords from all the major portals. So, for instance, if you go to Excite and type in the word pollution you'll see that underneath the banner ad is a "try this first" button that I bought from Excite and it sends you to a pollution control community on Excite which I run and program and all of the links from the Excite page come back to me. In fact, the search bar in Excite, if you type in "valve" you're searching pollutiononline's valve directory and valve manufactures listings. So, we buy those kind of deals with AltaVista and Excite, and some with Yahoo! Stay tuned for some more big portal deals.

We'll be launching direct mail to industry professionals. We go to 60 trade shows a year, so we have one booth with different logos from 60 trade shows. There's some telemarketing -- outbound telemarketing -- we have about 100 sales people now. About 20 in outbound telemarketing and telesales and they can call multiple companies in multiple markets and you don't see a lot of companies without some of those cost savings in a portfolio way that our competitors [do].

TMF: Have you realized any benefits from your relationships with, say, Safeguard Scientifics (NYSE: SFE) or Internet Capital Group (ICG)?

Walsh: ICG is our largest shareholder and ICG has obviously filed to go public. And it's their stated philosophy that they are one of the venture firms, soon to be a publicly held venture firm that's going to focus most significantly on business-to-business and market makers. So, yeah, we are always conscious of and close to our friends at ICG and the types of companies that they're investing in or partnering with because many of them are potential partners of ours as well. So, yeah, I think we're real tight with ICG.

Safeguard, less so. Safeguard's focus is far more diffuse and broad -- technology, services even some traditional business lines. So we haven't seen as much crossover in the Internet space with the Safeguard guys, but that's kind of why Safeguard helped start ICG -- to have a much more tight focus. We're very excited to have them as our majority shareholder.

TMF: Is there anything you'd like to add, just about your company or anything else?

Walsh: Yeah, here's what I'd like to add: I've been in the interactive service business for 15 years and the first 11-11 1/2 were in the consumer side, last 3 1/2 in the B-to-B [business-to-business] side. B-to-B is where the consumer was back in '93, '94 so we are just waking up and a lot of the hoorah about who's carving out this and competing -- there is so much yet to do.

China, for instance, we've got all sorts of traffic from China. If you look at the infrastructure and the industrial behavior and purchasing that a lot of second and third world economies are going to go through in the next decade, the Internet is the natural platform for the likes of purchasing and transactions and information of the industrial community behavior that's going to completely blow away what we've seen in the consumer side.

TMF: Well, that's a great way to wrap this up. Once again, I appreciate your taking some time to talk to us.

Walsh: Thanks a lot.

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