VerticalNet “Then” Analysis

1. VerticalNet“Then” Analysis Alicia Hickey Beth Anne Katz MBA 8555 Spring 2009

2. Introduction • VerticalNet was founded in 1995 by Mike McNulty when he came up with the idea that the internet would be the perfect avenue for industrial companies to sell their products. • In 1997, with the company growing fast and furious, VerticalNet recruited Mark Walsh, who had previously served as president of General Electric’s online service and founded AOL Enterprise, to lead VerticalNet into the future. • By 1999 VerticalNet was the largest creator of b2b vertical trade communities on the internet, owning and operating over 50 industry-specific websites.

3. Background • VerticalNet’s web communities provided comprehensive, industry-specific information, interaction, and e-commerce • product information, discussion forums, industry news, job listings, educational courses, directories, and many more topics and interaction forums. • Each community was branded and focused on one individual industry sector, designed to cater to those with common professional interests. • VerticalNet’s main objective was to better serve a market not adequately satisfied by the traditional channels of trade publications and trade shows by: • 1) providing a comprehensive set of features and functionality; • 2) leveraging infrastructure, technology, and marketing resources to achieve economies of scale and • 3) to make sites more appealing to a broader array of advertisers and supplies

4. Background • As the company continued to expand, however, so did the operating and marketing and promotions expenses. • These expenses grew more rapidly than the revenues leading to a $12.4 million net loss at the six-month ending period in 1999 and an overall company deficit of $31.7 million. • To offset this enormous deficit, VeritcalNet sought to capitalize on the growing e-commerce sector and expand current offerings to include a portfolio of services: • e-commerce centers or transaction-enabled storefronts; • online auctions where multiple buyers bid on a seller’s excess or obsolete inventory; • electronic marketplaces that aggregate electronic catalogs from suppliers in a vertical market; • and on-line exchanges or marketplaces for near commodities that enable multiple buyers and suppliers to conduct commerce.

5. Industry Background • It is important to understand and appreciate the characteristics of a b2b oriented site, which differ great from consumer sites. • There is a greater amount of self-selection among site visits (customers will probably not stumble upon it by sheer curiosity), • b2b users are often more critical of sites (it must display a solid understanding of the business) and • b2b transactions involve more than merely setting the best price; the market requires information, relationship building, service and support.

6. Problem Statement VerticalNet must determine how to close the gap between its current state, being a quality online portal, and their desired state, being a profitable e-commerce business. How can VerticalNet achieve an optimal mix of organic growth and planned acquisitions and alliances without running the risk of "too much diversification too fast"?

7. SWOT Analysis

8. Competitive Analysis • During the time of this case, many of the players in the b2b vertical trade communities were broadening their scope from a once specialized focus to 'a little bit of everything' approach including: • content development, buyer and seller aggregation, transaction facilitation and relationship building. • Primary competitors include: Ariba and Commerce One (software development), Chemdex (catalog based exchange), Tradex (software/system development), iMark.com and Adauctions.com (capital equipment/advertising inventory auction models) • In addition, VerticalNet competed for a share of customers’ advertising budgets with both online services and traditional off-line media, including print publications and trade associations. • Although VerticalNet had the largest portfolio of vertical trade communities, a number of companies had begun to offer competitive communities on a stand-alone or portfolio basis.

9. Financial Analysis • VerticalNet’s profit model was based on attaining revenues through selling internet trade advertising. • The most successful form of this advertising was through the creation of storefronts – web pages on the vertical communities that provided links to the advertisers’ web sites. • The formula proved successful for both VerticalNet, advertising revenues grew to $5.5 million in June of 1999, and the advertisers, 90% of VerticalNet’s advertisers carried over from 1998 to 1999. • However, in 1999, e-commerce only accounted for about 5% of VerticalNet’s revenues and as the company continued to expand, so did expenses. • These expenses grew more rapidly than the revenues leading to a $12.4 million net loss at the six-month ending period in 1999 and an overall company deficit of $31.7 million.

10. Alternatives • The first alternative involves, as CEO Mark Walsh states it, "doing more than what we currently do". • The second alternative is a more extreme shift of focus; shifting away from its current portal focus and towards that of a catalog hub. • The third alternative entails yet another shift – from an online portal provider to a pure online content provider.

11. Strategic Recommendation We recommend VerticalNet to pursue the second alternative and transition to a catalog hub. This will allow them to leverage their core strengths and maximize the value which can be extracted from its existing vertical communities.

12. Investment Recommendation VerticalNet's strong brand image, existing customer relationships, and ability to obtain external financing despite its accumulated deficit should not be underestimated. However, the fact that they have not been able extract enough value from its customers to support its current activities and the recent addition of $115M of convertible debt issued by the company, has introduced financial risk into the already high operating risk environment. We recommend to HOLD.

13. Thank you!