The Internet: Revenge of the Dinosaurs

By Newt Barrett

In 1941, the Japanese leadership underestimated the danger of reawakening the sleeping American giant by bombing Pearl Harbor. Big mistake.

In 2000, we're observing another big mistake. Internet entrepreneurs, venture capitalists, institutional and individual investors underestimated the strength of the broad range of assets enjoyed by pre-Internet players - and the ability of real world executives to embrace and assimilate the Web.

Jurassic Park Revisited: Publishing Dinosaurs Reinvent Themselves

Much has been made of being the first mover in a product category within the Internet market space (to use Internet speak). In fact, because of the pace of Internet development - and the amount of investment dollars available - fledgling companies would perhaps have been foolish not to grab the money and grow as fast as their Web-feet would carry them. This has been notably true for pure Internet publishing plays such as CNET, Chemdex and VerticalNet.

Most of you probably read a trade publication in your industry, whether it's banking, construction, hospitality or real estate. Many trade publications are also producing trade shows that strengthen their brands and their relationships with their advertisers. Your favorite publication has undoubtedly established a respectable web presence by now.

Done right, print publishing is a very profitable enterprise - and so is the trade show business. But, the glamour of pure Internet versions of trade publications seduced analysts and investors alike. In the wake of the April meltdown, there are some important business lessons to be learned through the partial clarity of early hindsight.

In the trade publishing industry, VerticalNet stands out as the archetype of the pure Internet play with a logical and intuitive approach to the business to business market. In fact, it initially scared the pants off the traditional publishing community.

Why the appeal? Simply put, the publishing lure of the Internet is that you can theoretically draw an almost infinite amount of visitors to a website and deliver information to them at a fraction of the cost that a print publication pays for production, printing and postage. Moreover, the Internet enables more timely coverage, the aggregation of wide-ranging resources, the creation of interactive, real-time communities, and the possibility of Ecommerce transaction revenues. Many print publishers were slow to act on this new reality.

VerticalNet began modestly with a single water-related site in 1996 and now manages 55 vertical sites, all with a similar look and feel. Each site has solid, timely content directed by a respected editor hired from the print world. In addition, each site includes buyers' guide functionality, product marketplaces and community-building functions. This makes for a very appealing investment scenario given the huge potential of B2B commerce on the Net.

In 1999, VerticalNet extended its tentacles beyond the Internet and completed the acquisition of NECX, a respected bricks and mortar electronics distributor. In late February 2000, it entered into an agreement to acquire Real World Electronics. This latter buy would be for $70 million in stock - then worth more than $200 per share - and $10 million in cash. Sounds pretty good. In fact, Robertson Stephens loves this company but found it fairly priced in February:

INVESTMENT THESIS: We believe VerticalNet represents a direct and diversified play on the rapidly emerging B2B Ecommerce space-where the company currently participates in 55 vertical markets. We believe VerticalNet is well-positioned to become a franchise player in this space. As much as we like VerticalNet, we believe the company's recent accomplishments are largely priced into the stock at this time - as the stock has appreciated 487% and added $7 billion in market cap since October 1. VerticalNet went public in February 1999 at $8 and a $250 million market cap. At $8 billion in market cap today, we recognize that the stock has had a substantial run and therefore believe there is a limited degree of near-term upside from here.

Other analysts were even more sanguine at the time. On Feb. 2, IndividualInvestor.com opined: This morning, P. Walravens at Lehman Brothers raised his price target to $350, unadjusted for the split. Bottom Line: We concur with the upgraded price target.

Keep in mind that when Lehman Brothers considered VerticalNet to be a screaming buy, it had an unadjusted stock price of $233, estimated 2000 revenues of only $117 million, and a projected loss of almost $70 million. As of April 14, 2000, its stock price had plummeted to $28 - a drop of 76 percent! Even that valuation may be much too rich based on the resurgence of just one of its many print-anchored competitors, Penton Media, Inc.

Penton Media, Inc.: Still Sexy After All These Years

Penton Media has been headquartered in Cleveland, Ohio since 1901, beginning as a steel-centric publishing company. Its product portfolio today includes a wide range of publications as well as trade shows and web sites. Its coverage ranges from traditional manufacturing to food processing, hospitality, communications and, yes, the Internet.

Although they were a bit slow out of the gate in online ventures, they have come a very long way. In fact, Penton owns the successful Internet World magazine and its related trade shows. In the past several months they have formed strategic alliances with online players to provide the kinds of community and Ecommerce solutions needed to go head to head with the likes of VerticalNet.

Penton's online offerings are not as polished and integrated in some respects as those of VerticalNet. But, that is changing rapidly. What's more, they have a track record of creating print-based special-interest communities that predates the Internet by decades. As CEO Tom Kemp noted at a recent conference, "Our core competency is bringing buyers and sellers together in vertical industry communities." The unintended effect of the B2B Ecommerce tidal wave is according to Kemp, "Our 100-year-old industry becomes sexy."

What does Penton have that VerticalNet lacks?

• $300 million in 1999 Revenues - triple that projected for VerticalNet in 2000
• A reasonable market cap of $752 million
• An 8% pretax in 1999 and projected profit increases stretching for the next several years, according to analysts
• 50 publications; 103 trade shows; 83 Websites
• 3.5 million print subscribers
• 700,000 email addresses

It's worth noting that on April 14, when VerticalNet swooned 9.06 percent, Penton declined a barely noticeable 0.44 percent.

The Bottom Line

Penton Media can replicate everything that VerticalNet can do, given some time. And Penton has the time and the resources to get it right. Moreover, Penton is just one of several powerful trade publishers, such as IDG, Intertec and Miller Freeman, who are pursuing the online B2B opportunity with a vengeance.

When you observe the Internet landscape, don't be surprised to see a shift in market momentum to the old brick and mortar veterans - not just in publishing but in every area of commerce. The veterans have the experience, the resources and the motivation to get things done right. Pure Internet plays such as VerticalNet no longer seem like a sure thing.