MetalSite: "It Was Overhyped by Everybody"

Now that it's the latest casualty of the B2B meltdown, CEO Patrick Stewart discusses what went wrong at the online steel marketplace

When it comes to the stages of grieving, Patrick B. Stewart is still in denial. Stewart, the president and chief executive of MetalSite Inc., pulled the plug Jun. 6 on the innovative steel marketplace he started on the Internet in 1998. The cause of death: Despite keeping careful tabs on the budget, the business-to-business venture, like so many other dot-coms, simply ran out of cash. Its Web site, where hundreds of steel buyers once did their shopping, is now blank. And on Jun. 15, the last of its few dozen employees -- down from 130 late last year -- will leave their offices in suburban Pittsburgh for good.

But Stewart insists MetalSite isn't dead yet. A former executive at Weirton Steel who began dabbling in e-commerce in 1996, Stewart says he is talking with several groups interested in reviving the site, perhaps as soon as July. Among them are Weirton and the four other steel companies that had bankrolled the online operation, chipping in 80% of the $35 million MetalSite burned through in its three years.


  True, B2B firms are dropping like flies these day. Just Jun. 13, MetalSpectrum LLC, a site that Alcoa Inc. launched a year ago to take on MetalSite, shut down. But Stewart insists that his business model is sound. As evidence, he notes that revenue doubled in 2000, while the number of transactions conducted on the site leaped to 50,000 from 9,000 in 1999. Indeed, now that rival sites have closed or are scaling down, he reasons MetalSite should have even more opportunities. Plus, steel buyers and sellers alike are still under pressure to cut costs, which could drive more business his way.

Others see no hope of a Lazarus-like comeback. One of MetalSite's backers, LTV Corp., is in Chapter 11 bankruptcy, while two of the others -- Weirton and Bethlehem Steel -- are losing money. Nor can Stewart turn to MetalSite's other investor, Internet Capital Group. The now-humbled Internet incubator paid $180 million to Weirton for a 35% stake in MetalSite in late 1999 and then injected $7 million more into the venture. Last December, it wrote off its entire investment and walked away. On top of that, steel prices are down, which would cut into any fees a resurrected MetalSite would generate on transactions.

In between conversations with MetalSite's attorneys and would-be investors, Stewart went over MetalSite's demise with BusinessWeek correspondent Michael Arndt in Chicago. Here is an edited version of their conversation:

Q: You were one of the true pioneers in the world of B2B ventures and were often cited as a role model for others. What went wrong?


I think the marketplace concept is working. The problem is that the cost to build out a lot of the functionality thought to be needed [on] Day 1 is just enormous. The reason most of the others have failed is that they spent all the money and time trying to use technology that really wasn't suited for the market's needs. We started three years ago custom-building our own technology to meet the metals industry's needs. That's one of the success factors we've had.

I think one of the failures we had was that we didn't anticipate that the steel industry and the technology sector could be at such lows at the same time. If we did not have the severe economic conditions in the steel industry that we have today, MetalSite would still be running. You can't blame our partners. It's really just what's going on in the industry right now.

Q: But the failures go beyond the steel industry. A lot of the B2B sites or marketplaces are having trouble today. How do you explain that?


First of all, they don't have industry backing. Any of the sites that do not have industry backing are, by default, struggling. Who's supporting them? And a lot of these exchanges, when you get under the covers of their technology and see what they can and cannot do, what we can and can't do as a marketplace is superior to anybody else. And because we built our technology ourselves, without having to go out and buy high-priced packages, we have less investment and better technology at the end of the day.

Q: Were you ever approaching profitability?


Actually, our goal was to be break-even by the end of 2001. One of the things the new investors are looking at is: Is there a way for MetalSite to be break-even within 60 days of opening again.

Q: How would you do that?


A lot of it has to do with how many people we have. There were roughly 70 employees in the company when it closed last week. Going forward, there will probably be only 40 employees, initially, to reopen the marketplace. Forty employees would be more than adequate to really make our partners successful Day 1.

Q: Do you think the media and others -- investors and analysts and dot-com executives, to name a few -- were guilty of over-hyping the Internet?


I think it was overhyped by everybody. I think it was overhyped by the people forming the companies, by investors, by venture capitalists, by everybody. You think about how complex [companies'] supply chains are, and how many decades these people have run their supply chains around certain nuances. You don't change that in a week. You don't change that in a year. You change that over time.

Q: Looking back, are there any dates or crossroads in the past year that, if you taken a different path, things would have turned out differently today?


When the markets were so good a year ago, or a year and a half ago, what we could have done was raise more money for the company. [Then], we could have weathered this period more easily. By not raising more money a year did put us in an awkward situation. Other companies have raised hundreds of millions of dollars and [are] weathering the storm. [But] that's the only thing I would have done differently. We managed the company very carefully with how much money we spent. We had very good partners. There's a lot of things we've done right. Altogether, I'm very pleased.

Edited by Thane Peterson

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