No Transaction Fees At Ubarter.com

Subscription-based Model Introduced As White Believes Transaction Fees Regressive

By Bob Meyer, Editor

In the autumn of 1996, Steven White phoned colleague and friend, Alan Zimmelman, who had recently sold his trade exchange and moved to San Diego.

White told Zimmelman that "52" was way too young to retire, and pitched him on the idea of consolidating the barter industry...with the ultimate intent to take his new company, International Barter Corporation, public.

Even though consolidation was a new concept in the barter industry, Zimmelman liked the idea. That November, International Barter Corp was formed with six employees: Alan Zimmelman, Dick Mayer, Barbara Ryan-Galpin, Stacy Lawrence, Patra Model, and Steve White.

Big dreams, small staff, lots of energy, little capital, and with a nondescript office near Sea-Tac airport—the company was launched. IBC's first transaction would be to purchase Cascade Trade Association, the company White founded in 1983.

IBC raised $150,000 from a group of 63 individuals, spending a little over one year to get the company listed on the entry-level board of the Nasdaq. The listing date was February 11, 1998, with the stock trading at $1.00.

A 1997 BarterNews cover story mapped out White's plans to consolidate the barter industry. The strategy was to create a centralized brain-center where trade managers from around the country could access all the products and services from one database.

Since IBC already had Cascade's several hundred business clients bartering off-line, they determined their first stab at the Internet would be geared toward the consumer.

Because eBay was gaining popularity, they thought consumers would jump at the concept. Ryan-Galpin, who started with the company in 1994, was the web master; White was in charge of the flow chart and business model. The programming and database building were farmed out.

After working nine months on the site, and watching their stock run from $1 to $14, the site was launched in July of 1998. Everyone was exceptionally nervous, not knowing if the marketplace was ready, or if the site would "scale." According to White, it was a disaster!

The site was unable to handle more than a couple dozen people at one time, and immediately crashed. The platform that the site was built on would not scale, and the programming company eventually went out of business.

The business model was flawed, as well. With no currency in circulation, users were unable to complete a transaction.

The site was closed within the first week, and their stock plummeted to $2. They were back to the drawing board, with the company facing extinction.

White said he considered many times jumping out the window. And would have, "but," he recalled, "since we were only on the second floor it was obvious the jump would not kill me—but only increase my pain!"

When three of the original investors asked what the company's plans were, White told them it was clear that the Internet was the place to be. Yet IBC should stick to what it knew best: business-to-business sales with a unique currency.

Five days later the investors sent White three checks totaling $1 million dollars and said "go to work."

The company changed its name to Ubarter.com believing if they built a first class, easy to use site that had free registration, free listings, and free browsing, users would give it a try.

Now that they were re-capitalized, it was time to fill in the holes of the organization. White approached Dan Schneider, who had continually updated Cascade's computer network during the previous ten years.

White asked him if he would consider leaving his very secure job of fifteen years, 401k plan, benefits, nice office and prestige, for a 25% pay cut and no guarantees to help build this vision. Schneider said he would.

Rob Benson, who had worked for White in the late '80s and early '90s, was next on the list. White asked him to leave his steady job and accept a pay cut. Benson knew the culture at the company, which was "we will die before failing."

(In the early '90s Benson and White actually lived in the office at the Grosvenor House in Seattle in order to keep their expenses to a minimum while they built the business.)

White also contacted Kevin Andersen who agreed to significantly wind down his CPA practice in order to become Ubarter's CFO.

Dick Mayer, who started with the company in 1996 along with Benson and Stacy, made certain the company generated revenue in the business-to-business off-line environment.

Schneider, Ryan-Galpin, and White got busy mapping out the future and interviewing dozens of potential builders for their new site.

Mindcorps of Seattle was chosen for the development of phase two in December 1998. Schneider and White logged thousands of hours, working on minute details as they debated endlessly with others on hundreds of particulars regarding the site's functionality.

Three months later, Ubarter completed their only acquisition—one of the largest trade exchanges in Canada—utilizing its client base to add more products for the site, plus giving them true international currency recognition.

By September 1999, the new web site version was launched--the first time barter was ever seen online. Ubarter.com successfully pioneered this space on the Internet.

"It was up to us to turn this first-mover advantage to winning the space--to be like E*trade or eBay," White related. "We instituted a new distribution channel in a brand new market."

Of course, that required that they maintain, expand, and market the site. Plus it would take additional funding, since they were (once again) almost out of money.

To add to their hurdles, Amazon.com had acquired Mindcorps. This meant Ubarter had to find a new e-commerce company, to build the next version of their site and continue to add functionality to the existing one.

After months of searching and another round of interviews, the company decided on AXC Interactive to build phase three.

As a gesture of their faith, AXC agreed to accept part of the initial payment in stock, as well as to accept Ubarter dollars for the sublease of their office space for six months.

In early December, investment bankers from Network Commerce became interested in learning about the Ubarter story. They liked what they heard, and thereafter arranged a meeting for White with Dwayne Walker, CEO.

Ubarter signed a letter of intent several days later, and Network Commerce wired $2 million to their account—to pay bills and keep phase three moving forward. At the time Ubarter was running on empty, with $411 in the bank.

Network Commerce subsequently acquired AXC, placing all development in-house.

Looking back, White smiled in remembrance. "Our business model is unique," he affirmed. "I can only imagine what our present potential is, with the strength of 400+ employees and access to the full Network Commerce team!"

As we move into 2001, we begin our interview by asking White how he likes his new position. . .

BarterNews: How does it feel to be heading a subsidiary of a much larger company, versus wearing an entrepreneurial hat, as you did for so many years?

White: It feels great, because the hardest part, for all of us who grew up in this industry, was wearing so many hats—all the time. It was extremely difficult to grow one's business beyond a certain point.

Not having to worry about raising capital, or making payroll at the end of the week is a real relief. And being able to go to fellow employees who are much smarter than I, in many areas, is a plus as well.

Network Commerce is very entrepreneurial. Each division or subsidiary has full responsibility to grow their business and utilize the infrastructure and resources at their disposal.

BarterNews: How much of your time, as CEO of Ubarter.com, was spent on tasks other than the barter business?

White: In 1999, our last months as a closely held company, I spent close to 75% of my time on public filings and trying to raise capital. A public entity is very cumbersome and expensive.

Prior to going into it, I had no idea the depth of effort needed to go public. If I had known how difficult the road would be, I probably would never have made the jump.

I think that's true about many things though�if people always knew what to expect from new endeavors, they might not go for it.

BarterNews: So if you're not spending time chasing down money or making payroll, what does Steve White, Senior V.P. of Network Commerce, do these days?

White: It's my job to operate and grow the Ubarter division, making it profitable by building the customer base, and increasing the liquidity within our system by expanding the amount of currency in circulation.

My goal is to achieve $1 billion trade dollars in circulation at Ubarter. Of course, managing the employees and keeping them all focused is also part of my job, along with fully integrating the division into the overall business objectives of Network Commerce.

BarterNews: What is the amount of currency in circulation at the present time?

White: Around $10 million, so our work is certainly cut out for us. We have to make the Ubarter dollar valuable and secure enough that we can make Ubarter loans, knowing it will come back to us and be spent within the system.

BarterNews: But you have an unusual asset in the ability to work with the other Network Commerce subsidiaries. Shouldn't they be able to assist you in reaching your goal much faster?

White: You bet. With over one million businesses on the Network Commerce Business Network, if we get 10% conversion to Ubarter and issue each business a $10,000 credit line we would immediately surpass our goal.

It's really all about building a critical mass and using the legs that Network Commerce has--a firm of 400 employees, with a strong balance sheet. We definitely will be a survivor and trader within the internet space.

BarterNews: How are things progressing now that you've been on the job six months in your present capacity with Network Commerce?

White: The challenge we've faced since July was to fully integrate Ubarter into the Network Commerce family and technology. And we have accomplished that.

Integration is a very difficult thing to do when a merger occurs because there's different software, human resources, agreements, as well as various business cultures.

Going into 2001, I see two challenges. How do we gain more client companies for our marketplace? And then, how do we motivate them to initiate more transactions?

We want to show not only value to the customer, which barter will do, but increased value by allowing our customers access to the entire Network Commerce suite of services.

BarterNews: What are your plans toward this end?

White: We're adopting a completely new business model.

BarterNews: Really.

White: It's a subscription-based model, where Ubarter clients will pay a flat $25 cash fee each month. There will be no transaction fees, which is unheard of in the barter industry.

Of our current 30,000 clients, we expect to convert 10,000 over to the subscription model. And our goal is 40,000 clients by the end of 2001.

BarterNews: Under this business model it appears Ubarter would not have to be as concerned about trading activity.

White: That's right, with no transaction fees the customer has every incentive to trade. Plus, an additional benefit is that it eliminates our collection problem, as every client will be on automatic payment—using a credit card or bank draft.

Actually, we think this new business model will begin to break down, and ultimately replace, the current 3-fold barter model now in existence with monthly fees, cash transaction fees, and ancillary charges--such as travel booking and annual renewal fees.

In fact, one of our new markets will be clients of other trade exchanges. Because if they are trading $250 or more monthly, they will appreciate the value of our new model with less fees.

Our thinking is this: If a client needs personalized service, then sure, it makes sense to charge the 8% to 10% cash transaction fees. But just to do a transaction, no. It's smarter to go to Ubarter.

We anticipate savvy clients will get their regular trading partners to join them in opening Ubarter accounts, which only cost $25 a month.

Part of the problem, as I see it, of getting people to trade is the barrier of high-service fees. It has become obvious to us that the marketplace never really accepted paying a cash transaction fee.

Transaction fees are regressive, they actually penalize the companies who create the liquidity in our barter economies. Even stock brokerage houses have gone to a flat fee, not a percentage of the deal.

As the barter industry evolves, the 10% to 15% transaction fees will have to significantly decrease. Ubarter is now attacking and eliminating this barrier for our own clients.

BarterNews: This is quite an unexpected announcement. Are there any others?

White: Yes. We plan to provide full disclosure of our barter economy to our clients and the marketplace. We will file a "white paper" with the American Institute of Certified Public Accountants, the Better Business Bureau, chambers of commerce, as well as internet agencies.

BarterNews: What do you mean by full disclosure?

White: Our intention is to disclose the number of clients within our system, the number of positive balance accounts, and the number of negative balance accounts.

We presently have a balanced system between the positive and negative accounts in the U.S., and expect to achieve an overall balanced system in the foreseeable future. I know of no other exchange that can make this statement.

It seems exchange owners are constantly arguing and debating this subject of deficit spending, and oftentimes they don't even know what their deficits are!

BarterNews: How does an exchange determine its deficit?

White: A deficit is found by totaling all the positive client accounts, and subtracting all the negative client accounts—excluding house accounts and inventory.

Ubarter believes its clients should know the health of our exchange, because there is a definite risk for them when an exchange has a sizeable deficit.

The rating system we will create is based on an exchange's deficit, and is intended to help our industry's credibility.

BarterNews: There have been some remarkable changes in the barter industry since our issue #42 interview, back in 1997. The last time we talked you were intent upon making industry acquisitions, which never materialized as you envisioned. Why do you think your efforts in this area fell short?

White: We were ahead of our time. I believe I educated the marketplace, encouraging everyone to think about it. The next guy then came along and executed that business model. In retrospect, I'm glad they're doing it and not me.

BarterNews: That's it? You just were too early?

White: Basically, yes. Exchange owners weren't ready for the idea. With the passage of two years and Ubarter being acquired, plus a couple of other well-funded companies hitting the market…well, it's all just come together.

Remember, Ubarter pioneered in two areas, as published three years ago in BarterNews. The first was our consolidation plan, and second we were the first to move into the online environment. Now everybody realizes that an online presence is necessary.

BarterNews: But most exchanges are not "purists" as you are, they don't believe online is the only way to go.

White: They overlook the fact that a pure online exchange, like Ubarter, can still enable a client to purchase things off-line (in person), at member establishments using their Ubarter.com card.

An online company allows clients to search and buy online at their own convenience, unlike the off-line where they're dependent upon their trade broker's schedule.

Let me add that, in a fast moving industry like ours, one of the keys to survival when you try something that doesn't work, is to figure out why. And then you must adapt and refine the business model, which is what we did--and will continue to do.

From our perspective, off-line is just not as profitable...there are employee costs, leases for each office, local area networks (LANS), traveling costs from office to office, making sure everyone is in sync, and keeping everyone in the loop.

What did stay in our original model was the commitment to centralized brainpower and operations. It's also beneficial as we now, effectively, have customers in two dozen online markets.

BarterNews: How will you leverage the assets of Network Commerce?

White: With Network Commerce as a base we have significant inventory already, from the 1,025,000 businesses on their Business Network. We anticipate our sales for fiscal 2000 will be more than $100 million.

And don't forget, Network Commerce has affinity with others (internet sites) in the marketplace. Additionally, scores of Network Commerce vendors are accepting Ubarter trade dollars when selling to us.

My big hot button, when I initially talked with Network Commerce about the acquisition, was the strength of their business model. They had invested $200 million in their technology, with over 100 people servicing this department.

Consequently, Ubarter will never have to worry about having a top of the line e-commerce site. Nor will we ever have to search for a web vendor again.

BarterNews: I would think that is especially difficult in the technological area, where you have to rely upon others. Select the wrong people and you're in trouble.

White: Exactly. If you'll remember, the speech I gave at NATE in 1999 had that exact message. No one should try to build his or her own e-commerce barter site. It's just not worth the loss of time as well as money.

If you want to get an e-commerce strategy, I highly recommend partnering up with somebody...rather than trying to build your own.

Ubarter made that error back in 1997. We threw our first site away after nine months worth of work. If we had waited until years later, you and I wouldn't even be talking today. So thank God it happened early on.

We lost about $100,000, which was a lot of money for us at the time. It didn't cripple us--although it was a close call.

We're into the 3.0 model now, with a very powerful search engine. We can offer immediate online transactions, just like E*trade or Charles Schwab. When one buys a hotel room, for instance, trade dollars are moved from the purchaser's account to the seller's account--immediately.

Plus the history of a client's purchases and sales, all the items they've listed past and present, will be on the site. We're trying to offer the barter community the best availability in products and services.

There is no registration cost, and no cost to list items. Additionally, sellers are able to remove their products or services at any time. For example, a hotel could list availabilities one month, take the hotel off the market the next, and put it back on at a later date. It's very easy to facilitate.

One of the big differences in our operations today, versus when we had an off-line company, is that we no longer push the information to our members between 9 a.m. and 5 p.m.

On the Internet we do it a different way. The clients decide when they want the information, on their time, at their convenience.

BarterNews: How do you stay in front of your client base?

White: We broadcast e-mail every week. Over half our staff is involved with customer service, enabling Ubarter to grow from 3,000 members at the end of 1999 to 30,000 at the end of 2000.

And the upgrades never stop. We've already completely integrated our sister properties—FreeMerchant, ShopNow, and B2B—at Network Commerce.

Since they're all using Oracle platforms, when a person at any of those sites registers, all the information provided will go to Ubarter when they hit a single button. It's selective registration, like the new Microsoft Network which aims to have all information available in one place on the Internet.

BarterNews: In retrospect, what do you suggest as the best way to go public, for a privately held barter company?

White: There's a couple of ways to go. One way is to be acquired, another is to initiate an IPO. I've made the suggestion that half-a-dozen of the guys in the industry could band together and go public.

In such a scenario one person would be named CEO, another the CFO and that would be the focus of their jobs. The problem is egos get in the way, and in some cases people might not "fit" comfortably in the new corporation.

BarterNews: Do you see this happening?

White: I don't think so, partly because of the greed factor. I read an article in the Harvard Business Review about VC funded companies going IPO, it said that within two years the average founder ended up with 7% of the firm.

So at IPO you have to question if you're willing to give up 93% of the company...and a lot of control.

BarterNews: What percentage did you have of Ubarter after two years?

White: Twenty-seven percent. That's the big reason why my early attempts at consolidation didn't work out. The trade exchange owners wanted too much for their barter companies, plus they didn't understand the dynamics of getting stock for their company—like they do now. They're definitely better educated today.

BarterNews: So is the day of the entrepreneur going into the barter business about gone?

White: They can earn a living at it, but they won't get rich. The old model, where there is a two or three person office in a local community, will still be around. And their focus would be on servicing a very local clientele.

BarterNews: Could these types of operations plug in with a company such as yours?

White: They could and they should. Everyone needs an e-commerce strategy of some sort, and it would be wise to partner with an e-commerce site.

BarterNews: Let's look down the road a couple of years. What do you see?

White: Today there are seven companies I can name that have 10,000 or more clients. In one year I see only three of them surviving, and by the end of the following year it'll be down to two. I also anticipate transaction fees will be greatly reduced or eliminated.

BarterNews: What about the two trade associations, IRTA and NATE?

White: I expect they'll remain about the same. The local exchanges need a voice and the interaction of annual industry meetings; plus the associations also act as a quasi-training facility.

I also think the two currencies (IRTA's Universal Currency and NATE's Banc) will continue to be useful to the trade exchanges for reciprocal trading.

BarterNews: Do you see any big changes coming, or is it more of an evolution? After all, no one envisioned a few years ago all the money coming into the industry from Wall Street�or a barter company being sold for $45 million.

White: I see big changes coming. I believe our new subscription-based model will enable us to grow to one million customers having, ultimately, a billion Ubarter currency in circulation.

And the reason that's a possibility is technology has made it easier for businesses to communicate. Easier for Ubarter's customers to find the liquidity that they desire for their products and services.

Add to that the fact that new pricing models, which didn't exist five years ago, are now becoming commonplace.

BarterNews: What does this mean for the barter business?

White: Companies are beginning to understand that there are various ways of purchasing a product, other than walking into a store and writing a check or using one's credit card.

BarterNews: So you're saying our industry is going to introduce a new payment option. One that really has been around for 40 years?

White: It may have been around for four decades, but it's never been totally accepted. What's happening for the consumer is that they now understand various pricing models and payment options. Most importantly, a mental shift has taken place.

After all, our industry enables the business community to stretch their dollars, adding value by enhancing life styles and expanding their business.

And think about it, that's really all we are—our secondary currency is a different payment option. The day it's totally accepted we will see our industry grow dramatically.