DWAYNE WALKER - SHOPNOW.COM INC (SPNW)
CEO Interview - published 04/17/2000

DOCUMENT # JAW608

DWAYNE M. WALKER has over 18 years of business and technology
experience. Mr. Walker began as President and Chief Executive Officer of
ShopNow.com Inc. in March 1996 and prior to that he served as Chairman
of the Board. During 1995 and 1996, he was also Chairman of US Connect,
which was acquired by IKON Office Systems. Mr. Walker is an investor and
advisor to NETDelivery, Inc. and other technology and services
companies. Mr. Walker first entered the high tech industry by building
software that connected early personal computers to mainframes at Hughes
Aircraft in 1980. He became a programmer and systems analyst for TRW in
1983. In 1985, he co-authored the book, Micro to Mainframe: Creating an
Integrated Environment, before Ashton-Tate acquired his expertise in
1986 to manage their database products and software application
development. Mr. Walker then moved into the technology and management
consulting area with DMR Group, a 1,200-person technology and management
consulting company. In 1989, Mr. Walker began his successful seven-year
journey with Microsoft Corporation where he held several positions,
including General Manager of Sales and Marketing, Director of Windows NT
and Networking Products, Director of SQL Server and Network Products,
and other senior management positions. He was recruited by Microsoft
Corporation to spearhead the launching of the first two versions of SQL
Server and Windows NT. In addition, Mr. Walker designed and led the
worldwide deployment of the Microsoft Solutions Provider Channel
program. Under his direction, the program grew from just a few hundred
participants to more than 7,000 and has become one of Microsoft's most
successful business partnership programs of all time generating over $1
billion in sales for Microsoft.

Sector: internet services

TWST: Could we start out with an overview and history of ShopNow.com
just to set the stage for readers?

Mr. Walker: ShopNow.com is an Internet infrastructure company that
provides enabling and outsourcing services for e-commerce. Specifically,
we operate two e-commerce marketplaces. One is the ShopNow marketplace
and the other is the b2bNow marketplace. The ShopNow marketplace has
about 50,000 merchants. The b2bNow Network is our business-to-business
marketplace providing business products, services, and infrastructure to
over 500,000 companies. The ShopNow Network experiences between 12 and
20 million visits per month.

TWST: Where do you see the biggest opportunities for the company over
the next couple of years? Which of these seems to offer the most
potential?

Mr. Walker: We expect the largest growth area to be in the business-to-
business marketplace. The ShopNow marketplace is a very large, healthy,
growing business, on a percentage growth basis as well as on a long-term
growth basis, but the business-to-business marketplace would be the
larger of the two.

TWST: As you look at that marketplace, who are you competing with, and
what is it that you bring to that marketplace that other people don't?

Mr. Walker: Our primary competitors would be companies such as
CyberSource or Go2Net, any company that provides e-commerce
infrastructure services. Our differentiator is that we provide complete
end-to-end solutions. ShopNow.com provides everything from the core
infrastructure in terms of e-commerce and data centers, through to
customer acquisition models that are necessary to bring customers into a
buying and selling network. Our business is all about connecting buyers
and sellers. We offer technology, products and services that provide an
e-commerce infrastructure for merchants and businesses.

TWST: All we hear these days is rhetoric about B2B. How big is the
market now and how fast is it growing and what's the outlook?

Mr. Walker: It's a trillion dollar market and is probably among the
largest opportunities we've seen in the computer and telecommunications
business to date. Business-to-business commerce using the Internet is a
relatively new phenomenon in the last four or five years, and has become
particularly pronounced in the last two years. There are certainly
hundreds of billions of dollars in opportunity to provide infrastructure
products and services between businesses via the Internet.

TWST: As we look at that marketplace, what segments of it are you
addressing? Are you specialized?

Mr. Walker: We focus on providing e-commerce infrastructure and service
to small- and medium-sized businesses, businesses which generate up to
about $1 billion in revenue. This represents about 80 to 90% of our
customer base, with the balance being large corporations. We focus on
companies that generate up to about $1 billion in revenues.

TWST: How much of that marketplace is currently using the Internet and
how much is likely to in the next couple of years?

Mr. Walker: If you look at the number of individuals and businesses
currently using the Internet, it certainly is over 70% a vast majority.
The number of businesses currently taking advantage of e-commerce is
about 10%, which is expected to rise. It is projected that more than 80%
of current business users on the Internet will begin to take advantage
of e-commerce services. Therefore, the growth opportunity going forward
is quite large.

TWST: What is going to cause that to happen?

Mr. Walker: Competition. There are three reasons that businesses must
respond to the Internet. First, it's an opportunity to increase revenues
and to reach a much larger customer base at a more effective price
point. Second, it's an opportunity to lower the cost of doing business.
Utilizing a telecommunications network like the Internet and
facilitating connections through customers and other businesses lowers
the cost of doing business. And third, it's an opportunity to improve
customer service and customer relationship management between companies
and their customers.

TWST: How quickly will this happen?

Mr. Walker: Right now, the e-commerce base is growing 200 to 400% a
year. I believe it's happening about as fast as the market can absorb.

TWST: What does the company have to do to make sure it's positioned to
take full advantage of this opportunity?

Mr. Walker: ShopNow.com is growing very quickly. The company generated
$27 million in revenues in 1999. Analysts are predicting that we'll have
between $80 and $85 million in 2000. We have a great management team,
and we have over 600 employees and multiple offices. Today our emphasis
is more on quality execution.

TWST: As we look at this vast opportunity, what could possibly disrupt
it?

Mr. Walker: I think that any business is always subject to the economic
cycles of the market, meaning that as long as economies around the world
are healthy, then business on the Internet is healthy. We're obviously a
mirror of the real world. We want to continue to see a strong economy, a
hands-off approach by the government in terms of taxation on the
Internet, and continued adoption of the Internet as a viable tool for
consumers and business. I think all these variables are currently in
place, thus we have a very healthy market.

TWST: If the government begins to impose taxation on the Internet, how
much of a negative would that be?

Mr. Walker: I don't view Internet taxation as negative. It will of
course have a certain impact, but the growth of the Internet will offset
what I believe will be a small impact. It will be a hot discussion point
when it occurs, but six months later no one will care. I believe it
really is a non-issue.

TWST: What kind of growth should investors expect from the company over
the next two or three years?

Mr. Walker: Analysts are saying that ShopNow.com is going to go from
last year's $27 million in revenues to somewhere between $80 and $85
million in 2000. That's a pretty significant growth from 1999 to 2000,
and strong continued growth rates are predicted after that. If you look
at analysts' expectations, the company is poised for success over the
next few years.

TWST: Do you have the management team in place to handle that kind of
growth?

Mr. Walker: Absolutely. Most of the people on the management team have
managed businesses larger than the business that ShopNow.com is
projected to be five years from now. The management team is very strong
and has run very sizeable operations previous to joining our company.

TWST: For investors looking at the company, what should they worry about
at this point? Where is the risk in the equation?

Mr. Walker: I believe there is limited competitive risk. The company has
experienced strong growth, and our losses are expected to decline every
quarter. ShopNow.com is predicting profitability in the first half of
2002. I believe that as long as we continue to take advantage of
opportunities and challenges in the marketplace, execute our plans, and
stay flexible, we will maintain our leadership position. It's basically
execution time. We simply have to focus on performance and meeting the
needs of our customers.

TWST: So you're really not inventing anything at this point?

Mr. Walker: We've already built three networks, and are in the process
of growing those networks. Today we have the ShopNow Network, the b2bNow
Network and the BottomDollar Network; and we'll be adding wireless and
broadband networks to complement these. Again, the focus now is on
execution.

TWST: Is there any reason for you to acquire anything or do you have
everything you need in house at this point?

Mr. Walker: The company has been aggressive in the past with mergers and
acquisitions and we will continue to use M&As as one way to develop
strategic products and services that we feel are necessary for the long
term, as well as for consolidation purposes and opportunity for
increased market share.

TWST: What will you be looking for? Will there be new businesses or just
things adding to what you already do?

Mr. Walker: We will continue to add to what we have, but are not looking
to enter new businesses. We expect tremendous growth in B2B, so there
may be acquisitions and focuses in that area. Infrastructure and B2B
will be our first priorities.

TWST: As CEO of the company, where are you spending your time right now?

Mr. Walker: My priority, first and foremost, is to make sure that we're
able to continue to recruit and retain our management team and employees
across the company. Our most important asset is our people. Second, it's
obviously important for me to continue to make sure that we have the
necessary resources in place , financial resources, people resources,
and all of the various resources needed to grow a company at this speed.
My focus is to stay out in front of the company for at least a year or
two to make sure that we have what's necessary to put us in position for
not only essential growth, but quality growth.

TWST: You mentioned people. How difficult is it to find the people you
need in this tight labor environment?

Mr. Walker: It's very difficult and is a challenge to everyone in the
high technology space. Probably the biggest challenge facing every
business, especially technology businesses, is acquiring and retaining
great people. We do this through hiring, mergers and acquisitions, and
aggressive recruitment efforts. We're used to significant challenges in
this business. Every year there are new challenges to which we adapt and
move forward.

TWST: Do you have the balance sheet you need to do what you want to do?

Mr. Walker: Right now, we believe we have cash and securities that would
take us to our profitability point. The company is well financed for its
growth.

TWST: In terms of profitability you mentioned sometime next year, I
think it was?

Mr. Walker: Analysts are predicting that we will reach a break-even
point in the second quarter of 2002.

TWST: Ultimately, what kind of an operating margin should you be able to
generate in these businesses?

Mr. Walker: Our investment bankers are best able to answer this
question, but ShopNow.com believes that it has a high leverage business
model, and once we hit our break-even and profitability point we will be
able to offer very, very attractive gross margins on a very sustainable
basis.

TWST: Given this high growth and rapid expansion, what kind of corporate
culture have you sought to develop within the company that would allow
you to do this?

Mr. Walker: Deploying a culture is always difficult when you're in a
hyper-growth market. There are tremendous challenges placed on employees
and the management team to grow very quickly. You must create an
environment that's entrepreneurial, and one that rewards people for risk
taking. When people make mistakes we encourage them to get back on the
horse, so to speak, and move forward. It's essential for people to have
the necessary tools, resources, and benefits they need within their
work-environment. We try to create an environment in which people think
outside of the box, and have some fun, too. We've put an emphasis on
evaluating and conducting employee surveys every 90 days to six months
to help strengthen and improve our work environment. ShopNow.com doubled
in size during the last six months, which creates a certain amount of
strain on any company. But our management team and employees have dealt
with it extremely well and we have a great work environment. But we're
always interested in identifying ways to make it better.

TWST: In that context, what kind of an option program have you put in
place?

Mr. Walker: Everyone in the company owns options, regardless of role. I
believe it's very important that we share the ownership of the company
throughout the employee base. It's been that way since 1995.

TWST: For investors keeping an eye on the company, what can they use as
benchmarks or milestones to see if you're on track over the next 18
months?

Mr. Walker: Strong financial performance, continued strong revenue
growth, and continued strong gross margins are basic benchmarks. We've
indicated that we think our gross margin should be 42% or higher
throughout 2000. In the third quarter our margins were 36%, and in the
fourth quarter they reached 42%. We're telling the market that it should
expect the company to have gross margins in excess of 42% throughout
2000. Another indicator is the growth and size of our networks because
they reflect the extent to which we monetize those networks. The fact
that we've grown from 10,000 merchants to 50,000 merchants in 12 months
or the fact that we have 500,000 businesses on our b2bNow Network and
we're growing between 5,000 and 20,000 new businesses per month, are
indicators of future success. The size of our network is another
indicator of our future success. Then the final question is how we
monetize the base of merchants and businesses across our networks. That
is reflected in financial performance.

TWST: What's the factor there that will drive it up to the level you
want?

Mr. Walker: For ShopNow.com, three factors have been driving our gross
margins. One is the rapid growth of our business-to-business division,
which has very high gross margins, usually 50% and greater. That
division continues to be the fastest growing element of our business,
and drives the gross margin of the company. The second is the continued
strength of the ShopNow Network, which has gross margins of 30% or
better. I would say the third and final factor is how well we're able to
cross sell and up sell existing customers for new products and services.
Success in this area tends to yield a much higher gross margin.
Certainly the biggest driver of both revenues and gross margins is our
business-to-business division.

TWST: Given the increasingly competitive nature of the Internet, how are
you going to be able to maintain those high levels?

Mr. Walker: Our business is growing rapidly. It is easy to lose
perspective in such a rapidly growing industry. Even if the Internet was
cut in half in terms of its growth, it's still a phenomenal business
opportunity for the next five or 10 years. I'm not sure growth is going
to be an issue. The issue is making sure that everyone keeps
perspective. Will any market continue to grow 200% to 400% a year
forever? Absolutely not. We're looking at a market, especially in e-
commerce, that's easily going to grow at 50% or more for the next five
years.

TWST: How do you feel about the value the market is currently putting on
your company?

Mr. Walker: I believe that our company is definitely undervalued
relative to the others in the marketplace doing what we do. But I also
fundamentally believe that markets take care of themselves. If the stock
is undervalued, at some point in time it will be discovered in one way
or another. If a company doesn't reach its full market value, it's up to
the company's board of directors or the management team to take action
that will cause that value to be unlocked. Our company's stock is
currently undervalued, but ShopNow.com has only been public since
September 28, 1999. Again, it's something to keep in perspective. The
company is just now approaching six months of being a public company and
it's only our second reporting quarter. We believe that with continued
quality execution, our market valuation will take care of itself.

TWST: What's the market missing in terms of your stock price? Why isn't
it being properly valued?

Mr. Walker: I do not think the market has put full value on our B2B
division, the growth and size of our e-commerce network, our e-commerce
technology infrastructure, or the market penetration the company has
already achieved. I think that most of the value of the company has been
attributed to the ShopNow marketplace and not so much to the B2B side of
our business. As the marketplace fully internalizes both the size and
growth rate as well as the opportunities that we have on the B2B side, I
believe, again, it will take care of itself. I also feel that the
marketplace has not zeroed in on the gross margins of the company. There
are very few companies that operate a business like ours, and grow at
the rates we grow while maintaining gross margins above 40%. The stock
price reflects the fact that both our B2B division and the gross margin
of the company are not fully valued.

TWST: You went public last year. How did you feel about the process?

Mr. Walker: I think the process is just that, it's a process. It creates
an opportunity for the company to become more visible, raise capital,
grow, and execute mergers and acquisitions that wouldn't otherwise be
feasible with private stock. The process is obviously draining for the
management team and the financial team of the company, but it is a
process that's necessary to continue to reward our employees and
shareholders with the kind of returns and securities they want from a
long-term point of view.

TWST: If you were sitting down with some investors, what two or three
reasons would you give them today to go out and buy the stock?

Mr. Walker: First and foremost, I believe the financial upside
opportunity of this company is tremendous. I believe that the financial
performance of ShopNow.com speaks for itself. Second, opportunities for
our business-to-business division are tremendous. And third, despite
ShopNow.com's hyper growth, that growth has all been within the US. As
we expand outside of the US further upside opportunities exist.

TWST: Thank you.

DWAYNE M. WALKER
 Chairman & CEO
 ShopNow.com Inc.
 411 First Avenue South
 Suite 200N
 Seattle, WA 98104
 (206) 223-1996
 (206) 264-8221 ' FAX

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Copyright 2000 The Wall Street Transcript Corporation
All Rights Reserved


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