Netscape: Taking on Goliath
In early 1995, with the World Wide Web new to most people, Netscape was just another
Silicon Valley start-up in danger of heading down the road to oblivion. With its $12
million in seed money running out, co-founders James Clark and Marc Andreesson laid
off a dozen workers, froze hiring and hoped new Chief Executive officer Jim Barksdale,
having served previously with AT&T and Federal Express, had some fresh ideas. VicePresident Richard Schell recalled: "Jim walked in the door and said: 'This rocket is
going to take off, or it's going to crash into the ground. So, ladies and gentlemen, strap it
on!'" (1).
The decision was historic; as the Web took off in 1995, so did Netscape
Communications. It's sales for its first full year of operations in 1995 hit $81 million, a
faster rise than any software company in history. Just 16 months after its founding,
Netscape's Initial Public Offering (IPO) in August, 1995, turned a company with only $20
million in sales and no profit into a Wall Street darling with a market capitalization of $2
billion. By 1996, the firm employed over 2000 people and earned $21 million on sales of
$346 million. The firm's milestones have been impressive to say the least (2).
In this business, a year's worth of change happens in a couple of months, a
phenomenon known as "Internet Time". Over 50 million copies of Netscape's popular
internet browser have been distributed in two years, making it the number 2 program in
the world right behind Windows. While Microsoft's founder Bill Gates originally was slow
to react to the Internet, he has now focused a daunting amount of Microsoft's resources
behind the development of his own Internet Explorer, first introduced in August, 1995.
Since then, Gates has integrated the browser into his Windows operating system, a
move that has allowed Microsoft to capture roughly 40% of the browser market (3).
In the Beginning
Shortly after meeting and forming the company in April, 1994, Clark and Andreesson
visited the National Center for Supercomputing Applications at the University of Illinois.
Within days, they hired nearly the entire team that developed Mosaic, the first userfriendly web browser. Having completed the first version of Navigator in the next few
months, Andreesson insisted that the company release a new version of the product in
every 6 months, an almost unheard of pace (4).
To get the product to market as quickly and as widely as possible, Andreesson
proposed another revolutionary idea - give the browser away free over the Web (the
way Mosaic had been distributed). On October 14, 1994, just 6 months after Netscape
began, a free test version of Navigator was posted on the Netscape web site. By the
spring of 1995, 6 million copies had been downloaded (5). This new distribution medium
not only had profound effects on Netscape, but portended huge changes in the
computer software business itself.
Today, Netscape still gives away trial copies of its browser, but is still able to generate
51% of its revenue from browser sales. In addition, with over 4 million visitors every day
to its web site, the Netscape home page is the most sought after advertising space on
the Web, generating millions of dollars in fees. The pace at the company is so fast, it
utilizes what it calls "surround-sound" management: an issue is identified, key people
assemble, and a decision is concluded in about 20 minutes (6).
With Success Comes Competition
Although Netscape was largely alone to develop the web browser market, it did not take
long for Microsoft to take notice and react with its own browser offering - Microsoft
Internet Explorer. In 1996, Microsoft spent $750 million to acquire or invest in 20
Internet related companies. Caught off guard at the start, Gates now claims that the
Internet is driving everything at Microsoft (7). Other firms, including IBM/Lotus with its
Lotus Notes offering, only add to the competitive fever driving the industry.
This is a problem with many Internet upstarts, their initial success attracts the attention
of more experienced and more capitalized rivals. Amazon.com was an early and
successful provider of on-line books, but Barnes and Noble is entering internet
commerce in competition to Amazon. Kevin Landis, manager of the Technology
Leaders Fund in San Jose, California, says that the key to many early movers is to
remain on the cutting edge. "As soon as innovation slows down, they are playing a
game the Goliaths have been playing for a long time. There are going to be companies
along the way that get crushed in the process" (8). Additional Internet companies
including Cybercash, Spyglass, and CompuServe (purchased by AOL) have suffered as
increased competition erodes their profits.
Another problem with Netscape is its drive to evolve beyond a one-product company. Its
decisions to enter groupware and email for intranets forces it to compete with the likes
of Microsoft and IBM. Bill Gates is particularly critical of Netscape's choice to enter the
groupware market. "IBM has decided this market is strategic, meaning they are willing
to take noneconomic returns, hoping it will help them imagewise or marginwise in other
businesses. Microsoft has decided that Exchange [its email product] is 'strategic'. This
means we are willing to take noneconomic returns. So you'd call this space
hypercompetitive between IBM and Microsoft. It is kind of surprising to have somebody
else come along and say, "Oh, yeah, me too'" (9).
Can Netscape Survive?
Microsoft's entry into the browser market has not been without controversy. It's decision
to link it's Navigator browser into its Windows operating system caused the Justice
Department to launch an inquiry into the practice, an investigation that eventually
resulted in Microsoft backing down from this strategy. However, with massive
advertising behind its product offerings, Microsoft can outspend Netscape at every turn.
Microsoft's new version of Explorer is designed to give users almost seamless
integration between the World Wide Web and the user's PC hard disk. By bundling its
browser into its dominance in its Windows operating system, Microsoft is pushing a
multitude of corporate partners, including Disney, Time Warner, Pointcast and others
through the use of an "Active Desktop" control panel or "dashboard" (10). The feature
makes it possible to reach these and other popular Internet locations with a single
mouse click.
Under question is whether Microsoft utilized unfair monopoly power in attempting to limit
Netscape's exposure in the browser market. The United State's Justice Department
began a trial in October, 1998 to determine if Microsoft violated the law in conspiring to
illegally dominate the market. Testimony by Netscape CEO James Barksdale is critical
to the government's case against Microsoft, as Mircrosoft's attorneys are claiming that
Netscape actually approached Microsoft about dividing up the market between them
(11).
Netscape's legacy to the computer software market will remain regardless if it survives
as an independent entity. More than any other company, Netscape pioneered
downloading software on the web, a practice today that is followed by every major
software provider. Netscape continues to attempt to reinvent itself - its is investigating
the possibility of turning its online site into a web "portal", brimming with many contentdriven amenities available at other providers (12).
Netscape's Netcenter is the second most-visited site on the web, with 23.1 million
discrete users, behind Yahoo.com with 31.3 million. Microsoft's homesite, in
comparison, receives 17.9 million users. This strategy attempts to capitalize on the
realization that Internet activity clusters around a few major hubs (13). In addition to
advertising, Netscape receives payments from search-engine companies licensing
positions on its Website. The Netscape homepage generated $18 million in fees in the
first nine months of 1996 alone (14).
AOL to the Rescue
On November 24, 1998 , America Online announced the purchase of Netscape
Communications - with a side licensing agreement with Sun Microsystems - in a stockfor-stock deal worth $4.3 billion. AOL argues that the purchase will strengthen its brand
in the following ways:
•
•
•
Advance America Online's multiple-brand strategy with one of the Internet's best
known brands;
Substantially broaden America Online's global audience at home and at work, by
adding the fast-growing Netscape Netcenter portal that is integrated with the
Netscape browser used by millions of people;
Accelerate the growth of e-commerce across the America Online and Netscape
brands and provide added value to their business partners;
•
•
•
Provide significant new opportunities to make America Online's brands available
anywhere to interactive consumers, as well as to maximize the value of these
brands, by taking advantage of AOL's existing shared infrastructure; and
Expand the range of America Online products and services by adding worldclass technology and an experienced development team that has demonstrated
its ability to innovate rapidly.
AOL News Release, 11-24-98
Netscape's heralded browser may actually be a by-product of a deal that is more
concerned with E-commerce software, a market predicted to be $3.8 billion by 2002.
However, adding in back-office support software linked to the web that includes servers,
software and services, and the market grows to $63 billion in 2002 (15).
Can this new corporate arrangement compete effectively with Microsoft and IBM?
Much will depend on the ability of Steve Case, head of AOL, to blend the differing
corporate cultures into a unified whole. One disturbing statistic is Netscape's continued
loss of the browser market to Microsoft's Explorer. Most recent statistics suggest
Explorer enjoys a three-to-one edge in users.
Netscape: Taking on Goliath: Review Questions
Question 1 What was Netscape's impact on the Internet in particular, and the
business community in general?
Question 2
Can Netscape survive as an independent entity?
Question 3
Can Netscape continue by giving away its primary product?
Question 4
Identify 5 additional Internet sites related to web commerce.
Endnotes
1. Hof, Robert D. "Netspeed at Netscape," Business Week, February 10, 1997: 78 86.
2. Ibid., p.78.
3. "Why Netscape isn't Dead," The Economist, July 5, 1997: 62.
4. Kirkpatrick, David. "Can Netscape Compete?," Fortune, June 9, 1997: 135.
5. Kirkpatrick, David. "The Saga of How the Web Was Won," Fortune, July 7, 1997:
202.
6. Hof, op. cit., p.80.
7. Markoff, John. "Microsoft vs. Netscape: The Border War Heats Up," The New
York Times, September 29, 1997: D: 4.
8. Rynecki, David. "Internet Upstarts Need Strategy to Defend Their Territory," USA
Today, January 7, 1998: 3B.
9. Kirkpatick, op. cit., (June) p. 135.
10. Grant, Lorrie. "Struggling Netscape Refocuses," USA Today, January 7, 1998:
2B.
11. Wilke, John. "Netscape Details Meeting with Microsoft", The Wall Street Journal,
October 23, 1998: B5.
12. "Netscape gets Webbier?". Cnnfn.com. March 13, 1998.
13. Ibid.
14. Hof, op. cit., p. 80.
15. Kirkpatrick, op. cit., (June) p. 135.
16. Green, Heather and Yangh, Catherine. "Not So Odd a Couple After All,"
Business Week, December 21, 1998: p77.