The Netscape Drama:

From Hero To Zero

Eric Ellis, San Jose

02/14/1998

Microsoft now appears to be calling the shots in the struggle for browser superiority on the internet. But as Eric Ellis reports from Silicon Valley, it isn't so much winning the battle as Netscape losing it.

ONLY in America, and then only in Silicon Valley, would they compare Netscape's problems to the American Civil War. Netscape, the company that could reasonably claim to have "invented" the world wide web, is cast as the Confederate side, vastly outnumbered but brave and brash. In the battle for the hearts and minds of the people in the Great Browser War, dashing Netscape certainly has the hearts.

Ranged against it are the mighty forces of the Union, in this case Bill Gates' omnipresent Microsoft. Supported by seemingly unlimited resources, the Union's harsh rule may not be popular, but it is winning. The battleground, of course, is the modern-day Gettysburg of the internet, and the victor will probably steer what is fast becoming the medium of the next century, one expected to affect just about every possible form of commercial activity.

Netscape even has its own Confederate general in chief executive Jim Barksdale, a Mississippi native with a predilection for the biographies -video-taped, of course, and viewed while jogging on a treadmill in the early hours before work - of even earlier great warriors like Julius Caesar, Napoleon Bonaparte and Alexander the Great.

But as Barksdale knows, it was the Union that ultimately prevailed. So, it seems, will Microsoft. Barksdale's company may have invented and finessed the means to access the internet, but thanks to a couple of crucial missteps, it is Microsoft that is demystifying it and looking likely to make the most money out of it.

Already, despite its anti-monopoly battles with the US Justice Department, Microsoft is subtly marketing itself as an internet company. Its current version of Windows, installed as standard in the latest and future computers of Compaq, Dell and other big suppliers, including Apple, is designed to look as if users are surfing the web, when in fact they are simply navigating offline between files.

The intent seems clear. Get the 85 per cent of the world's computer users who are already "hostage" to Windows software familiar with internet-style protocol and hopefully they'll overcome the belief that the internet is a medium for boffins and geeks.

Microsoft isn't so much winning the browser battle as Netscape is los-ing it, snatching defeat from the jaws of victory.

Only two years ago, Netscape was to the internet what Microsoft was to the computer desktop - the standard. It achieved that by devising a way to scan the internet - the Navigator browser - and then giving it away.

As interest in the internet blossomed, Netscape quickly snared 95 per cent of the browser "market". For much of the past two to three years, the most visited site on the internet has been Netscape's, accessed by millions logging in to download the free software.

As recently as a year ago, Microsoft looked like the loser as the next wave of technology crowded around Netscape and its cabal of Silicon Valley cronies like Larry Ellison's Oracle and Scott McNealy's Sun Microsystems, both of whom have their own reasons to hate Microsoft.

But Netscape misjudged. As General Gates and his ruthless lieutenants marshalled a response in the form of Microsoft's Internet Explorer, cocky Netscape retreated (though it didn't realise it at the time) by forcing users to pay for what they used to get free, and it did so before it was able to develop a business alternative. Netscape's market share has slumped to 50 to 60 per cent of a much bigger pie, and it remains in free fall.

Worse, as market share tumbled, Netscape panicked and decided to reintroduce free software from its web site to stem the outflow. It simply looked like Netscape didn't know how to respond.

"I have trouble understanding Netscape's strategy," says Nathan Mhyrvold, Microsoft's chief technology officer. "There's a virtue in being quick on your feet, but having a strategy du jour is not a good thing."

This is more than just another business battle. Netscape's experiences are redefining the business cycle in corporate America and the technology-obsessed "new economy".

Five years ago, Netscape did not exist. Three years ago, it was a private company. Then, with just modest profits and lots of blue sky, it went public in one of the most successful floats ever.

When Netscape debuted on the stockmarket in August 1995, its share price leapt from $US28 to $US58.25 on its first day. The company, which had just $US16.6 million in revenue during the first half of 1995, was valued at more than $US1.1 billion.

A few months after it listed it was worth almost $US3 billion, a value that analysts justified with spectacular earnings forecasts. (Yahoo, an internet search engine company, has a similar valuation, as have a range of competitors. The New York Times recently said they had bull's-eyes on their backs.)

That sort of justification, which Netscape was happy to hear as it struggled with Microsoft, conveniently forgets one of the most basic tenets of Silicon Valley, a dictum that springs from something called Moore's Law, named for a founder of the valley's mightiest company, Intel. That law holds that the technology of computer chips doubles every 18 months. Although it specifically relates to chip technology, the theory can easily be applied elsewhere as the general rule that with something developing very fast, it is easy to be left behind.

It has not yet become the Bre-X of the internet, but Netscape has gone from multibillion-dollar valuations built on little but hype and personality (you don't hear much these days of the company's "ubergeek", Marc Andreesen, the original 25-year-old fatboy who adapted his college friend's inspiration to devise the basic Navigator) to the indignity of seeing its suffering share price rise and fall in response to takeover rumours.

Once the highest flier of the internet, as well as the darling of the sharemarket, Netscape said last month it lost $US115.5 million in 1997 and would have to sack 400 of its 3,200 staff. (It claims it is in better fiscal shape than Microsoft was at the same time in its development.)

A big part of its problem is that for all the supposed technical excellence of its product, Netscape hasn't figured out how to make good money from the internet; yet it is being driven by the short-term considerations of shareholders who have been fed a rich diet of valuation and hype.

Silicon Valley complains about Microsoft partly out of envy. It may be the international mecca of technology for the pizza and latte set, but the valley doesn't have a Microsoft. It has Intel, a technopoly that has become so because of its close connections to Microsoft.

The solution to Netscape's problems may ultimately be to create a true competitor to Microsoft, one helped along by the Justice Department's efforts to tackle the Seattle-based giant's pull.

Lining up to look at what Netscape has is a list of Silicon Valley companies, competitors of sorts but more joined in what the valley's legendary venture capitalist, John Doerr, of Kleiner Perkins Caulfield and Byers, calls a keiretsu, named after corporate Japan's technique of forging inter-related links and connections.

Given Japan's problems that may be an ill-conceived if trendy way of putting it for valley types, but companies like Netscape, Sun, Oracle and Apple are united not just by business links but by a long-held desire to squash Bill Gates. IBM is also reportedly interested, as is America Online, the world's biggest online service, which just bought the second-biggest, Compuserve, and uses Microsoft-based technology.

Sun and Oracle are the likeliest contenders. Sun, in particular, represents the valley's anti-Microsoft platform, and its founder, chairman Scott McNealy, has what often seems to be a personal vendetta against Gates. Sun is also suing Microsoft for alleged infringement of its Java software, and is a vigorous supporter of the Justice Department's action to force Microsoft into "unbundling" its internet software from its Windows operating system.

That was a fortnight ago - a long time in technology. In the past few days, the interest surrounding Netscape has subsided, as has its share price -again.

But not before the officers made sure the mansion was secure before the plantation was sacked. Netscape's generals, Jim Barksdale and Jim Clark, have both reduced their holdings of Netscape stock over the past year, at prices better than the ones the rest of the market is suffering. That's one battle won.