FOOL ON THE HILL
An Investment Opinion
by Alex Schay
The Dynamic Duo: Software and the Net
In a recent interview, Netscape (Nasdaq:NSCP - news) chief executive officer James Barksdale used the following example
to illustrate how Microsoft (Nasdaq:MSFT - news) might be able to use its clout in the market to bias consumer choice:
Imagine turning on a new Compaq PC. "On the
Windows 98 screen it says, 'Do you want to
[shop for] your travel services?' And you say,
'Yes, I think I will.' Well, what does it pull down?
It pulls down a Microsoft travel service. If you
want to gather information about automobiles,
you pull down Microsoft's automobile shopping
service... And the list goes on and on."
This type of example probably differs markedly from most observers' expectations. What of the grand rhetoric surrounding the
browser war? Well, it's still a Coke-Pepsi type battle, but toward a subtle shift in ends. The browser is the key to Netsape's
Netcenter business, but as both Marc Andreeson and Barksdale have been proclaiming rather disingenuously over the last
couple months, "[We], get no revenue from the browser." In fact, Netscape does, but of course not directly from Navigator
sales. Of Netscape's roughly $500 million in revenues that it generates per year, roughly $400 million of the total comes from
the company's role as strategic software arms supplier for the coming e-commerce wars as well as other business applications
-- about $100 million in run-rate sales. The remaining $100 million (growing at 50% per quarter) comes from its role as
bootstrap partner -- as in, "Hey, you've got no traffic, let Netscape bootstrap your business."
The genesis for this partnership strategy occurred when an unnamed online travel reservations company -- name not mentioned
in order to protect the innocent -- found that after employing Netscape's software to build its online venture that it was still
generating very little flight traffic. Light bulbs began to glow brightly at Netscape corporate offices -- notice that "bright" and
"brilliant" are just a question of intensity -- and the idea was presented to partner with the travel reservations company.
Netscape could guarantee it some users by "harvesting" a percentage of the 70 million screaming Netscape clients that forget to
change their default home page (through ignorance or laziness), and by building up an area that might actually make them
continue "to use" Netscape as their home page. NetCenter was born.
And so were partnerships with Excite, Infoseek, Lycos, and AltaVista guaranteeing these companies a degree of prominence in
Netscape's "Search the Web" function as well as a much-needed cash reward for all that sweat Netscape expended getting
people to use Netscape to begin with. Finally the company was making some money from its enormous existing user base --
congruent with the much talked about "portal" strategies pursued by the artists formerly known as search engines.
So, when Jim Barksdale expresses concern about Microsoft in the automobile shopping business and the travel reservations
business, its because, well... Microsoft could be a player in both these segments. Unlike Netscape, which merely "partners"
with some of these concerns, Microsoft actually has the clout and resources to compete in these areas -- witness MSNBC and
MSN. So Microsoft in the travel reservations business affects Netscape's business partnerships in this realm -- albeit indirectly
-- which explains all the squawking about unfair competition. When the browser was the key source of revenue, the inquisitorial
heat was turned up on Microsoft's browser strategies, and so let it be with Netscape's public stance on Microsoft's other
business "tying ." However, there are tremendous intricacies to the debate worth explorin g that this superficial view does not
address.
What's important to note, however, is how dramatically the Internet is affecting the business models of traditional software
companies. Netscape is both a software company and an online services company, because irrevocable trends have forced
Netscape's hand. Unlike Yahoo (Nasdaq:YHOO - news) and America Online (NYSE:AOL - news) , which have both
made substantial investments in software development (roughly half of Yahoo's 600 employee are developers), neither have
leveraged this investment directly into software sales.
Other companies that have succumbed to the dynamism of the Net, offering services online based on their software, include
Oracle (Nasdaq:ORCL - news) and Intuit (Nasdaq:INTU - news) . Oracle sells software and is also the fourth-largest
systems integrator on the planet. Intuit, seeing the digital ink on the browser, staunched a loss in retail sales by offering online
services directly linked to the types of software that it developed. Don't believe the hype, a sizable chunk of Netscape's
immediate future growth is still linked to its browser market share (which is still dominant); however, this may be subdued
somewhat if NetCenter actually becomes a valued destination spot. |
