Netscape's balancing act
Software developer reimagining itself as
rumors swirl that it's up for sale
May 29, 1998: 1:53 p.m. ET
SAN FRANCISCO (The Red Herring) - We had to
wait: Jim Barksdale, Netscape's CEO, was being
filmed for a documentary on Silicon Valley. As we
were cooling our heels, we wondered, Was it
possible to imagine a documentary about Silicon
Valley that did not include Netscape?
Netscape's future, however, was in doubt.
Rumors were flying that IBM, Novell, EDS, Oracle,
Sun Microsystems, and America Online were
interested in buying all or parts of the company.
Netscape had pitched itself as the platform for the
Internet age, maintaining that its Web
browsers--working with HTML, Java, and
JavaScript--would render Microsoft's operating
systems irrelevant. The company's initial public
offering in August 1995 had been a media event and
given rise to a whole class of Internet startups, many
of which had planned to build applications based on
Netscape's browser, Navigator. Even the Red
Herring--by having so many companies to write
about--had profited.
But since last summer the fastest-growing
software company in history has lost half its market
value, in large part because of Microsoft, whose free
and (according to many reports) superior Web
browser, Internet Explorer, has eaten into the market
share of Netscape's most famous product.
(Microsoft now has an estimated 40 percent share of
the browser market; Netscape once held more than
85 percent.)
Four-year-old Netscape hit bottom in the fourth
quarter of last year. Despite analysts' predictions of
profitability, Netscape lost $91 million on sales of
$128 million for the quarter. (In all of 1997, the
company dropped only $115 million on sales of
$534 million.)
In January Netscape did something startling: it
decided to give away its browser to customers and
release its source code to developers in order to
drive sales of its other products. The hope is that a
free Netscape browser will stem the loss of market
share to Microsoft, that thousands of developers all
around the world will improve Netscape's code and
write applications optimized for its browser, and that
corporations will buy its server software because
Netscape servers will work best with all the new
Netscape browser applications. The browser once
brought in more than half of the company's revenues,
but Netscape is now relying almost wholly on sales
of its enterprise Internet servers. It estimates that
servers will generate more than two-thirds of
revenues this year, with the remainder coming from
sales of advertising space, services, and products on
Netcenter, the default home page on Navigator.
But so far Wall Street is unimpressed by
Netscape's radical reimagining of itself. At our press
time, the Mountain View-based company's stock
(NSCP), though volatile, was trading in the low
$20s, less than half its 52-week high of $49.50. With
Oracle chief operating officer Ray Lane telling a
Japanese journalist that Oracle might be interested in
purchasing Netscape, and sources telling us that
Barksdale had been talking to bankers about selling
the company for over a year, we were dying to know
what was next for Netscape.
Was Barksdale planning to spin off a part of the
company or sell out altogether? With Netscape's
stock in such a slump, he had to do something.
All bark, plus bite
Finally Barksdale arrived. Carefully sizing us up,
he suggested that he might favor us with advance
news of Netscape's plans, only to change his mind a
few moments later: our publication date was too
close to the third week of May, when Netscape
would report its second-quarter numbers. (Netscape
had announced that it was changing its fiscal
year-end from December to October; this means its
fourth-quarter numbers are now its first-quarter
results.)
Looking for some way to get him talking, we
changed tack. How had the company evolved into a
server company? we asked. Barksdale responded
impatiently: Netscape had learned from its customers
and competitors. He explicitly confirmed that it was
no longer a browser company, snapping, "I get no
revenue from our browser, so I can't be a browser
company." (Throughout the interview he continued to
refer to Netscape in the first person. The Jackson,
Mississippi, native, who once served in key positions
at AT&T Wireless Services and Federal Express,
was as gentlemanly as ever, but there was an
unmistakably defiant tone to his responses.)
We had been under the impression that Netscape
had wanted to provide developers with an alternative
to Microsoft (see "The Good Ship Netscape").
Countless articles from 1996 and 1997 reported that
Netscape viewed itself as a "Microsoft killer."
Barksdale quickly denied this. "I think anybody who
wrote that was naive," he said. But even Microsoft
executives, in a number of internal (but widely
circulated) memos, one of which the Department of
Justice is using in its lawsuit against the company, had
stated that Netscape and Java represented the
greatest existing threat to the company's business. In
Barksdale's view, the real conflict has always been
between Microsoft and open standards--a battle
that, in his opinion, open standards have won.
Talking to Barksdale, we got the impression that
all was going according to plan. Netscape had made
$350 million from the browser in three years, he
reminded us, despite facing a competitor that was
giving away its product. The company was surviving
its shift to the server business, he insisted: "I don't
know many businesses that could make a more
spectacular transition if I told them half their revenue
would be removed in 12 months."
Contrary to the widely held belief that Microsoft
is reeling in Netscape, Barksdale said he does not
think Microsoft will be able to undermine his
company with lower prices for its servers, or even no
price at all (Microsoft Internet Information Server is
bundled with Windows NT). Citing a March study of
84 organizations by a consulting group called
Creative Networks, he claimed that Netscape's
Enterprise Server 3.0 was technically superior to
Microsoft's IIS 3.0: "IIS is free, but corporations
don't use it."
Barksdale also argued that there are plenty of
areas where Netscape can avoid Microsoft. Take
Netscape's directory server, a stand-alone product
that Ford Motor uses for its enormous corporate
intranet. "Nobody has scaled numbers like that
before," he said. He dismissed Microsoft as a
competitor in the directory server market, claiming
that Active Directory, the latest iteration of
Microsoft's directory server software, uses a closed
architecture and will not be available until Windows
NT 5.0 arrives in 1999 or 2000.
MS Words
Not surprisingly, Microsoft has a different take on
things. Jonathan Perera, the lead product manager
for the Windows NT server group, says that figures
from Netcraft, a U.K. consultancy, showed that in
1997 Microsoft's share of the Web server market
rose from 9 to 22 percent, while Netscape's fell from
13 to 11 percent. And although the Gartner Group
has claimed that Microsoft's Active Directory will not
be suitable for widespread deployment until the year
2000, Perera asserts that it will support common
industry standards and that Microsoft will ship beta
versions of Windows NT 5.0 with Active Directory
in the first half of this year.
Moreover, Yusuf Mehdi, director of marketing
for Microsoft's personal business systems group,
predictably claims that Microsoft's Internet Explorer
browser is simply a better product than Netscape's,
citing tests by c|net, PC Magazine, PC Week, and
TechNet that have ranked it higher than Netscape's
Navigator browser.
Talk like this doesn't seem to faze "Bark," as
Barksdale is known. Netscape is "growing up the
stack," he said, and "following customers up the
value chain as they discover more important uses for
open standard software. That's where we put most
of the wood behind the arrow."
Barksdale admitted that many people don't know
how to categorize Netscape. The company's goal, he
said, is to make products that enable corporations to
build "mission critical" applications. When we
pressed him for more detail, he described Netscape's
mission as "enterprise communications." He
conceded that, in fact, Netscape was still a browser
company in one sense: maintaining Netscape's
browser share is "very important" to sustaining its
sales of enterprise servers and its revenues from
Netcenter. The company is counting on an installed
base of 68 million browsers and traffic from 3.6
million Netcenter subscribers to drive demand for its
servers and Netcenter services and products.
Sounding very much like a media mogul, Barksdale
told us, "The browser is our way of creating a brand.
Brand is king."
But Netscape is not a media company: these
days, it's in the business of selling server software.
And neither Novell nor Apache has a significant
consumer brand name even though both have very
successful Internet servers (Apache is free).
As for Netcenter, which represented 17 percent
of Netscape's fourth-quarter sales, Charles Finnie of
Volpe Brown Whelan says that the vast majority of
the site's visitors are still people who simply have not
reset the default on Netscape browsers. He claims
that viewers only spend one-tenth to one-seventh as
much time on Netscape's site as they do on Yahoo,
CBS SportsLine, or c|net. Netcenter head Mike
Homer disagrees, saying that figures from reliable
sources support Netscape's contention that visitors
spend more time, not less, on its site. But with
Netcenter sales down 22 percent from the third
quarter to the fourth quarter of 1997, and Netscape's
enterprise server business facing increased
competition from Microsoft and IBM, Netscape
clearly needs to find another stimulus to propel its
stock out of the doldrums.
Wild card
Barksdale acknowledged that it is important for
Netscape to impress Wall Street with its next
quarterly numbers. Some analysts have speculated
that Netscape shifted its fiscal year in order to
manipulate earnings results, but Barksdale called this
"bullshit"; it was done to make the company's
reporting schedule more amenable to the Christmas
holidays, he said. He was equally dismissive of
rumors surrounding Netscape's recent insider sales,
including cofounder Marc Andreessen's decision to
sell a quarter of his stock. "I sold a fair amount of
shares, but I still have the vast majority of my stock.
I'm here for the long haul, and so is this company,"
Barksdale asserted.
Barksdale refused to comment about acquisition
rumors. "I'm a public company," he replied. "Every
day I'm for sale." When asked for a reaction to
Lane's comment, however, Barksdale's impatience
shone through once again: "It's irrelevant how I felt. If
Oracle goes down to $2, I'll buy Oracle, OK? How
about that? Does that make Ray Lane feel bad?" He
continued, more calmly, "People are going to
speculate about things. I still trade at a multiple of
revenues that most companies on this planet would
kill for, and that makes me a very expensive target
for somebody."
But what about Netscape's secret plan? If the
company has no "exit strategy," then how does it
propose to recapture the market momentum that
analysts say it so sorely needs? Surely there is more
to Netscape's strategy than giving away its browser
and browser source code.
Barksdale remained mum. Pointing out that the
company currently does business with 92 of the
Fortune 100 companies, 85 percent of which use
Windows or Windows NT, he is apparently satisfied
that the market will accept Netscape's contention
that the enterprise market is big enough to support
both Netscape and Microsoft and that it will do so
because corporate customers want choice.
We believe him. With millions of browsers in
circulation and thousands of Internet servers in use
by corporations worldwide, Netscape has too much
value as a franchise to disappear into thin air. The
question is, Will it continue as an independent
company?
As we went to press, Netscape's stock was
climbing, propelled by two factors: rumors that Sun
would purchase the company and the huge premium
that investors are paying for "Internet portals" like
Yahoo and America Online. But although Netscape
had discussed the possibility of selling the company
to Sun and IBM, according to a senior Netscape
official, these discussions "lasted 15 minutes," and
they are now over for the foreseeable future. In order
to give investors a portal pure-play, sources report
that Netscape did consider creating two classes of
stock--one for its enterprise server business and one
for Netcenter--but failed to find any clear benefit to
this strategy. In mid-May Netscape planned to
announce a deal with a portal company that would
enable Netscape to offer a whole host of services on
Netcenter, including a Netscape-branded search and
directory service, free HTML email, automatic
software updates, and a wide array of information
channels. But even though this announcement will
probably boost Netscape's stock, a minority
investment by Sun or IBM would do much more to
restore confidence in Netscape and give it the
breathing room it needs to develop more enterprise
communications applications that take advantage of
open standards.
We wish Barksdale well. But as much as he
personally identifies with Netscape, we continue to
wonder if Netscape won't need a little help from its
friends. |
