Spyglass's secrets for survival

Both Spyglass, the company that licensed Microsoft the technology that would become Internet Explorer, and Netscape Communications tried to maneuver themselves out of Microsoft's sights as the software giant leveraged its ubiquitous Windows operating system and its decision to offer the browser free of charge.

Netscape followed suit, giving away not only the browser but also the underlying source code to its Communicator software suite--dividing its energies between the corporate software market and Internet media through its Netcenter portal.

Netscape's efforts may have salvaged Communicator's chances for survival and certainly enhanced the company's value to America Online, which acquired it in a three-way deal with Sun Microsystems late last year. Netscape wound up being valued at more than $10 billion, more than 30 times Spyglass's current market capitalization of less than $300 million.

But Spyglass remains an independent company that has staked a claim on one of the hottest emerging markets in the world of technology: so-called information and Internet devices. This is in line with the company's usual strategy of jumping on market trends rather than remaining in a single business--a strategy that has been key to Spyglass's survival.

Spyglass and Netscape were born from the same engineering group from the University of Illinois and went public at roughly the same time with browsing technology for the PC. The companies competed head to head, though Netscape was focused more on the consumer market and Spyglass on corporations.

Enter Microsoft, which built its browser on top of Mosaic technology licensed from Spyglass and gave that product away, making money instead on the "back-end" servers that PCs connect to for Internet access. Microsoft and Spyglass became entangled in a legal dispute over licensing fees: Including an $8 million settlement, Microsoft wound up with a fully owned Mosaic license after having paid the company less than $20 million.

Microsoft's free browser deflated the market and left not only Netscape but also Spyglass and its licensees gasping for air. Half of Spyglass's licensees subsequently went out of business, according to the company.

Spyglass then consulted its crystal ball and saw the future populated by Internet devices--non-PC products ranging from enhanced cellular phones to television set-top boxes. The firm decided to discontinue the licensing and management of Mosaic and begin development on technology and services to manufacturers of such devices.

The road to success
While the Internet device has not quite picked up where the PC browser leaves off, analysts paint a bright picture for Spyglass even without a "huge explosion in this market," said Jae Kim, analyst with Paul Kagan & Associates. Although the "embedded browser is less of a category killer," he said, "I'm very bullish."

However nascent the market, Spyglass managed to turn things around and last quarter beat analysts' expectations with a small profit. Some analysts expect Spyglass to remain profitable in the near term at least. Analyst Abhishek Gami at William Blair reiterated his long-term "buy" recommendation on Spyglass last month with a 12-month $20 price target.

Spyglass is trading at about half its 52-week high of 32.25, but the company said that level was reached in an anomalous 48-hour trading period. Factoring that out, it said, the stock's high range is in the low 20s.

A key part of Spyglass's strategy is to provide not only browsing software for devices but also services to corporations that decide to implement them. That means taking on the research and development and customization of devices and software, as well as consulting.

"What people don't realize is that it's not really about technology, it's about services," Gami said. "It's about the integration of that technology into multiple form factors and getting content across multiple platforms. "Spyglass is excellent at helping companies to configure content for all these devices. They've been doing it for a few years now and are way ahead of everybody else. They bet the company that devices would happen. It was the riskiest bet they made, and I think they were correct. It's paying off now."

Confronting the competition
Spyglass's chief competitors are not software or device manufactures, said Gami, but the large corporate consulting firms such as Andersen Consulting and McKinsey.

Consulting will help Spyglass keep its place even if Microsoft and Sun expand their small device operating system products to intrude on the embeddable browser space.

"The key with Spyglass is not just having the technology but the engineers and professional services guys to implement these devices," said Frank Sparacino, analyst with Barrington Research. Sparacino said that potential competitors include Sun, Microsoft, a number of emerging start-ups, and even the internal information systems departments of large corporations.

Spyglass and Microsoft joined in a second technology licensing partnership this year, which sent Spyglass's stock soaring.

Another defense against a huge assault by a large competitor is the diversity of Internet appliances that many expect to see.

"These devices are very heterogeneous," said Bruce Beerbower, manager of investor relations for Spyglass. "We serve a number of vertical markets with heterogeneous hardware. That's a very defensible strategy, because no one software technology will be able to facilitate those devices across the board. That's why we went after this market."

Spyglass has both the Mosaic browser that sits on top of the device and content conversion software called Prism that sits on the Internet service provider end and slims down Web pages so they can be read on small screens and on small computers. 3Com's Palm Computing Internet-enabled device has similar functionality.