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First year no honeymoon for Sun-Netscape venture

After a rocky first year, the alliance between Sun Microsystems and America Online's Netscape may find new strength from forays into the lucrative e-commerce software market.

    After a rocky first year of marriage, the alliance between Sun Microsystems and America Online's Netscape may find new strength from forays into the lucrative e-commerce software market.

    The Sun-Netscape Alliance, formed in late 1998, teamed two powerhouses in the still-evolving market for server-based Web software. Sun brought to the deal its highly regarded NetDynamics application server software. Netscape offered a wide range of technology, from application servers to directory software.

    But Alliance quickly lost its early lead in the e-commerce software market in the face of stiff competition from IBM, Microsoft, Novell and other software makers. The reasons are many, say analysts: executive turnover, an uneasy integration between the two firms' technologies, and a confusing product roadmap that forced the partnership to mash their duplicate technologies into single products.

    "Due to the poor communications within the alliance and a convoluted plan for the future, the application servers have languished, and the goodwill of customers and invaluable technical leadership have all but dried up," Giga Information Group analyst Mike Gilpin wrote in a recent report.

    Alliance executives claim that its sales increased in the past year and that it has added about 15 new application server customers in the past quarter.

    Still, Doculabs analyst Jeetu Patel said his clients seldom include Sun-Netscape Alliance's products as an option while shopping for e-commerce software. "We don't see them on as many 'short lists' as we used to," he said.

    Alliance executives acknowledge past missteps and say they are now on the right course. After a year of transition, Sun-Netscape is ready to take on rivals. The company has ambitious plans to double yearly revenue from $500 million to $1 billion within two years.

    "The first year was organizing, assessing and sorting things out, and we emerged with a sound strategy," said Marge Breya, chief marketing officer for Alliance. She acknowledged it had been tough to combine two different corporate cultures. "Year two is the year we basically land with a presence in this market and hopefully with strong results."

    While analysts gave the alliance a thumbs down for its first year, they agree that there is a potentially bright future ahead. At the very least, they say, the venture can continue to make money marketing its brand name. Zona Research analyst Martin Marshall said Sun's strong position in the server market can help the firm sell e-commerce software for high-end computers.

    The alliance stems from an agreement Sun and AOL made after AOL acquired Netscape in late 1998. The two companies last March detailed a strategy to build and sell software that allows businesses to create e-commerce Web sites.

    Each firm originally brought about 1,000 employees to the project, but the venture was immediately dealt a blow through a series of employee departures from Netscape and Sun, including Zack Rinat, a Sun vice president who helped run Sun's e-commerce software group and founded NetDynamics.

    Although Alliance executives say turnover was on par with the rest of Silicon Valley, one insider said fallout from news of the combination was high. For example, Rinat took about 20 former NetDynamics employees with him to a new start-up called ModelN. Netscape co-founder Marc Andreessen also took some Netscape alumni to Loudcloud, his new start-up.

    Then the companies had to figure out how to pare down overlap in their product lines after the alliance. Both firms sold corporate email and calendaring software, Web servers, application servers and directory servers, a central information database for computer users.

    Last March, Alliance executives announced plans to continue to sell their overlapping products through the end of 1999, until the company came out with newly combined products early this year. And in January, the company launched an extensive advertising and marketing campaign, renaming its products "iPlanet."

    Executives say they're now poised to tackle the fast-growing e-commerce software market and compete against dozens of rivals, including software giants IBM, Oracle and Microsoft. "There was a lot of sorting out that went on the first half of last year, but we've just started to build steam again," said Alliance's Breya.

    But some analysts say Sun-Netscape Alliance's revenue goals are too lofty and say the partnership has lost too much momentum in the past year and will have to claw its way to a leadership position.

    It's difficult to gauge the alliance's success because of the complex three-year deal between Sun and AOL. The companies do not break out separate financial data for the alliance. In a Securities Exchange Filing last year, Sun guaranteed that AOL will earn $1.25 billion in sales royalties on Netscape software. In exchange, AOL agreed to buy $500 million of Sun hardware. Sun chief executive Scott McNealy said last year that he expected the alliance to become profitable in two years.

    It is also unclear what will happen to the partnership after the three-year contract ends. Analysts speculate that the companies may choose to continue the relationship, spin off the venture, or Sun would buy the Netscape from AOL.

    Regardless, Gartner Group estimates that the company's revenues grew last year, earning about $474 million.

    Smith said that the alliance has breathed new life into Netscape's products because the company, before the AOL buyout, was struggling. "If you talked to companies considering Netscape's products, they were scared to death committing to a company that they saw Microsoft as putting out of business," he said. "It was difficult to sell any of their products the last six to eight months as a public company, so the alliance has helped."

    To sell e-commerce software, Smith said Sun-Netscape Alliance has to capitalize on its relationship with AOL, which he considers the most powerful Internet firm today.

    Breya said Sun-Netscape plans to do just that. The alliance will soon build AOL's popular Web messaging software--Instant Messenger--into its entire family of e-commerce software products, with more security features for businesses who use the software for communication.

    Breya said the partnership, which now has 2,500 employees, will soon expand its software offerings with an online trading marketplace that competes with similar products by Ariba and CommerceOne.

    The biggest challenge for the alliance will now be reclaiming credibility with potential customers, said Patel. "The credibility of their products isn't as high as it was a year ago," he said. "With all the competition and the way (Alliance has) sat on their laurels, you just don't have time to keep figuring out and revising your work structure because customers are looking to solve their problems now."