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Netscape at turning point


Practically synonymous with the Internet, Netscape Communications (NSCP) has directly mirrored the explosive growth of the new medium.

The executive troika of Marc Andreessen, James Barksdale, and Jim Clark--known colloquially at the company as "Marc, Bark, and Clark"--instantly became Silicon Valley superstars, navigating the company's stock to 300 percent growth in its first five months of existence.

Today, more than 2-1/2 years after it was founded, Netscape has settled into a less heady trajectory, shedding its adolescent start-up status and developing into a grown-up company with even more grown-up competitors. As it matures, Netscape is faced with tough choices about running its business more like its bigger competitors or scrappily maintaining the maverick ideals upon which the company was founded.

A key barometer of its progress will become public later today when Netscape announces its fourth-quarter earnings. The announcement is sure to be watched closely by financial analysts and investors, both of whom have taken Netscape stock on a jagged mountain-climbing expedition in recent months.

This crossroads marks a defining moment in Netscape's short history, which began with the company's stated goal of embracing the openness of the Internet by giving away its browser and lending early support to Java and other cross-platform technologies. Ironically, some analysts and competitors feel that Netscape has, in practice, begun to move more closely toward the proprietary model of its rivals.

A case in point is Netscape's plans to offer a "matched" client and server that would require users to buy both ends of a system to make either work. In doing so, critics say, Netscape is following in the footsteps of competitors like Lotus Development and Microsoft

"Before, they were fighting the battle by trying to change the rules," said Don Bulens, chief executive officer of RadNet, which makes Web-based groupware software. "Now, they're playing by the other guys' rules. In some ways, Netscape's switch to a matched client and server seems tragic. No matter what they say, it removes some freedom of choice from the customer. It's kind of a bait and switch." Netscape executives say that the company hasn't deviated from its guiding philosophy of supporting open Net standards and that its products still give customers more freedom of choice than software from Microsoft or Lotus.

"The interchangeable aspect of our products is a key differentiator from the old-line legacy vendors like Microsoft and Lotus," said Andreessen, chief technology officer. "It's in our interest to maintain that and not compromise it, which is what we're doing."

While company executives say their values haven't changed, Wall Street's feelings about Netscape stock certainly have. Two investment banks--Deutsche Morgan Grenfell and Merrill Lynch--recently downgraded the company's stock over fears Netscape would fall short of earnings estimates this quarter, sending the stock tumbling. But bullish analysts explain the rockiness of the stock by saying that the company is moving from early "momentum investors" to more committed long-term shareholders.

Jim Barksdale, CEO, Netscape (Oct. 18, 1996)
There is no denying that the competitive pressures have been nerve-racking for the young Netscape. The stock of Microsoft (MSFT), its chief competitor in the Web browser and server market, has steadily risen--reflecting, in part, growing confidence about that company's Net strategy. Throughout 1996, Microsoft attacked Netscape's dominance of the browser market with a missionary zeal, steadily improving its Internet Explorer browser while matching its rival in giving its software away for free.

While Netscape derives the majority of its revenues--60 percent--from its $39 Navigator software, some analysts think that growth in its server software business will help its chances against Microsoft. The behemoth from the Pacific Northwest has attacked Netscape on the server front as well, bundling its Internet Information Server with the Windows NT operating system at no extra charge.

"We will be disappointed if the server portion of Netscape's product mix doesn't increase significantly from last quarter," said Daniel Rimer, Internet analyst with Hambrecht and Quist. Netscape earns more than 80 percent of its revenues in the business market, where Navigator still commands the lion's share of corporate intranet users. The company has racked up an enviable list of corporate customers, including Chrysler, Kaiser Permanente, and Pratt and Whitney. Just last week, KPMG signed up to use 17,000 copies of Navigator.

At the same time, Netscape is showing some signs of vulnerability. In a survey of companies released this week by Zona Research, Navigator has slipped as the primary browser to 70 percent of users, compared with 80 percent in September. Internet Explorer, meanwhile, has risen to 28 percent, compared with 8 percent in September.

Although weakening market share could ultimately diminish its command of Internet and intranet developers--much as the Macintosh's dwindling share of operating systems has scared away programmers--Netscape's Navigator business is growing steadily. More than 45 million copies of the program, many of them not paid for, are currently in circulation.

Nevertheless, Netscape executives are fully aware that the early days of uncontested control of the browser market are gone, and the company seems reluctantly resigned to share the Internet with Microsoft.

"When you have 80 percent of the market, you have nowhere to go but down," said Eric Hahn, Netscape senior vice president of enterprise technologies. "We are not happy about that, but we're cognizant that our client cannot maintain that level of market share. That's the reason we've invested so heavily in broadening our product line."

Indeed, that line has swelled from its early offerings--a Web browser, two Web servers, a Usenet news server, proxy server, and a collection of commerce applications--to include Communicator, a full-fledged communications client with email, groupware, browsing, and Internet telephone capabilities, and SuiteSpot 3.0, a matching $3,995 array of servers designed to set up what Netscape calls a "full-service intranet."

Now in the midst of beta testing, Communicator and SuiteSpot 3.0 represent Netscape's first serious attempt to tackle the groupware and messaging market dominated by Lotus and, to a lesser extent, by Microsoft and Novell. The move is a risky one for Netscape, pitting the relative newcomer against incumbents like Lotus, which is backed by the vast resources and experience of IBM.

But the move is also vital for Netscape since the company had little hope of surviving on the scraps of the consumer market. The coming year will be critical in showing how successful the new client and server products are in breaking into the enterprise market.

"Communicator is nice, but you can't underestimate the seven years Lotus has in this space," said Ian Campbell, director of collaborative and intranet computing at International Data Corporation. "Taking customers from Lotus is going to be a challenge. Still, there's a lot of growth potential in this market."

Netscape's sales pitch to companies is that its products are significantly cheaper and easier to implement than Lotus Notes. Because they are cross-platform and based on Internet standards such as HTML, HTTP, and SMTP, the company argues that Netscape servers and clients can be mixed and matched with products from other companies, giving customers more flexibility than a proprietary solution such as Notes. The gospel of intranets--internal company networks running Web and other Internet Protocol-based servers--is converting a growing flock of corporate users.

"The number-one reason why these products are so appealing is that they create a shift of balance in power from vendor to customer," said Netscape's Hahn. "If you get down to fundamental buying power, this push towards open systems gives [customers] control over their deployments."

Unfortunately for Netscape, vendors of proprietary solutions have heard the intranet gospel as well. Lotus has moved aggressively to give users access to Notes data and messaging stores through ordinary Web browsers. Lotus is also embracing Internet technologies like Java and ActiveX. Meanwhile, Microsoft is trying to wed its Exchange messaging system more closely to Internet protocols.

Some companies have experimented with Netscape's software, but found that Notes and Microsoft's IIS were more solid and fit better with their current technology investments.

"We were looking for a more integrated solution than Netscape could provide," said Keith Cleveland, first vice president of messaging at Countrywide Home Loans. "Because of the history of Web servers, they are not natively hooked into any application. What we quickly found is that it takes a lot of time to build high-performance applications that require interactivity [using Netscape's software]." After using Netscape's browser and sever software, Countrywide opted to use Notes and Lotus's Domino Web server to set up an intranet.

That companies can easily switch from Netscape software, whether its mail server or a browser, to products from another company has created a peculiar dilemma for the company.

In theory, its support of open Internet protocols undermines Netscape's ability to "lock in" customers to a monolithic proprietary solution like Notes. In spite of drawbacks for customers, product "lock-ins" have been valuable for Microsoft and Lotus, both of which can be fairly certain that existing customers will continue to invest in their technologies.

"Every time [customers] buy Netscape products, we exert less account control over them," Hahn said. "Every product cycle, we have to reearn their business. They are free to switch." 

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