Netscape's enterprise challenge

When is the world's most famous browser company not a browser company?

Just ask chief executive Jim Barksdale, who has presided over Netscape Communications' (NSCP) move to mold itself into a business solutions company.

Only 18 percent of Netscape's fourth-quarter revenue came from browser sales, Barksdale told a conference last week. Instead, an ever-increasing portion of the company's revenue comes from server software and selling the expertise to integrate that software into the existing systems of large businesses.

"It's something they've talked about repeatedly over the last couple years," Giga Information Group analyst Ira Machevsky said, echoing other observations of the company's move toward the enterprise market.

Netscape still leads rival Microsoft (MSFT) in the browser market, but that lead is in danger of disappearing as Microsoft ships its Windows operating system with a built-in Internet Explorer. One recent study claimed that IE's market share has roughly doubled in nine months to approach 40 percent, though Netscape disputes that finding.

Indicative of Netscape's changing direction is this week's announcement that the company is buying Kiva Software for its high-end application server. The Kiva acquisition, the buyback of Actra--a joint e-commerce system software venture between Netscape and GE Information Systems--and the growth of Netscape's consulting division all make it clear that the company must succeed by convincing large corporations that it not only has the right products but the expertise to put them together in vastly complex environments.

"It's the key for Netscape to walk in a CIO's door and say they have a total solution," said Peter Jackson, president and CEO of Intraware, a major reseller and integrator of Netscape software.

Perhaps the most intriguing move is the company's attempt to create a large staff of in-house consultants who would help large customers integrate and customize Netscape and third-party software into their existing systems.

"Our customers have been asking for Netscape's involvement for quite some time in the implementation of products, but now they want assistance in product development and linking back to legacy systems," said Randy Favero, vice president in charge of professional services who has set a target of 600 people in his division by the end of 1998.

Observers agree that it's exactly what Netscape needs to do--but they also point out obstacles. "Consulting requires an army of folks, you don't get a great sales multiple like you do with software, and there's a lot of quality control involved," said John Robb, Gomez Advisors' principal of technology consultancy. "It's a very tough industry."

Favero declined to disclose the size of his division, but the Kiva acquisition will add seven people, Netscape said yesterday. He acknowledged that it will be a challenge to find and keep highly talented people, especially with companies such as IBM--which recently kicked off a multimillion-dollar campaign to tout its e-commerce products and services--also recruiting heavily.

"It's a hugely competitive market right now. Everyone's looking for the same kind of people," Favero said. "And one should never discount IBM or think they're not around any given corner, especially given their ability to muster resources."

The company must also walk a fine line between satisfying the needs of corporate customers who want Netscape--not a third-party consultant--to hold their hands, and taking too much consulting business away from important partners in the reseller and integration channels.

"From our perspective, it's potentially competitive if their professional services get too huge," said William Sears, vice president of technology and new business development at Digital Boardwalk. "But we haven't seen any reluctance so far on their part to introduce us into national accounts."

On the other hand, Netscape, which has a long list of "Solution Experts" it says it can call on, can't rely too much on third-party consultants for large corporate accounts if it truly wants to be regarded in the same light as IBM, Oracle, and other total solution providers. The painful recent history of losing the giant KPMG account to Microsoft should reinforce that point, Intraware's Jackson said.

Other Netscape analysts agreed. "Netscape has to take on a consultative role, because customers are now telling them, 'We need you to tell us how to integrate your products into our existing systems,'" said Tim Sloan, director of Internet research at the Aberdeen Group and author of a report that criticized Netscape's enterprise strategy earlier this year. "Netscape needs to have a pound of flesh in it."

Netscape admitted last week that the company needs to refocus its priorities on quality of software instead of features and ship dates. "There's always been a focus on new features," said Jeffrey Barca-Hall, director of product development for tools. "Now the job is to mature them."

"Our product rev cycles are slowing down across the board," added tools product manager Rick Fleischman, who said the company's priorities used to be (in descending order) features, schedule, and quality. Now, the company wants to flip that order around.

"I'm delighted to hear it," Sloan said when told about Netscape's comments. "It was fundamental to their original model to get out the door with more features faster than anyone else. But now they have corporate customers whom they can't afford to surprise with a bad upgrade that could bring an existing system to its knees."

The admission that quality was Job Three might sound a bit too confessional, but Intraware's Jackson thinks it's a good move on Netscape's part: "Customers have grown used to the lack of quality, no matter who the vendor is. In fact, the biggest selling product for our company is the lack of QA [quality assurance] out there. Netscape is actually being proactive."

Another danger Netscape faces is losing focus on the evolution of client technology, according to Gomez Advisors' Robb. As companies extend their intranets to external customers and business partners ("extranets," in Netscape parlance), technology standards supported become increasingly important to a company's purchasing decisions, Robb said.

"Those standards were once largely in Netscape's domain," Robb said. "If it slows down in improving standards and moves toward enterprise sales exclusively, Microsoft will roll right past them, and that perceptual shift will change the way CIOs buy software."

Especially important is the battle with Microsoft over Java, Giga's Machevsky said.

"Java is the Pork Chop Hill...since that's where a lot of enterprise application efforts are moving," he said. "If there's a fragmentation of that market in terms of standards, it'll be harder to implement Java enterprise apps."

Of course, Netscape has plenty of allies in that battle against Microsoft.

If Netscape's enterprise shift is ultimately successful, it will no doubt be compared to Microsoft's now-famous decision to "turn on a dime" and become an Internet company. The comparisons are also apt because it is Microsoft's focus on the Internet space that is driving Netscape in new directions.

"At least it's something Netscape can compete against, instead of sitting around and waiting for Microsoft to mop up their features and functions into their packages," Machevsky said. "It's something Netscape has better control over."