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Can AOL and Netscape make it work?

Sealing the deal was the easy part. Now the online giant and the browser pioneer must find a way to work out their differences.

Just last December, AOL chief executive Steve Case told industry colleagues that "the mass market doesn't care about the technology itself."

His point: that America Online is a media company that happens to produce technology, such as Instant Messenger.

On the other hand, Netscape, the company that AOL plans to purchase, is a technology company that happens to produce media, namely its Netcenter portal.

Even while the two companies have grown increasingly similar over the years, they remain very different. So why did they decide to get together? Most analysts argue that they really didn't have much choice.

The "corporatization of the Net"
"We've already gone through the commercialization of the Internet," said Mark Mooradian, an analyst with Jupiter Communications. "Now we're starting to get to the corporatization of the Internet."

Once a vast open landscape with seemingly endless real estate, the Net--along with almost every other large industry--now is in a consolidation phase. Bigger companies have been swallowing smaller ones, and now the carnivores of the Internet world--the Microsofts, Disneys, and Time Warners--are positioned at the top of the food chain. They're big, they're hungry, and they're ready to either eat their competitors or tear them to shreds.

"We're at the stage where businesses are consolidating and merging and turning into these very giant powers online," Mooradian said. "Many different players are consolidating into vast, vertically integrated technology, media, and navigation companies."

Added David Readerman, an analyst with Montgomery Securities, "In any emerging business, in any ecosystem, a hierarchy begins to be established. It's kind of growing up. It's the way systems are. That's what you're seeing. It's kind of economic Darwinism, if you want to be crass about it."

Indeed, companies have to get big, muscular, and mean in order to compete--something that AOL has known since its inception. The online giant's goal, to become the brand associated with the Internet, has never changed, and for years it has been buying companies that help it extend its reach.

So far, the biggest of its acquisition targets, online service CompuServe and messaging technology provider ICQ, have neatly fit in to its existing offerings. But the online world is a moving target, and companies now face a convergence push among technology industries. At the same time, they are feeling the pull to reach into several different markets all at once in preparation for the next shift, whether it be providing Internet access through handheld devices, melding the Net with television, or creating a service that allows a PC to simultaneously be a telephone, secretary, and entertainer.

In other markets, convergence goes by the name "diversification," but the idea is the same--to be prepared for anything and everything, just in case.

AOL, for its part, maintains that it is ready.

"We're becoming a company that has a variety of products that appeal to different audiences," said Barry Schuler, president of AOL interactive services.

Making the marriage work
AOL increasingly is forging new relationships. In its biggest to date, Netscape, AOL, and Sun Microsystems last week joined forces. But the hardest part of the deal lies ahead, as the companies must work together to make their union last. And like all close relationships, doing that will require some hard work.

"On the face of it, [AOL and Netscape] have very, very different cultures and products," Mooradian said. "One of them is trying to appeal to the lowest common denominator and the other is creating the most advanced Web-savvy features that are available."

Added Peter Krasilovsky, an analyst with Arlen Communications: "AOL's a company that uses technology for expediency, while Netscape is trying to push the envelope because it's basically a technology innovator."

AOL and Netscape now must work to make sure their differences don't drive them apart. In the world of mergers and acquisitions, this means AOL must work to make sure Netscape's employees don't jump ship once the sale of the company is complete.

"One of the biggest challenges that AOL is going to have is for retention of people," said Readerman of Montgomery Securities.

Incentives such as stock options will be critical in that effort, and bottom line-minded Netscape employees will no doubt be happy to trade in their Netscape shares for hot AOL stock.

But there's more to retaining employees in the often quirky Silicon Valley milieu than just money. Many in the high-tech world crave that ahead-of-the-curve, bleeding-edge kind of feeling that they get--or at least once got--at pioneer Netscape.

Some Netscape employees will simply decide that they don't want to work for a company where technology is a means to an end, not an end in and of itself, while others could decide that they don't want to work for a company based on the East Coast. Still others might set their sights on Silicon Valley start-ups where they still can get in on the ground floor.

"Ground zero for the Internet is between San Francisco and San Jose," Readerman said. "People have a lot of choice. What's the vision that AOL will offer them that will compel them to stay there?"

Executives from AOL and Netscape think they have an answer to that question.

Resistance is futile?
AOL maintains that it is not interested in swallowing up the companies it acquires only to assimilate them, like the Borg of Star Trek fame. Rather, its strategy has been and will continue to be to create several corporate arms with distinct missions, according to AOL's Schuler.

He pointed out that AOL has allowed both ICQ and CompuServe to remain independent, consolidating only their shared functions, such as human resources and corporate relations. Schuler said that AOL fully intends to keep Netscape separate as well, and noted that he himself joined AOL when his Silicon Valley company was acquired by the online giant.

"[Netscape] will be an independent operating brand just like AOL and ICQ and CompuServe," he said. "It will give us even more critical mass in Silicon Valley. People who go to work for Netscape will be working for the Netscape product unit. We will run it in a way that is consistent with the Valley."

As far as East Coast vs. Silicon Valley culture, Schuler said he understands the pull of Silicon Valley, calling it the Hollywood of the high-tech industry. "It is a place where everyone has the dream of being involved in a start-up that goes and runs for it," he said.

He emphasized that AOL today is much more than its flagship property, the ISP that has 14 million members and is adding more every day. Once ruefully and regularly derided for its naivete by Internet old-timers, who dubbed the company "AOHell," America Online now is a grown-up company with many varying interests, Schuler said.

"There are other product units inside the company, and they each have their own personality and flavor," he said. "Our challenge as we're growing is to be able to add operating units that capture the spirit of entrepreneurism, that can move quickly."

Schuler acknowledged, however, that simulating that spirit and actually being an entrepreneurial company are two different things. As a result, he said, some people may leave AOL simply because they don't want to be part of a giant.

"Any time you acquire a company, what you're really acquiring is the people. [Staying or going] becomes a personal decision," he said. "I went through this when I sold my company to America Online. There are some people who hate the idea of being part of a bigger company and don't want to hang around. There are others who say, 'Hey I'm going to give this a shot--ride it out and see how it goes.'"

AOL, for its part, said it will do everything it can to encourage people to ride out its latest transition.

As a first step, Case and AOL president Robert Pittman are flying across the country this week to meet in person with Netscape employees, said Schuler. What they, together with Netscape executives, will be sure to emphasize is not their differences--East vs. West or a focus on technology vs. a focus on media--but their similarities.

"The culture of America Online is more West Coast," said one former employee. "I felt like I was stepping out of Washington, D.C., and into San Francisco. They are very Californian in feel."

Mike Homer, executive vice president of Netscape who soon will report directly to Pittman, agreed: "[AOL is] aggressive, creative, bright, and hard-working. I think the cultures are remarkably similar."

Homer is convinced that once the Netscape troops meet AOL employees, they will see things the same way.

"It's almost like getting a new set of in-laws," he said. "You worry because you haven't met them. Netscape people need the opportunity to meet them.

"AOL is enlightened about the importance of employees," he added. "There will be significant retention programs in place over the course of the next week or two. In Silicon Valley, building great products and services and an equity stake are two of the most important incentives.

Homer argued that valuable AOL stock options, along with the potential for the combined companies to build "the best e-commerce and online services company," will be enough to keep them together.

But, as with even the most promising marriages, only time will tell.