The AOL/Netscape Deal
It's About Prestige, Portal Sites, and the Power of Marketing to the Masses
It was the week after the deal. AOL had made a blockbuster announcement that it would acquire Netscape Communications, as well as form a strategic alliance with Sun Microsystems that will give Sun rights to Netscape's enterprise software. And now Sun's Scott McNealy was sitting down with Netscape executives to discuss what would clearly be a melding of very different corporate cultures. To break the ice, McNealy took a cue from a routine made famous on a popular U.
- You now have to wear ties when you go to the head office. [A reference to AOL's more formal East Coast corporate culture]
- No really good software comes out of Washington (D.C. or state) [A reference to Netscape's more prestigious location in the Silicon Valley, with a backhanded jab at Microsoft..]
- [Netscape CEO Jim] Barksdale, a southerner, would change the greeting to: "Y'all got mail." [Instead of "You've got mail"- AOL's now famous delivery message that is now the title of a motion picture with Tom Hanks and Meg Ryan]
But as everyone in the room knew, corporate acquisitions tend to go one way: with the big fish swallowing the little ones. And AOL, not Netscape, has become a mighty big fish. In December the company shares climbed 55 percent in just a single week, giving AOL a market valuation exceeding that of Walt Disney Company. Of course, this valuation has everything to do with Wall Street's crazed affection for Internet stocks. When AOL closed on November 30th at 138.
But then again, AOL has carved a unique niche for itself. After temporarily faltering over nationwide complaints of interrupted service and inaccessible phone lines, the company has come roaring back, growing fast in a growing market by attracting even more subscribers. AOL remains the single largest Internet service provider in the world. Some 15 million households are AOL subscribers as of the end of 1998, and that doesn't include the 2 million members of CompuServe, which AOL acquired in January of 1998. Over the Christmas holiday, AOL claimed it generated about $1.
While the "A" in AOL stands for America, AOL has also gone worldwide, claiming more than 2.
AOL has achieved this success by unabashedly peddling its services to the masses. Well before the Web was a household name, AOL provided its subscribers with a full-color-some would say "blinding"-user interface and a host of chat rooms which, while not famous for conversational depth, has attracted legions of teenagers. Like Walt Disney Company, Sony, and McDonald's, AOL understood early on that family entertainment that is easy to access and predictably consistent in quality is a proven road to riches.
Former foes sit down to talk
With AOL generating cash, it looks to find ways to spend it, and the Netscape purchase is just that-a long-term investment to help keep the juggernaut moving. The deal was consummated after several months of speculation that suitors, including Sun and Oracle, were approaching Netscape with offers of purchase. According to a CNET report, the idea came up at an AOL board meeting last August-evidence that the strained relationship between the two companies had been mended. It wasn't that long ago when AOL surprised the industry by selecting Internet Explorer rather than Navigator as its default browser, thereby giving a huge boost to the Microsoft technology. But later, Netscape provided a button link to AOL's Instant Messenger and used AOL's Digital City as the engine for Net Center's Local Channel. Actual discussions between the companies took place in the early fall at a time when Netscape seemed surrounded by the enemy: by Microsoft on the browser front, by Excite and Yahoo! on the portal site front, and by Microsoft and IBM, which both compete for enterprise software.
Discussions took place on both coasts, reflecting AOL's location near Washington DC. Now, Netscape co-founder Marc Andreessen is rumored to be considering re-locating to AOL's headquarters, an area he considers to have the potential to become another Silicon Valley-this one specializing in communications.
And what does AOL get for its money? In a word: respect. The one thing you don't get with being a mass appeal Internet provider is respect from the more technically savvy Internet community. It may sound silly, but the domain name "AOL.
But the reverse is also true. From the moment the acquisition was announced, Netscape customers worried that the company, once in AOL's grip, would be dumbed down somehow-transformed into AOL's populist image. Of particular concern was that AOL would either meddle with or terminate the Mozilla project, viewing Open Source as a geek experiment unworthy of a red-blooded, capitalist company. As for Netscape's fabled programmers, given the scarcity of programming talent, the acquisition got the attention of many a job recruiter.
AOL must have expected these jitters and has worked hard to calm them. The company has pledged to Netscape and Mozilla developers that the Open Source business model will remain intact and that mozilla.
AOL also sought to reassure its broader staff of employees that its corporate culture would remain intact. Speeches by AOL CEO Steve Case, Netscape CEO Jim Barksdale, and McNealy were greeting with cheering as was the news that Netscape employees would receive an extra month's salary to stick around. Indeed, judging from AOL's track record, it's unlikely that AOL will subsume Netscape or its identity. After all, the company purchased its arch-rival CompuServe and kept that online service's identity intact.
The world's biggest portal?
Of course, AOL didn't pay an estimated $4.
In a business notorious for losing money but raising expectations, portal sites are as close as the Web gets to producing a sure thing. The reason: on the Web, as in all media, volume counts. Just as popular television shows can charge advertisers higher prices, so too can true portal sites extract a higher fee from its advertisers with the promise of more eyeballs and mouse clicks.
The theory behind portal sites is simple enough: the great majority of users will enter the Web from just a few sites, and so by definition, only a few sites have enough volume to qualify as true portal sites. This funneling effect is augmented by the fact that Web browsers come with a home page-a Web site that comes up before any other. Given the breadth of the Web, new users in particular are relying on these sites as a familiar safe haven, just as they might rely on the neighborhood grocery store for their shopping. These sites, in turn, are trying to attract even more people by providing a myriad of services: everything from search engines to electronic commerce sites to stock quotes, weather and sports scores, all neatly laid out, and all available from a screenfull of links.
The value of being a portal site cannot be underestimated. Consider that Yahoo!-whose entire identity is wrapped up in its smart, audited single search engine-is making money. The company reported $16.
And so it is Netscape's portal site, not its much talked about enterprise technology, that provided the principal lure for AOL. "We believe that on the Internet in the next couple of years, three or so major players will emerge in this space," said Yahoo spokeswoman Diane Hunt, in a CNET interview. "The difference between yesterday and today added to the likelihood that Netscape would be added to the big three."
Indeed, what's significant about Sun's acquiring Netscape's enterprise software is not, at this stage, what Sun plans to do with it (Sun isn't talking), but the fact that AOL spun that part of Netscape off. After all, it wasn't that long ago when Netscape's server technology, including the Kiva application server Netscape acquired, were considered the main source of Netscape's profit. The company would give away its browser, but compete with its server software. Now, with the server technology jettisoned, it's clear that the Netscape Net Center (at www.
Indeed, Microsoft lawyers even sited AOL's Netscape acquisition as evidence that the technology landscape is more competitive than the U.
Others, including the presiding judge himself, disagreed. "AOL's merger with Netscape has no bearing on the Microsoft case, as nothing we're doing is competitive with Windows," wrote AOL chief Steve Case in the Washington Post. "We have no flight of fancy that we can dent in any way, shape or form what is a (Microsoft) monopoly in the operating systems business." Oracle chairman and CEO Larry Ellison, a vocal Microsoft critic, put it more bluntly. "This is not a sign that everything is well. This was a sign that Netscape had no choice but to disappear." Netscape won't disappear. It's name is too valuable for that. But the company's days of free-wheeling independence are probably over. Netscape was the very symbol of the computer industry's ability to reinvent itself, to stage new revolutions after the old ones quelled. It was a reminder that every generation can have its pioneers and its self-made billionaires. And with its purchase, Netscape is a reminder of something else: that the road to corporate riches is usually through the mass market. It's fun to sell to the elite, but it's far more profitable to sell to everyone else. Just ask the folks at Sony, Disney and McDonalds. Just ask Bill Gates. That's why AOL is purchasing Netscape, and not the other way around.
Lest we forget, Netscape also makes a browser-and a popular one at that. Could that be of use to AOL? Some observers think so, especially in AOL's Web access offering. "The Web via AOL is a painful experience," said Tim Sloan an analyst with Aberdeen Group, to the Los Angeles Times. "If anyone can help them fix that, it'd be Netscape."
AOL could also leverage the Netscape brand through the browser. The company has plans to build a new online service based on Navigator that would target 20-somethings who need online access after losing their college accounts. "We think these people are never going to get excited about the AOL brand but they do have an affinity for the Netscape brand," said Barry Schuler, president of America Online's main programming division, to The New York Times. But AOL denies it will do the obvious: dump Internet Explorer for Netscape Navigator as its default browser. After all, AOL software is included in the ultimate PC software distribution package: Microsoft Windows, albeit as an almost unbranded feature.