Success story Netscape posted a loss for the first time and axed 400 jobs last month, reports Mark Tran
The trophies on display in the reception area of Netscape Communications testify to one of the most meteoric successes in Silicon Valley. Given by trade magazines, the awards cite Jim Clark and Marc Andreessen, who founded the Internet company little more than three years ago.
Netscape went public in August 1995 amid an investor frenzy that sent its share price rocketing from $14 to $86 in a day. The huge jump in share price turned Clark and Andreessen into paper millionaires, and Netscape became one of the fastest-growing software companies in history on the back of its Web browsing program, Navigator.
Those heady days are gone. Last Tuesday, Netscape announced a fourth-quarter loss of $88,3-million, the first quarterly loss in its history, making an overall loss last year. More importantly, this loss and the decision to axe 400 jobs have sharpened questions about Netscape’s survival in an environment where it is a minnow compared with whales like Microsoft and IBM.
The employees who toil away in Netscape’s red and white cubicles at company headquarters in Mountain View, an hour’s drive south of San Francisco, now wonder whether they will go the same way as Apple Computer, just down the road at Cupertino. Apple seemed set to conquer the world only to see Microsoft bulldoze it into a niche player. Apple’s biggest mistake was its refusal to license the Macintosh operating system, scuppering its chances of making Macintosh the industry standard.
With Apple’s fate in mind, perhaps, Netscape last week announced that it will give away its Navigator browser free, a move that was largely expected. More of a surprise was Netscape’s decision to give away the programming code of its browser as well. Software companies normally jealously guard the programming or source code to their programs, but Netscape hopes to tap into an army of unpaid software developers who can modify or improve Navigator.
Netscape also received a lift when Microsoft bowed to a United States Department of Justice demand to let personal computer makers remove the Explorer browser from its Windows 95 operating system. But last week’s deal resolves only a part of a much broader dispute and does not address how this would affect future versions of Windows.
Netscape initially did distribute its browser free, quickly grabbing a 90% share of the browser market, before it began charging. The company continued to charge full price for Navigator when Microsoft released Internet Explorer 3 for free in August 1996. Microsoft’s market share grew rapidly, and, following last year’s release of IE4, the company now has 40%.
Netscape was criticised for not giving away its browser sooner. But Linda Lawrence, vice-president of international marketing, argues that the company needed the revenues from browser sales to plough into research and innovation.
Today, sales of what Netscape calls “stand- alone” browsers — those competing directly with Microsoft’s Internet Explorer — account for only 13% of company revenue. So the moment is ripe to give away Navigator. The real battle now lies in the rush to build intranets — corporate networks based on Internet technology.
Corporations are expected to spend over $10-billion on Internet software by 2000. As companies set up their own intranets linking employees, partners and customers, they will need packages of browsers and server programs. This so-called enterprise market is where Netscape intends to cash in.
Since plunging into the enterprise market and taking on Microsoft (with Windows NT) and IBM (with Lotus Notes and Domino), Netscape has seen tremendous growth. But this stalled last year, triggering alarm bells on Wall Street.
“It was a shock and it showed that there were aspects of the business model that weren’t working,” says Danny Rimer, an analyst with a San Francisco investment bank.
While Netscape’s Web-server software is good, it lacks the “killer applications” to make it clearly superior to Microsoft or IBM.
“Netscape will live or die in the enterprise market. It’s not a company that can offer a large variety of products. It is an Internet browser server company and if it can’t make money here there is nothing for it to fall back upon,” says Mitchell Toomey, of Subtext Media Projects, a New York company that builds websites for Fortune 500 companies.
Netscape said that the blip in the fourth quarter came from companies shaving off the value of contracts already negotiated. Netscape hopes that a number of big deals in the first quarter will put the company back on its upward trajectory.
“Our goal is to be designed into the corporate infrastructure of our customers and we’ve got the whole company focused on it,” says Andreessen. “Our inhibitor isn’t Microsoft, but our ability to execute. Can we hire enough people and manage everything well to keep up? Those are the kinds of questions that keep us up at nights.”
Netscape still has a few things going for it. It has a brand name that makes the company’s website one of the most frequently visited on the Net, and therefore a valuable site for advertisers. Jim Preissler, of Internet analyst PaineWebber, estimates that half of Netscape’s earnings flow from ad sales, a business that is almost pure profit. That is why it is important for Netscape to stay above the psychologically important 50% of share of the browser market. If Microsoft keeps eroding Netscape’s share, Netscape will lose the ability to command high ad rates and revenue.
Jim Barksdale, Netscape’s president and chief executive, is a transplanted Southerner who has tried to rally the company’s 3 000 employees by telling them that every startup company hits a bump at this stage of its existence.
Barksdale is well qualified to take Netscape through this phase. Before coming to Silicon Valley, he had top jobs at McCaw Cellular Communications and Federal Express, both of which wound up dominating their respective industries in cellphones and package delivery.
“Netscape remains one of the best companies to leverage opportunities on the Internet, but it is unclear what its business is,” says Rimer. “The issue is not whether Netscape will survive, it is whether it has enough momentum from software sales to be a multibillion-dollar business.”