Information Processing: THE INTERNET
IS NETSCAPE BROWSING FOR A BRUISING?
The upstart hustles to hold its own against Microsoft
For a man square in the crosshairs of mighty Microsoft Corp., James E. Clark looks pretty relaxed--or is it jet lag? The chairman and self-described traveling salesman of Internet wunderkind Netscape Communications Corp. has just returned to Silicon Valley from a whirlwind trip to sign up consumer electronics and telecommunications giants in Europe and Asia. But Clark has no illusions about his new adversary: "I'm totally paranoid about Microsoft--always have been, always will be," he says.
Clark may be racking up the frequent-flier miles for a long time. Far from simply cranking out nifty software for helping people cruise the Internet or run Web sites, Netscape is assembling the programming that corporations will use to create all sorts of new Net-based systems. His goal is nothing less than to make Netscape, with $81 million in annual revenues, the software leader in a new era of computing. And that puts it on a collision course with today's leader, $6 billion Microsoft. The battle could be Netscape's undoing--or the chance to prove it is worth the hefty $5 billion valuation that the market has bestowed.
While Clark has been circling the globe selling and using Netscape's stock to buy companies with key technology, Microsoft has begun its assault. It started last summer with the release of Internet Explorer, a browser to compete with Netscape's Navigator. Explorer can be downloaded for free and comes bundled with Windows 95 PCs. The giveaway is standard procedure--that's how Navigator became the No.1 browser. But Microsoft has gone a step further: On Feb. 12, it brought out a free program for running a Web site that can be downloaded from the Net and will become part of Windows NT.
Sounds like a direct attack on Netscape. Microsoft's view? In the Net era, a Web program should be part of the basic software for any network server. "Things that many companies want become commodities," says James E. Allchin, senior vice-president of Microsoft's Business Systems Div. Microsoft's move made Netscape's stock plunge 6%, to 611/2--a $340 million drop in market value. The stock has been drifting downward ever since. It's now trading in the 50s as a result of the growing Microsoft threat and a recent sell-off in many tech stocks. That's 40% off the high of $85, adjusted for a two-for-one split on Feb. 7.
Is Netscape, the Web rocket, about to fall to earth? Don't bet on it. Netscape has a two-year head start and is determined to keep its edge. The new Navigator 2.0 browser, for instance, adds new features--such as "frames," which let more than one page be displayed at a time--that Microsoft will have to match. Many Web developers boast that their sites use the latest Netscape innovations and are best viewed with Navigator. And despite brisk sales of PCs with the Internet Explorer program, Navigator's market share has risen from 75% last August to more than 80% now.
Even more surprising: Navigator is a real moneymaker--comprising 55% of Netscape's $40.6 million in fourth-quarter sales. Even though individuals can download Navigator for free, many pay up to $49 for it anyway because they want extra features or technical support. That's especially true within corporations, many of which are building internal Webs, or "intranets." Corporations make up 70% of Netscape's business. Hewlett-Packard Co., for instance, licensed 100,000 copies last year to outfit every desktop machine in the company. Says Hambrecht & Quist Inc. analyst J. Neil Weintraut: "The so-called browser is turning into a far more significant market opener than people expected."
"ALL THE RIGHT THINGS." As a result, Netscape is riding high. It has posted two straight profitable quarters since going public last August--a feat for any startup. Its $80.7 million in 1995 sales--up from $1.4 million in 1994--blasted past Netscape's own late-1994 forecast of $26 million. That made Netscape the fastest-growing software company on record. And analysts expect income to hit $15 million for 1996, on revenues of as much as $230 million. "They're doing all the right things," says Marshall Senk, an analyst with Robertson, Stephens & Co.
Clark and co-founder Marc L. Andreessen show no signs of letting up. On Mar. 5, they're set to unveil a new generation of Web server software that analysts say will beat Microsoft's on several counts--such as including Sun Microsystems Inc.'s red-hot Java software for creating network-based programs. That's an important edge over Microsoft, which in December said it would license Java but has yet to ink a deal. Moreover, Netscape is slashing prices on its main server software: The $1,295 Netscape Commerce server for Windows NT could drop by 75%.
Microsoft isn't the only competitor Netscape has to deal with in the Web server business. IBM's Lotus subsidiary is retooling its Notes groupware program, already used by some 5 million workers, to be a Web server. Oracle Corp. on Feb. 26 introduced new Web server programs that work with its popular database software. And Open Market is gaining converts for high-traffic commercial Web sites.
Clark figures he must always maintain a six-month lead to stay safely ahead of the pack. But doing so gets harder as Netscape moves into more complex forms of software, such as groupware for helping workers collaborate over the Net. That puts enormous pressure on management--at a time when it's absorbing new subsidiaries and hundreds of new employees (headcount has doubled to 518 since June). Already, there are signs of strain. Netscape has had to issue software "patches" over the Net to fix security holes in its browser programs, including a flaw found in Navigator 2.0 in late February.
CABLE CRUISERS. For now, market-share gains are paramount--to make its programs de facto standards. Says Andreessen: "We want to make this into something that everybody uses and everybody needs." The grab for market share is an investment: Down the road, it can sell browser and Web server customers upgrades and add-ons--that will bring in revenue and keep Netscape a step ahead of Microsoft. For now, Netscape is quietly forging deals with PC makers such as Compaq Computer, Dell, and HP, to distribute the browser with their PCs. And AT&T will give away Navigator as part of its new WorldNet Service (page 86). By early next year, says Clark, Navigator will appear in TV set-top boxes and other devices that provide Net access via cable television.
Netscape is also beefing up Navigator faster than ever. The latest version, Navigator 2.0, allows other software programs to be easily plugged in, enabling Net surfers to view more complex graphics and 3-D models as well as audio and video material. It also runs "applets," written with Sun's Java.
And Clark continues to use his stock as a cheap source of funds to snap up software companies and top programmers. Last year, Netscape bought Collabra Software Inc., a maker of groupware programs that will be incorporated into Navigator 3.0 in June. On Jan. 31, it agreed to pay $160 million for InSoft Inc., a maker of multimedia conferencing software, and on Feb. 12 it inked a deal to buy Paper Software Inc., a maker of virtual-reality software. Those companies have technology that should help Netscape's effort to set a standard for multimedia communications on the Net.
Still, Microsoft has struck at Netscape's most promising growth market: server programs. Netscape's packages, which cost from $300 up to several thousand dollars, now compete with a freebie--and one that may be faster, at least on the Windows NT operating system. PC servers running NT are rare on the Net now, but won't be for long. In 1996, such machines will challenge the dominance of Unix-based machines from companies such as Sun Microsystems that run Netscape. "Microsoft's going to put a lot of pressure on Netscape," says Meta Group analyst David B. Folger.
Netscape counters that Microsoft's server can end up costing several hundred to several thousand dollars, too--once support costs, operating-system upgrades, and advanced features are factored in. Besides, price may not be the only criterion. Netscape is adding features to its top-of-the-line servers so they can be the linchpins of corporate networks--managing E-mail and other functions. And the company is creating versions for online publishing, electronic storefronts, and other Net ventures.
FLEXIBLE. Another selling point for Netscape: Unlike Microsoft, whose programs run only on Windows, Netscape programs run on all sorts of machines--six brands of Unix computers, Intel-based PCs, and Macintoshes. For companies that want flexibility, "Microsoft is not even in the picture," says Greg Sherwood, Web coordinator at National Semiconductor Corp.
Even with all the things Netscape is doing right, questions remain. The biggest: Can any startup handle all this activity? And, asks Rob Enderle, an analyst with market researcher Giga Information Group, if Netscape's stock keeps dropping, can it buy the technology it needs? Can it weather the coming barrage of Microsoft Internet programs? Says Enderle, "Microsoft has more weapons to bring against Netscape than Netscape has to bring against Microsoft."
Computers may be a world of ones- and-zeros and on/off circuits, but the Web contest need not be a binary event, says Clark. "Microsoft doesn't have to fail in order for us to be successful," he says. Indeed, he's peeved Microsoft seems to think that way. "I don't have anything against 'em, except they want to kill us," he says. That sort of paranoia may be just what Netscape needs.By Robert D. Hof in Mountain View, Calif., with Amy Cortese in New YorkReturn to top