The 800 Pound Gorilla Of E Commerce?

AOL, now with Sun and Netscape in its corner, plans a broad E-biz offensive

As the world's premier online service, America Online Inc. has thrived by reinventing itself time and again. Now, after closing its $10.2 billion deal with Netscape Communications Corp. on Mar. 17, AOL is poised for another transformation. With help from Netscape's software and a strategic alliance with Sun Microsystems Inc., AOL is turning from an online service into a full-blown electronic-commerce powerhouse. "We want to turbocharge this Net economy," crows Barry Schuler, president of AOL Interactive Services.

On Mar. 24, AOL started revving its engine. The company is building up its Interactive Services Group by folding in Netscape's Web-browser products and Netcenter portal site. Meanwhile, it's creating a Netscape Enterprise Group that will become part of a newly formed alliance with Sun. The alliance--as yet unnamed--is to be made up of some 2,000 Sun and former Netscape employees. Its purpose: to develop and sell a broad line of software products ranging from basic Web servers and messaging products to E-commerce applications. "It will be the largest E-commerce company in the industry," says Sun COO Edward J. Zander.

Size does matter. That's because the AOL/Sun alliance faces competition from industry giants Microsoft Corp. and IBM--both of which are targeting E-commerce. Analysts say it will be a challenge for the AOL/Sun alliance to match the resources of their two rivals. What's more, the new outfit will have to overcome fears from potential computer hardware and software partners that it will push Sun's agenda as a hardware manufacturer. At the same time, the new organization has to blend the corporate cultures of AOL, Netscape, and Sun. "It's tremendously challenging to meld people with such dramatically different genetic makeups," says Ted Schadler, a software analyst at Forrester Research Inc.

COMPELLING. Investors don't seem to be worried. AOL's stock has skyrocketed clear into cyberspace. Its shares closed at 117 1/8 on March 24--up 156% from 45 11/16 on Nov. 24, when the Netscape deal was disclosed. Analysts laud the matchup of AOL's consumer-marketing savvy, Sun's strength in providing the computing muscle for high-powered Web sites, and Netscape's pioneering software. Even rivals believe that the AOL/Sun alliance will be formidable. "They're going to be a serious competitor," says Karl Salnoske, general manager of IBM's E-commerce unit.

AOL is already a powerhouse online. The company is unmatched at attracting eyeballs--the current measure of success in cyberspace--with 16 million subscribers, compared with less than 2 million for Microsoft's MSN Internet access service. When Netscape's Web site visitors are included, AOL's network of sites logged 50 million visitors last month--compared with 29 million for Yahoo!, now the No. 2 Web portal. The MSN Web site ranks third, with 20 million visitors last month, according to the research firm Media Metrix Inc.

Now, AOL hopes to take advantage of Netscape's browser and Netcenter portal for yet another wave of growth. With 13 million registered users, Netcenter reaches workers during the day at their offices, while AOL targets customers who log on from their homes at night. AOL's plan is to offer people services such as E-mail and calendaring that they can access either from their AOL account at home or the Netscape Web site at work--so an AOL property remains their gateway to the Internet no matter where they are.

MALL-LIKE SITES. Where does Sun come in? AOL is planning to take advantage of its alliance with Sun and the Netscape software to beef up E-commerce on its Web sites and online services. Not only can AOL lure retailers to its mall-like sites with a high volume of customer traffic, but through the Sun combo with Nestcape it will be able to offer them the software tools they need to build new generations of cybershops.

Netscape already has a jump here. Its software is the market leader in E-commerce applications at large corporations, with $42 million in sales last year and a 9.4% market share, according to market researcher International Data Corp. Now, because of AOL, Netscape's products are being refocused on a much larger market of small and medium-size businesses and on selling to consumers.

Those sales could really take off, thanks to the Sun connection. The new outfit will have a 500-person sales force. Meanwhile, Sun's own 7,000-person sales team will be able to sell products developed by the alliance partners. Sun's Mark Tolliver, who headed its consumer division, will be general manager of the organization. Netscape COO Barry Ariko will lead the sales force.

For all its promise, the alliance is fraught with potential conflict. Tolliver will report to an advisory committee made up of Sun and AOL executives. But it's unclear how expenses and profits will be divided. Still, analysts say AOL has done a good job of putting the right incentives in place for Sun to make it work. Over the next three years, Sun has committed to pay AOL $1.1 billion for licensing rights and $10 million a year in cooperative marketing fees. In return, over that same period, AOL will pay $500 million for Sun hardware and services and $5 million a quarter to license the Java software.

There's a potential hitch, though. Sun has yet to prove itself in the software business, which comprises 6% of its $10 billion in revenues. While it has successfully marketed its Solaris operating system and made huge headway with its Java technology, Sun's nascent efforts to sell applications--the programs corporations actually use to do particular tasks--has been slow going. "This is a huge bet for Sun," admits Zander.

Indeed, the alliance could founder if Sun fails to shed its iconoclastic, in-your-face mentality. A vocal enemy of Microsoft, Sun has never been known as a company that works well with others in the industry. Netscape's customers worry that Sun will end up tweaking Netscape's programs to run best on Sun hardware and the Sun sales force won't be inclined to sell alliance software for other platforms. "It's just hard to imagine that the Netscape Web server will get as much attention on Microsoft's Windows NT as it will on Solaris," worries Jeffrey J. Bussgang, vice-president of marketing for Open Market Inc., a maker of E-commerce applications that operate on both NT and Solaris.

Within the alliance itself, Sun and Netscape have few overlapping products. Sun has little E-commerce software, while Netscape has tools for companies to set up Web sites that sell their products to consumers or arrange purchases from their suppliers. But a conflict could break out between Sun and Netscape over their respective applications servers, which handle high-volume E-commerce transaction loads. Each company may want their own technology to prevail, and over time, Sun will need to bring the two product lines together.

Then AOL and Sun can focus on the next step: information appliances. Indeed, that's the subject that got Sun CEO Scott McNealy and AOL CEO Stephen M. Case talking, long before the Netscape acquisition was considered. By coupling Sun's technical expertise with AOL's huge customer base and marketing savvy, the two--either on their own, or by working with others--could develop innovative devices to break the PC's lock on the Information Age. "As we move to the post-PC era, we're hugely motivated to get this right," says Sun's Tolliver. In April, AOL will start announcing information-appliance initiatives that could include such non-PC products as handheld computers and Internet phones. Then AOL and Sun need to start making good on their promises.

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