On March 3, Netscape President Jim Barksdale testified at a hearing of the Senate Judiciary Committee that his company faced much trouble. Once viewed as one of the most promising companies in the emerging Internet market, Netscape's share of the browser market had fallen from over 90% to almost 50%. The company's share price suffered accordingly, plummeting from a high of over $80 per share to just under $20 per share in the last two years. What contributed to Netscape's spectacular rise and how could the Mountain View-based company have fallen so far?
When Marc Andreessen joined the National Center for Supercomputing Applications (NCSA) at the University of Illinois in 1992, a major change in the computing industry was occurring. Large costly supercomputers were being replaced with more cost-efficient workstations based on microprocessors. The NCSA realized it no longer made economic sense to run powerful supercomputers, and decided the next stage would be to network everything together -- especially the scientists and educators who had been using the supercomputers [1].
The idea of linking computers together into a data network had been gaining momentum for over a decade, and a number of network applications had been developed to allow users to communicate through the network. Some examples included e-mail, gopher, telnet, ftp, and lynx. However, a major barrier to broader appleal was that these applications all had non-trivial and incompatible interfaces which limited their use to people with reasonable programming skills.
At the urging of Andreessen, NCSA decided to address this technical barrier. The technology to link people from all over the world existed along with network applications, hypertext, and personal computers. The challenge was to put all the pieces together. Under his leadership emerged the first version of the primitive Mosaic browser in 1993. Mosaic was very user-friendly -- it had a simple user interface -- and it allowed users connected to the Internet to share multimedia webpages.
To test Mosaic, NCSA used the Internet itself -- this time as a distribution medium. By allowing free download from the network, the center was able to quickly get Mosaic into hands of mainstream users. Overall, user response was tremendous. As the browser's popularity increased many public companies courted NCSA to commercialize Mosaic.
The founder of Silicon Graphics, Jim Clark, was one who noted the success of Mosaic. Sensing the tremendous opportunity that the browser held, Clark recruited Andreessen and together they founded Netscape. Netscape's mission was to be the leading provider of open software that links people and information over the Internet and Intranets. In order to quickly create a market for its products, Netscape decided to give away its client browser free of charge. Netscape reasoned that by giving everyone a window to the Internet, users would accept the company's technology and help develop it in new and creative ways [2].
The pace at which the Internet has developed into a technology with mass appeal and popularity is astounding. Much of Netscape's initial growth can be attributed to being a first-mover in the Internet browser market and therefore being able to reap the rewards produced through demand side positive feedback experienced in this new medium. The company sought to leverage this success by quickly expanding its product line to include a full line of clients, servers, development tools, and commercial applications. However, the profit potential in this rapidly-growing market did not go unnoticed for long, with competitors introducing a multitude of products to directly compete with Netscape's products.
The success of the Netscape browser is directly linked to the success of a range of complementary products. First, the company's browser could not run without basic complementary products such as the operating system (Windows, Mac, or Unix), the computer (PC, Apple, or Workstation) and the network. While having all three of these products provides the functionality needed to use Netscape's browser, the impact on the actual performance of the browser must be measured on a continuum: the faster that each of these products allows the Netscape browser to operate, the better [3].
Second, the development of Netscape owes much to complementary plug-in applications that can be run from within the browser window. Some programs traditionally having their own interface to the Internet have been bundled in with the browser. Two examples are gopher and file transfer protocol (FTP) which previously were executed from a command line prompt (Unix) or through a graphical user interface (Windows or Mac). Today most new users do not even know that the two applications exist because users are only exposed to the browser interface rather than the stand-alone applications.
A wealth of multimedia plug-in applications that give the browser enhanced multimedia capabilities has also contributed to the popularity of Netscape. Video, audio, animation, virtual reality, and image files compose some of the types of multimedia files that can be seen or heard through plug-ins such as RealAudio, Shockwave, Media Player, and Voxware Toolbox. Many of these applications are designed to enhance a user's experience, regardless of that user's choice of browser. While this arrangement certainly benefits Netscape, the stronger version of this complementary relationship occurs when applications are designed exclusively for Netscape's browser. For instance, if Netscape were the only browser that featured a plug-in that allowed text on a user's screen to be read aloud to the user, those interested in that particular feature would be forced to use Netscape as their browser.
Finally, numerous features accessed through Netscape can be thought of as complementary products. Chat rooms, internet telephony, guestbooks, stock portfolios, content providers, date matching, java appelets, and on-line commerce are just some of the services provided through the Netscape browser. Again we see Netscape benefiting from positive feedback: the more people who use Netscape, the more services we see available for or through the browser, which leads to more users, and so forth.
Netscape's initial domination of the browser market can be linked to several strategic decisions. First, Netscape Navigator was the first widely distributed Web browser [4]. While much has been made of the company's decision to distribute its browser for free over the Internet, it should be noted that only 5% of all Netscape shipments were delivered through the World Wide Web in 1996 [5], so the free beta version download does not explain the extended popularity of the Netscape browser. Instead, the majority of the company's browser sales have occurred either at retail or into the growing corporate segment of the market. For example, Netscape's business plan includes direct sales to the Fortune 100 corporations and agreements with scores of OEM companies like Compaq, IBM, HP, Sun, and Digital [6]. The company's proficiency in traditional product distribution network should not be overlooked as a key factor of success.
Second, the company's founder realized that the promise of future profits lay not necessarily with the browser but in the maturing Internet infrastructure and applications market. With this in mind, the company leveraged its initial success by broadening its product line to include a full line of clients, servers, development tools, and commercial applications.
Third, Netscape has actively pursued a strategy of "coopetition". Netscape publishes its standards openly and has won many partners with its willingness to share the market and profits. Prominent Netscape technology partners include General Electric, Sun, and Informix [7]. Netscape works with General Electric on EDI; with Sun on Java applets; and with Informix on database access through browsers. The result of this "coopetition" has been the interoperability and portibility of the Netscape browser. Gradually, the Netscape browser has become a key intranet component for many IT managers [8].
By the end of 1997, the company's stand alone browser was estimated to make up only 13% its revenue. Netscape's brand name is strong, it has a large installed client base, and the company's enterprise software and Web site continue to provide a decent revenue stream [9]. With the new strategy to make its browser free for anyone to distribute or enhance, there is still a chance for the Netscape browser to become the spanning layer over all major operation systems on all platforms. However, the potential in this rapidly-growing market did not go^M unnoticed for long, with competition introducing a products^M directly competing with Netscape.^M
Netscape's most formidable competitor is Microsoft's Internet Explorer which today integrates its own operating system with the browser [10]. In the last two years the software giant's Internet Explorer has gone from zero to almost 50% of the browser market, and many analysts estimate that it will pass Netscape in dominant market share during 1998.
Microsoft's interest in the browser market can be traced to 1994 when the company first talked to Netscape about licensing its browser technology. Netscape declined, feeling that Microsoft's offer was undervalued and in addition would provide the company with access to virtually all of Netscape's technology. A year later, Microsoft introduced its own browser.
The battle between Netscape and Microsoft to dominate the browser market has been an interesting one. Earlier this year Netscape proposed that dominating this space hinged on providing customers with enhanced features. When sales of Netscape Communicator -- which includes e-mail, group discussion, and conferencing features -- proved disappointing, Netscape once again began pushing a stand-alone version of its browser [11].
So just how important is market share in this market? On the one hand, Netscape CEO James Barksdale insists that the Internet business will not evolve in the same way as the operating system business. "Our bet," he says, "is that the Internet will not be a winner-take-all market and that Netscape will be a big winner in this world" [12].
On the other hand, while browser revenue accounted for only 13% of Netscape's revenue in the fourth quarter of 1997, Barksdale remarks that "the browser market is the seed corn that feeds the other businesses" [13]. These include advertising and electronic-commerce revenues from its popular Web site and sales of Internet software used on servers [14].
Microsoft certainly agrees with the latter point. As one industry pundit puts it, "The browser already is the operating system" [15]. Recognizing the future implications of this statement, the company has been working hard on several fronts to assert its dominance in the browser market.
Microsoft has leveraged its dominance in the desktop operating system (OS) environment, where the company's Windows OS can be found on more than 100 million computers worldwide [16]. The company has integrated Internet Explorer into Windows 98, its operating system update due out later this year. "That kind of enhancement is great for customers," says Microsoft CEO Bill Gates, "making it so when you turn on a PC, the Internet is there and it's easy to use" [17].
Microsoft also recently announced a deal with America Online (AOL), the most popular online service. In return for making Internet Explorer the service's default browser, Microsoft agreed to integrate AOL's software into all future versions of its Windows operating system [18].
Further, the company has built on its relationships with distributors and customers. Until recently, Microsoft's browser was free, while Netscape's browser was not. This allowed Microsoft to make tremendous gains in market share. With both browsers being distributed for free, Microsoft's deep-rooted advantages have become clear. Because PC makers are locked in to distributing Microsoft's Windows 98 operating system, many do not see the benefit in providing Netscape's browser on top of Microsoft's browser.
Many are frightened at the prospect of winding up on Microsoft's bad side. "There is absolutely no question that in the computer business you are better off being a friend of (Microsoft's chairman, Bill Gates)," quips Jonathan Jacobson, an antitrust lawyer [19].
Finally, Microsoft has actively encouraged developers to tailor their Web sites to Internet Explorer. The company believes that in time, developing for both Netscape and Internet Explorer browsers will prove too much of a burden. Hence, it should attempt to win developers over now, perhaps by emphasizing specific features of Internet Explorer and reminding developers that switching costs will only increase over time. After postulating that the browser either has or will become the operating system, venture capitalist J. William Gurley goes on to note that "developer support is the key to success in the operating-system game" [20].
To its credit, Netscape still holds a majority market share in the browser market and has done its best to make operating the PC and surfing the Internet one and the same. Its recent decision to distribute its browser products for free should help to stabilize its market share. Further, its decision to license its basic computer code for free could stimulate demand for the company's browser products: for example, PC manufacturers could modify the Netscape browser and even put their own brand on it.
More generally, Netscape hopes to rally a community of software developers around its technology standard and push that standard forward. "This could open up the desktop to competition," says Bruce D. Smith, a software analyst with Merrill Lynch & Co., "and that could be a huge opportunity for Netscape" [21].
But Microsoft's dominant position in the industry, combined with its
seemingly limitless financial resources and a tremendous focus on winning
this battle, appear to give it the upper hand in the browser war.
Netscape is in trouble. Its share of the browser market is shrinking and its profits are on the decline: in the fourth quarter of last year, the company's revenues from so-called client software, which includes its Navigator browser, dropped to $12 million, down from $52 million a year earlier [22].
The growth of its other businesses -- which include advertising and electronic-commerce revenues from its popular Web site, and sales of Internet software used on servers -- is not enough to offset the drop in its client software sales. In January, Netscape reported a net loss of $115 million for FY 1997 and announced that it would lay off 300 of its 3,200 workers [23]. Its stock price sank, and its future seemed bleak.
The president of We Develop Inc., Warren Woodford, said, "I think Netscape
as a company is desperate. It on the technology side has fought a good
fight." However, Netscape is now losing the fans of its browsers and the
customers of its web application servers. While Microsoft's browser, Internet
Explorer 4.0, is a separate application from the Windows 95 operating system,
the majority of buyers of new PCs automatically receive it because Microsoft
has required PC makers that install Windows 95 on the machines they ship
to add Internet Explorer as well [24]. To
determine how much choice Internet users actually have in web browsers,
an organization called NetAction recently surveyed several top Internet
service providers, asking each ISP which browser consumers received with
the service's start-up kit. The survey results are displayed in table below
[25]. The survey was conducted by telephone
during July, 1997.
| Rank | Internet Service Provider | Browser provided with start-up kit |
|---|---|---|
| 1 | America Online | IE 3.1 |
| 2 | Compuserve | IE 3.1; NN 3.0 available as a download |
| 3 | Internet MCI | IE 3.1(Microsoft Internet Explorer 3.1) |
| 4 | IBM | NN 3.0(Netscape Navigator 3.0) |
| 5 | Microsoft | IE 3.1 |
| 6 | BIGLOBE | N/A |
| 7 | T-Online | N/A |
| 8 | Sprint IP Services | Choice of IE 3.02 or NN 3.0 |
| 9 | UUNET | N/A |
| 10 | PSINet Inc. (Mindspring) | IE 3.02 |
Another reason of the falling of Netscape browsers could be the company's
anti-Microsoft policy: the company focuses too much energy on the battle
against Microsoft. Ironically, some observers claim that it would be a
better idea for Netscape to cooperate more with Microsoft if it wants to
survive. After all, its browsers rely heavily on the growth of not only
Unix but of Microsoft's Windows NT platform, and the recent growth of Windows
NT machines is vastly greater than the growth of Unix, a trend that is
expected to continue.
The initial success of Netscape Navigator was phenomenal. By creating a common spanning layer with a unified user interface to many underlying Internet services (hypertext, multimedia, ftp, etc.), Netscape was able to unleash the Internet to the mass market. Netscape fostered "coopetition" with many other companies by publishing open standards and creating synergistic partnerships. This enabled Netscape to rapidly increase the market for its browser, by giving the consumer many complementary products and stimulating demand for the Internet as a whole.
To win market share in this emerging market, Netscape developed a solid business plan, which focused on getting the browser to as many consumers as possible in as short a time as possible. This meant direct sales to large corporations, agreements with OEM companies and a free trial scheme aimed at more price-sensitive individual consumers. With a majority of the market share in the rapidly growing web browser market, Netscape rapidly became a successful and major player in the Internet industry.
Unfortunately, new competition quickly emerged. Microsoft soon began a full scale attack on the browser market, in an attempt to gain market share away from Netscape. To accomplish this, Microsoft undercut Netscape in both pricing and distribution. To persuade price-sensitive consumers to switch to the IE browser, Microsoft gave it away for free. By bundling IE with its operating system (Windows), Internet Service Provider software, and new PCs from OEMs, IE could be widely distributed. Thus, with the right price (free) and no user-initiated installation, Microsoft could lock-in consumers to its browser solution before they even had a chance to acquire and try the Netscape browser.
The cutthroat competition from Microsoft and the resulting decline in market share for its browser has required Netscape to rethink its business plan. Netscape has decided to give its browser away for free, and to top Microsoft, is going to give away the source code as well. However, it remains unclear whether or not this will stop Netscape's market share from eroding. If not, Netscape may need to further rethink its business plan. This might include leaving the browser market and focusing on its complementary products (servers, e-commerce, etc.), partnering or merging with a larger company with more financial resources, or even cooperating with Microsoft to develop value-added enhancements to its browser.
Maybe the comment given by Bryan Vincent, the president of Bryan Vincent Association Inc., quite describes the future of Netscape, "People do not seem willing to bet their companies, infrastructure, and message on Netscape. The reason is they just don't know how well Netscape is going to do."[27]