Making Of A Web Superpower

November 24 was the day when online
history was made. America Online (AOL), the world’s largest online service provider and
Netscape, browser market leader, decided that the former would buy the latter for $4.21
billion in a three-way deal that also includes Sun Microsystems. This merger creates a
superpower in the online market with combined sales of $3 billion and 11,000 workers. The
deal with Sun also creates an alliance that has the technology and the desire to rival
Microsoft’s power in the computer market.

With Netscape, AOL acquires the
most widely used internet browser and will control two of the four most visited web sites
on the internet. Together, Netscape and AOL sites account for a staggering 70% of all
people who access the internet, according to NetRatings, a research firm.

AOL’s $41.12-a-share offer for
Netscape is more than double the price of Netscape’s stock in early October. It was a deal
Netscape couldn’t resist. “AOL provides more value than going at it alone,” said
Netscape CEO James Barksdale, whose stock value is now worth close to $200 based on the
AOL offer.

Netscape will continue as a
subsidiary of AOL. Barksdale will retire from day-to-day operations but remain an AOL
Board member. “The way great companies get built is through combinations, and this is
a combination of a smaller company with two much bigger companies. This is the way
AT&T got built,” Barksdale said.

AOL CEO Steve Case said a key
aspect of the merger is the ability of the combined company to leverage its combined web
power and sales and marketing operations to achieve an even greater share of the online
market. “NetCenter was already one of the major portals, and Netscape has just a
terrific brand.” We just want to take that Netcenter strategy to the next step and
reach an even wider audience,” said Case. The three-way deal takes direct aim at
Microsoft. Sun Microsystems will distribute Netscape’s business-level server software for
three years in return for AOL distributing Sun’s Java to its 14 million subscribers. AOL
will offer Java for services on next-generation internet devices such as hand-held
computers, organizers and mobile phones, which will tap the internet.

No Sun, No Deal

Bringing in Sun Microsystems was critical to
the overall deal coming together. Without the joint marketing and development alliance
that will let Sun market the Netscape server software to corporate customers, AOL would
likely have had to sell off that part of Netscape, which is also the most profitable part
of the operation. But AOL has neither the experience nor the credibility to jump into the
corporate market and provide a full line of offerings for electronic commerce, from
corporate Web sites to the computer screens of consumers.

That’s where Sun comes in. The
Sun-AOL-Netscape alliance is in large part the brainchild of William Raduchel, Sun’s chief
strategist and the former economics professor for McNealy at Harvard University. Raduchel,
has been working closely with AOL for the past year in developing a strategy to maximize
the marketability of Sun’s Java and Jini networking software. According to Raduchel’s
plan, combining Sun’s technology prowess with AOL’s powerful consumer brand, the two will
be able to offer computer users an alternative around Microsoft’s control over the
desktop.

As part of the program, Sun has
developed a powerful Java-based $200 Internet information appliance that ISPs will be able
to give away to consumers who sign up for their services. The devices will deliver AOL’s
Internet media and electronic commerce services to millions of homes where PCs, even at
around $1,000 have failed to create an interest.

These computer users will depend on
AOL for all their computing requirements, including the use of applications, surfing the
Internet, electronic shopping, banking and the like.

Case explained that AOL users won’t
see much of a chance in the short term. Eventually AOL will provide its 14+ million
subscribers easy links to Netscape’s popular NetCenter Web site. AOL is expected to offer
advertisers a single rate to reach users of its proprietary online service and visitors to
the NetCenter site as well as to its existing AOL.com Internet site.

Case also said he hopes to use
Netscape’s software to eventually create a new AOL browser that makes it easier for people
to view and retrieve Web information.

AOL’s expansion also could help it
compete with other Web search and service companies such as Yahoo! Inc., and new rivals
such as cable-TV and phone companies, which hope to soon provide much higher speed service
to the Internet than AOL.

The market for those devices is
expected to explode, and McNealy wants Java to be the key software for it. “You don’t
have to have a big, old Microsoft desktop to use AOL services,” explained Scott
McNealy, Sun’s Chairman and CEO, adding that he has sought a deal with AOL for a long time
as he desperately wanted AOL to be a major force behind Java. “I’ve been calling on
Steve Case for about four years. Every three to six months I would go knocking on his
door.”

Sun also will pay AOL more than
$350 million in licensing and marketing fees. In return, AOL will buy $500 million of
Sun’s powerful workstation computers to run its network.

Analysts said the acquisition of
Netscape makes it clear that AOL wants to become the ‘Next Microsoft,’ by way of
dominating online media and ecommerce, two of the hottest new business sectors.
“Acquiring Netscape would enhance AOL’s role as the premier internet media company.
AOL is assembling the kind of audience numbers that will convince people that the internet
is becoming a mainstream media,” said James Moore, President of the Geopartners, a
consulting firm. By the year 2003, Forrester Research, whose is in the business of
analyzing trends in Cyberspace, projects that internet commerce could reach $3.2 trillion,
or 5% of the sales worldwide.

While AOL will continue to sport
the Explorer browser for some time, the company will also distribute a customized version
of Netscape’s browser to the 20 million customers of its free ICQ video chat service.
“At this point, we are intending to continue using IE (Internet Explorer) and AOL
because we believe it is very important that AOL continue to be bundled with
Windows,” Case said. “We do recognize Microsoft as a major competitor in a lot
of different areas, but we’ve always said we’d like to work with them wherever it makes
sense,” Case said.

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