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.

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.