Mega-merger challenge to Microsoft hegemony

In the early days of the Net, perhaps all of two years ago, one Silicon Valley company above all others served as the benchmark for technology company success: Netscape.

The Mountain View, California firm - which created what has remained (if only barely) the dominant Internet browser, Navigator, - was the quintessential Internet company. To be "the next Netscape" became the technology industry cliche for spectacular success. The phrase appeared in newspaper and magazine headlines, became common currency through Silicon Valley, hung unspoken in the air as venture capitalists eyed hungry start-ups which had come searching for investment capital. Who would be the next Netscape?

Practically overnight, Netscape shot from a handful of employees working for 23-year-old golden boy, Marc Andreessen, to a corporation of hundreds, then thousands. When it went public, its shares skyrocketed, defining the shockingly hyperactive "norm" for the Net industry and setting the stage for many successive Internet company flotations. But for the past year, no one in the industry has wanted to be the next Netscape: the next company to be challenged aggressively in the marketplace it created by the pugnacious king of software companies, Microsoft. The next company to watch market share slide and in some areas, halve. The next company to make a number of crucial, strategic blunders and as a result, bungle needed partnership deals and misjudge market swings.

Last week, it was taken over by a company which has had the reverse profile of Netscape, online service provider, America Online (AOL). In its earlier days Netscape was seen as hip and adept, a company with buckets of Net street cred. In contrast, AOL was awkward and clumsy, an Internet-for-dummies company which seemed to be taking all the wrong decisions. Sometimes it seemed it couldn't alienate its customers fast enough, with frequent email blackouts, plans to market its own subscribers' email addresses to advertisers, and more.

But AOL proved its critics wrong - probably because the critics were mostly Net pundits comfortable with customising their Web browsers and using search engines. What they still tend grossly to overestimate is the ability, much less the interest, of the average computer user in wading through the Internet's little arcanities. AOL held hands and offered plenty of easy-to-find content.

Now, Netscape and AOL are holding hands in one of the most interesting weddings to date in this fledgling industry. It is of course a menage a trois, with computer maker Sun Microsystems hopping into bed as well.

But what motivated each of them to complete such a deal and what does it mean for the industry? In essence, it is all about creating a force to rival the might of Microsoft.

Netscape went to market at a premium price, $4.2 billion (£2.8 billion), its peak market valuation. Although it has recreated itself as a server software company and has turned a profit recently, Microsoft still poses plenty of threat in the server software arena and has devoured Netscape's browser market share. Netscape also recently transformed itself into a major Internet "portal" site, NetCenter, concentrating services and content in one place for nine million registered users. AOL is the world's dominant online service provider, having picked up CompuServe last year. It has 13 million subscribers and growing. It is increasingly focusing on electronic commerce, has plenty of cash, and beats allcomers as the most-visited portal site (at a shade more than Yahoo and Microsoft's MSN). Netscape will provide it with an extensive range of the software needed for e-commerce and an understanding of providing services. The two joined together will create a massive Internet portal.

Sun Microsystems gains access to Netscape's wide range of server software which it can market along with its hardware to form what should prove attractive, complete packages for customers. Sun's sales force dwarfs Netscape's (7,000 to 700), enhancing the latter's ability to penetrate the corporate market. AOL also agreed to buy $500 million in hardware from Sun in coming years and there were other licensing agreements which will benefit both companies.

As linked partners the three form a very serious challenge to Microsoft, which markets server software, wants to be the major Internet browser company, and is trying to seize electronic commerce space via MSN. Microsoft has already asked the US government to throw out its antitrust suit on the basis that the new entity proves Microsoft must manoeuvre against wily foes.

It is an argument the government is unlikely to buy. It will surely argue that the buy-out proves that Microsoft was powerful enough to wipe out a once-dominant company through its marketing tactics. Of course, the deal could backfire as well. Analysts wonder if AOL is up to marketing software and whether Sun will happily sell Netscape software for Windows as eagerly as for its own Solaris operating system. And there are - ironically - antitrust issues which must be examined as these three companies join forces.

Overall, in one week, the industry has realigned in startling and intriguing ways which may significantly reshape its future - underlining just how unpredictable the Internet world can be.

Karlin Lillington is at klillington@irish-times.ie