AOL, You've Got Netscape

By MICHAEL KRANTZ

Steve Case had plenty to be thankful for last Thursday. The CEO of America Online sat down to turkey with his family just two days after announcing a deal to devour Netscape Communications nearly whole (he carved off a piece for his friends at Sun Microsystems). The initial spin on the most momentous merger in Internet history was that it put the world's leading online service first in line for electronic commerce and entertainment--a market that could be worth trillions in just a few years.

But every holiday binger faces that morning-after moment when the bathroom scale measures what the feast has wrought. And AOL's new bottom line is a company swollen with millions of new customers, rivers of new revenue and essentially unlimited potential but also a tricky new business model that may prove difficult to take from the white board to the real world. The Netscape buyout has redrawn the online map, but a certain software concern based in Redmond, Wash., still looms menacingly on the horizon. The epic confrontation between Netscape and Microsoft is over, but the epic confrontation between Sun and Microsoft proceeds apace, and the epic confrontation between AOL and Microsoft has barely begun.

The deal is relatively straightforward: in exchange for $4.2 billion (roughly 10%) worth of its high-flying (if arguably inflated) stock, AOL gets all of Netscape, right down to the last cappuccino machine. These are indeed dark days for the Mountain View, Calif., start-up. The company whose trailblazing browser jump-started the World Wide Web back in 1994 was supposed to become the fastest hot rod on the Infobahn. Instead, Bill Gates sideswiped it into a ditch and left AOL to strip the wreck for parts: a browser, a website and a treasure chest of software. How well AOL exploits its new toys will determine whether its latest mantra, "AOL Everywhere," looks prescient or ironic a few dozen business cycles down the road.

THE WEBSITE. Netscape's Netcenter may turn out to have been worth a few billion in its own right. The Netcenter site is a leading contender in the race to become one of a handful of powerhouse "portals": full-service websites that are online launching pads, entertainment networks and shopping malls rolled into one. Between netscape.com aol.com and the AOL service itself, Case's audience now numbers in the tens of millions. His acquisition also makes a good daytime-nighttime fit. AOL's usage is heavily weighted toward the evening and weekend hours, when teenagers and home users do most of their surfing, while Netcenter is most heavily trafficked from 9 to 5, when white-collar workers log on via corporate networks.

THE BROWSER. Its lofty 80% market share back in heady '95 turned out to be a high-water mark for Navigator, the software jewel in Netscape's crown. Then Microsoft stuck its competing Web browser, Explorer, on millions of Windows desktops and grabbed roughly half the market with uncanny speed (the Justice Department is still trying to figure out exactly how that happened). Under AOL's wing, Navigator could once again take the lead--if Case decides to switch AOL's built-in browser from Explorer to Navigator. The problem is that if Case drops Explorer, AOL could lose its happy perch on those same millions of Windows desktops. What's it going to be, Steve?

THE SOFTWARE. Monday-morning quarterbacks wonder just what precisely AOL is now. Since its humble birth in Vienna, Va., as Quantum Computer Services in 1985, the company has focused on one thing: creating an attractive online experience for the average schmo who can barely plug in his PC. It was a smart plan whose execution has been more or less perfect. The catchy populist name. That effortless user interface. Those millions of free starter discs. Those infamous chat rooms. And, of course, that cheerful robot chirping, "You've got mail" (now the title of a romantic comedy coming soon, via Tom Hanks, Meg Ryan and two humming laptops, to a multiplex near you).

It all worked. AOL went public in 1995 with fewer than 200,000 subscribers. Today that number is 14 million and climbing, courtesy of a laser-beam consumer focus that may be precisely what the new company lacks. AOL has long since won the Net's largest mass audience, and through hundreds of sales alliances with companies, from Barnes & Noble to 1-800-FLOWERS, that audience is getting accustomed to the idea of the Net as one vast cash register. Now Case is gambling that as e-commerce grows from a novelty to the bedrock of 21st century capitalism, AOL can--perhaps must--become a major player in the lucrative "enterprise" market, helping corporations large and small move their operations online. "Companies who want to work with us are interested in a lot more than us promoting the site," says Case. "They want us to help build the service." It's another smart plan, but executing this one will mean battling not upstarts like Prodigy and CompuServe but behemoths like IBM and Microsoft.

Good luck. The smart guys in Silicon Valley, whose condescension toward AOL has risen in direct proportion to its embrace by the public, have never considered the company a serious technology player. "America Online has built an exceptional franchise on a technology base that could charitably be called dated," says Roger McNamee, founder of the high-tech investment firm Integral Partners. "It has been difficult for its partners to work with, and for AOL itself to maintain." How can the company possibly hope to compete in the corporate networking market if its own network is held together with Scotch tape and baling wire?

By marrying Netscape and taking Sun as a mistress, that's how. Netscape gives Case both a battalion of geek programmers and the software they've been working on, from industrial-strength Web tools to the back-office e-commerce programs that Netscape CEO Jim Barksdale was peddling to corporate customers before he abruptly, and wisely, folded his cards.

But the soul of AOL's newly empowered machine may turn out to be Scott McNealy, the brilliant, voluble CEO of Sun Microsystems. McNealy has been flacking his "the network is the computer" vision for years, pitching his Web-focused Java language as the platform on which to build a new generation of cheap, single-purpose network appliances, from TV set-top boxes to cell phones, that could finally break Microsoft's stranglehold on the digital universe. His deal with AOL--which also puts Sun's 7,000-strong sales force to work selling Netscape's e-commerce software--marks the official inauguration of a coalition that the industry had long since dubbed ABM: Anyone But Microsoft.

The immediate target is Microsoft's Windows NT operating system (soon to be renamed Windows 2000), the centerpiece of both the next generation of industry-standard PCs and Microsoft's effort to do to Java and Sun's Solaris operating system what it did to Navigator with Explorer. In fact, McNealy's primary motive for supporting the Netscape buyout may be the prospect of saving the Netscape browser. One of Microsoft's big advantages is its ability to integrate its Windows and browser software, offering customers a soup-to-nuts package deal. With AOL on his side, McNealy can offer a similar deal--as long as Case decides that a healthy Navigator is more important to him than keeping AOL safely ensconced on Windows.

But that's an iffy proposition. Mark Mooradian, a senior analyst with Jupiter Communications, points out that Case may soon discover that Netscape is a double-edged sword. AOL's old mandate was simple: get as many people as possible onto its service. Now that it's a sprawling, vertically integrated e-commerce company, nasty intramural conflicts are inevitable. When Jeff Bezos upgrades Amazon.com's server software, for instance, will he buy it from AOL, which is the host for arch-competitor Barnes & Noble? Will the Internet service providers who compete with AOL choose Navigator as their browser, and thus enrich their fiercest rival? How will McNealy feel when AOL creates enterprise tools for NT as well as Sun's Solaris?

Bill Gates has been running this obstacle course for years. Now it's Steve Case's turn to chase him around the track.

--With reporting by Janice Maloney/San Francisco

With reporting by Janice Maloney/San Francisco