10.4 – The World Wide Web gets noticed in America
Source: International Herald Tribune, 20 March 1995.
The Mosaic project also appeared to be a rival to the Web – and, to Berners-Lee for one, appeared to be seeking to wrest leadership away from the World Wide Web. At this time, the concept of hypertext information access and retrieval had not yet displaced traditional hierarchical indexing systems. At the University of Minnesota, a gopher information system based on menus had become increasingly popular and adopted outside the university. This came to a sudden halt in 1993 when the university announced its intention to impose a licence fee on non-academic users of its gopher server software. The threat of being held to ransom over intellectual property rights prompted many users to discontinue development work. This crystallised Berners-Lee’s thoughts. If the World Wide Web was to be accepted, he realised, such an overhang had to be removed. After negotiation with CERN, a declaration was made that access to the Web protocol would be free. By the beginning of 1994, therefore, the Web had momentum, it had an established group of interested users which would evolve into the standards governing body, the World Wide Web Consortium (W3C), it had removed the overhang of protocol property rights and it had an increasing number of user-friendly access tools.
The Internet, which had been funded by government, was therefore augmented by something of the vision articulated by Vannevar Bush some 40 years earlier. This vision was founded on machines being made to assist with the human thought process. It was the practical implementation of this vision that created tools that could sit on top of the Internet to allow it to be fulfilled. The development of these tools had also been largely funded by government, but in a much more ad hoc and decentralised manner. These were mostly software, or intellectual rather than physical products, and were quickly to become recognised as having potential that could grow in proportion to the rapidly expanding Web.
Part 2: Commericalising
the Internet
Privatisation was the key
Commercial exploitation of this type of potential had a long history in America. Not surprisingly, a repeat was in store. Critical in this was the decision of the NSF to relinquish control of the National Research and Education Research Network. (NREN). Originally this network had an ‘acceptable use policy’ which (aside from email) restricted access to non-commercial use. In 1992, a far-reaching proposal was made to change this. Then, in 1994, the NSF announced that NREN was to be privatised and reorientated to encourage commerce and competition. Finally, in April 1995, this happened. A network that had been publicly funded through various evolutionary phases since its inception nearly 40 years before was now in effect privatised.
Before the introduction of the World Wide Web and the privatisation of the Internet, the principal commercial opportunities were inevitably focused on the existing user base, which was mostly financed by the public purse. Software and hardware had to be attractive to these groups. Cisco’s early success, for example, reflected the growth in email traffic and users. However, this was ultimately constrained by the nature and size of the user base. Until the number of users broadened, product growth would be tied to the needs of the academic and government communities. It was not until the early 1990s that the elements for broader growth began to fall into place. The World Wide Web created the framework, Mosaic the entry point, and privatisation of the NREN the potential for commercial gain. Suddenly, after 30 years of investment and research, a new industry had been created.
10.5 – The Internet is privatised
Source: LA Times, 5 September 1994.
In the early years, there had been few companies with the insight or the knowledge to exploit the potential of the Internet. Those that possessed both were actively involved in Internet-related work and were now in a position to commercialise their activities. The major powerhouses in the industry, on the other hand, had largely shunned the Internet and related applications, either on the basis that commercial activity was proscribed, or because they had simply failed to forecast the growth that would occur. Microsoft and the other big players gave newcomers the space to enter the market, without the crushing competition that might have been expected from such wealthy firms. One of the earliest players to emerge boasted the kind of product that was necessary to bring access to the Internet to a wider audience: the browser. Before the browser appeared there were also a number of companies set up to provide access to the Web – later known as Internet service providers (ISPs).
10.6 – The ‘Apple’ of the Internet: the arrival of Mosaic
Source: New York Times, 8 December 1993.
In his book, Weaving the Web (2000), Berners-Lee records how he sought to stimulate the development of easy-to-use browsers to encourage increasing use of the Web. Other authors dispute this, suggesting that his concept centred on individual browsers for researchers, as opposed to the mass-market approach of Netscape’s founder, Marc Andreessen.⁹⁸ Whatever the history, increased use of the Web created growing demand for easy-to-use browsers. Without the ability to ‘browse’ – to retrieve, display and navigate through information – the Internet would have remained a replacement for the traditional postal system and never reached the dreams expressed by Engelbart or Nelson. This was not lost on developers, and as use of the Web began to grow exponentially, the more commercially aware of them sought to take advantage. Marc Andreessen, who had helped develop the Mosaic browser, left NCSA to join Enterprise Integration Technology. Shortly after that, in April 1994, he founded Mosaic Communications Corporation with Jim Clark, formerly of Silicon Graphics. The Mosaic browser was to the Web what the Apple Mac had been to personal computing – and for the same reasons. It was user-friendly, with a graphical user interface that allowed users to issue instructions and browse by pointing and clicking with a mouse.
The rise and fall of Netscape
The short history of Netscape began in late 1994 when the Mosaic Communications Corporation changed its name to Netscape Communications Corporation following settlement of a legal dispute with NCSA, which resulted in the latter paying roughly $2.3m for infringement of code and the use of the Mosaic name. By this time, the firm had raised nearly $10m in capital, but was burning cash at a rate of more than $1m per month. Although the company had to tighten its belt for a period, the release of Netscape Navigator and its overwhelming superiority to anything that existed in the market produced startling growth rates. Revenues were haphazard, as the company swayed between the competing goals of rapid market penetration, for which low or zero charging was required, and the need for revenue. Customers could download the software from the Web for a 30-day trial, and were then supposed to pay the $49 licence fee. The browser software had been rushed to market and as a consequence many areas of development were neglected. In a narrow sense, the company was an outstanding success, and clearly the pre-eminent newcomer in America’s newest and fastest growing industry. This was reflected in the success of the initial public offering which took place in August 1995, not much more than a year after its formation. The IPO raised $140m and the success of the shares in the aftermarket created a currency that would have allowed the company to make a share offer for pretty much any other newcomer it desired.
The history that actually unfolded for Netscape was one of strategic and commercial decline almost from the first point of its success. A detailed account of Netscape’s demise is provided by a former competitor, Charles Ferguson of Vermeer Technologies.⁹⁹ While Ferguson might have had his own axe to grind, his account makes compelling and persuasive reading. It presents a damning indictment of missed opportunity. After a brilliant start, Netscape’s story appears to have been a mixture of immature incompetence and willful arrogance. Business models and historical precedents featured little in the company’s development. Had they done, they would have underlined the need to build a robust architecture and improve software performance, while also pursuing a strategic approach to building alliances and reinforcing the
market share that had been gained in the initial flush of success.
A parallel to the reckless disregard of architecture and strategy can be found in the history of transcontinental railroads, where quality of construction was often sacrificed in the hectic pursuit of land and the completion of urban connections. The railroad companies were to find that those that paid the most attention to quality eventually overtook the others with ease. In the case of the railroads, there was also no equivalent of Microsoft, the brooding presence of an existing monopoly supplier in a closely related business. Netscape’s immaturity was manifested in many ways, not least the haste of its recruitment and the persistent and aggressive verbal challenging of Microsoft’s hegemony.
Netscape
10.7 – Netscape: short-lived might-have-been
Source: Thomson Reuters Datastream. Netscape annual reports.
The short financial history of Netscape illustrates the dangers of attempting to summarise the value of a company by reference to financial figures alone. Netscape enjoyed rapid revenue growth, but negligible and declining earnings. Despite this, the company was acquired by AOL for over $4bn in 2002, a figure some eight times the company’s total revenues. There are only two possible justifications for such a lofty acquisition price. Either Netscape had massive amounts of intellectual capital that could be better exploited by AOL, or else the purchase price was not really $4bn. A wide range of justifications were advanced to justify the merger at the time. These included the value of Netscape’s Netcenter website and the increased number of ‘eyeballs’ this would produce, and the software business which could be used to boost e-commerce activities. Interestingly the browser was only a partial reason given to justify the deal. AOL itself was clear that Microsoft Explorer would be retained.
From the perspective of fundamental security analysis, it is extremely difficult to see how Netscape could possibly have generated sufficient revenues and profits to justify a price tag of $4bn. Fortunately for AOL, this was not the price it actually paid. Since the acquisition was a paper transaction, the cost to AOL shareholders was dilution of their equity through the issuance of new equity. At the time, there were minimal profits to be diluted, and hence the impact on valuation measures such as the price-earnings ratio was meaningless. The PE was tending to infinity and could only be brought below 100 by looking forward more than three years. For the record, most Wall Street analysts rated AOL as a buy at the time of the Netscape deal and the acquisition was seen as reinforcing this case. For the shareholders of Netscape, the exit price represented an end to the company and an exit which if the AOL shares were monetised would have represented a huge financial gain for a company that in its lifetime had produced an accumulated loss, despite its rapid revenue growth. Some may argue that Netscape was acquired just as it was moving to a break-even point, but it is difficult to sustain the idea that it was poised for further explosive growth, given that it was already losing the browser war to Microsoft at the time.
10.8 – The Netscape IPO: big bang, limp ending
Source: Montage – sources in art itself.
The early success of Netscape rested largely on an often misused concept in business strategy: the first-mover advantage. Much as early PC users, Internet users were initially limited by the need to have sufficient technical knowledge to give instructions to the system. Just as the PC industry enjoyed a huge broadening of appeal when the concept of a GUI finally made its way from Engelbart to Xerox to Apple and Microsoft, so access to the Internet broadened rapidly when a GUI became available. The Netscape browser was not so much a scientific breakthrough as the outcome of efforts to tailor a tool that was fast and easy to use. The product had technical flaws but was still better than the other available browsers, most of which had not been designed as commercial products. It arrived just at a time when other obstacles to the growth of the Internet were being removed. The history of the computing industry demonstrated clearly that, in order to maintain a leading position, it was necessary for Netscape to establish its product as the industry standard and to make it freely available to all classes of user, including, most importantly, IBM-compatible machines (which by then could have been renamed the Microsoft class).
Netscape proved not to have learned any lessons from history. Rather than build on its incredible debut by creating an industry standard before its major competitor had time to react, it openly set itself in competition with Microsoft. Rather than seeking to enlist the support of those whose applications would reinforce Netscape’s position, it treated its important potential allies in a peremptory manner. Rather than anticipate Microsoft’s reaction, by continually refining the product and building its defences, Netscape appeared to treat Bill Gates’ company with disdain. This remained its position, even after Microsoft had openly declared its intent to focus on creating its own browser in the (now famous) 1995 internal memo from Bill Gates that appeared a year and a half after Netscape began. Microsoft went on to strangle Netscape, taking advantage of a series of tactical and strategic errors by the company. In 1998, Netscape fell into the waiting arms of a long-time suitor, AOL. This was a failure – but a lucrative one. The exit valuation for Netscape was more than $4bn, if you took the shares offered by AOL at their then value.
10.9 – The war zone: browser market share
Source: Engineering Workstation Labs Browser Survey, University of Illinois. www.ews.uiuc.edu/bstats/months
10.10 – Wartime reporting: Netscape vs Microsoft – the browser war
Source: Montage – sources in art itself.
Getting access: America Online
The arrival of an easy-to-use browser paved the way for the growth of Internet service providers (ISPs) as the Web became accessible for more and more people. Until then, the history of service providers had been one of recurrent failure and a battle for survival, not the untrammelled growth which was to follow. Indeed, the service-provision model was arguably the product of repeated failures in other attempts to harness the new medium. The birth of AOL was a result of one of the ventures of a serial technology entrepreneur named Bill von Meister. Von Meister had raised funds for a succession of businesses, including photoelectric aids for security services and, in the mid-1970s, a switch-based cost-reduction system for telecommunications companies. So frequent were his ideas, and so little their success, that he was nicknamed the ‘Von Meister Shyster’. It was not that the concepts themselves were necessarily poor (although some were), but that his operating model seemed to consist of raising capital and then spending it as fast as possible before moving on to the next vision. The telecoms cost-reduction company TDX, for example, was eventually purchased by its major shareholder, Cable and Wireless, and turned into a successful business; but only after Von Meister had been bought out and removed.
Von Meister’s next company was based on a vision of linking homes to central computers to deliver services. This was a vision which had existed for many years and been expounded during the heady days of timeshare computing. The first attempt at creating this business ended (yet again) with Von Meister being bought out by disgruntled investors. Enthusiasm undiminished, he moved on to a new variant: the delivery of music via satellite and cable to the home. Again this was not a new idea, as home delivery of music had been tried through the telephone 70 years before. The company he formed to do this was named Home Music Store. He also hired a programmer with ARPANET experience named Marc Seriff. This venture failed when the record distribution industry reacted to the threat and the major recording companies quickly withdrew their support.
Undeterred, Von Meister moved on to the next hot area, computer games. Again the concept was to deliver games to the home electronically. Again Von Meister set out with unbridled enthusiasm to raise funds, this time from some of the premier venture capital funds. Kleiner Perkins and Hambrecht & Quist both invested in the company known as Control Video Corporation. Offices were established in Vienna, Virginia. In the early days, controls on expenditure were relat
ively tight – but this discipline soon faded. The early period looked promising as deals were signed and an IPO planned. Unfortunately this excitement disappeared when the lucrative market for video games became engulfed by competition, forcing a postponement of the IPO and its eventual abandonment. Von Meister was undeterred, and continued down his normal path, once again culminating in his removal from the company.
A new figure was brought in to CVC to sort out the mess. Jim Kimsey was a friend of one of the principal investors, a West Point graduate and Vietnam veteran. Working with Kimsey at that time were Steve Case, brother of Dan Case (the Hambrecht & Quist representative), and Marc Seriff. They had to figure out how to create a viable business from the debris. What followed was a constant battle to retain solvency. This involved successive deals with Bell South, Commodore and Apple. Driven by commercial necessity, CVC edged towards a niche market in online services. The team had also become battle-hardened by its experiences and recognised the need to diversify its customer base, particularly not to limit itself to one PC manufacturer.
Engines That Move Markets (2nd Ed) Page 52