NETSPEED AT NETSCAPE
How the hottest software startup in history plans to outrun Microsoft and remain master of the Web
Back in December, 1994, Netscape was just another Silicon Valley startup about to head down the road to oblivion. The World Wide Web wasn't on most folks' radar screens, and Netscape was virtually unknown beyond Silicon Valley. With no money coming in and its $12 million in seed funding almost gone, co-founders James H. Clark and Marc L. Andreessen blinked. They laid off a dozen employees, froze hiring--and hoped new Chief Executive James L. Barksdale had a plan.
He did. Barksdale ended the hiring freeze and issued his decree: Go for it. Recalls Vice-President Richard M. Schell: "Jim walked in the door and said: `This rocket is going to take off, or it's going to crash into the ground. So, ladies and gentlemen, strap it on!"'
The rest is legend. Barksdale launched Netscape's rocket into the stratosphere--and the record books. As the Web took off in 1995, so did Netscape Communications Corp. and its Navigator program for browsing the Web. Sales for the first full year of operation, ended on Dec. 31, hit $81 million. That's a faster rise than any software company--and among the fastest in history (chart, page 80). Netscape's August, 1995, initial stock offering set off an investor frenzy, turning a company with just $20 million in sales and no profit into a Wall Street phenom--with a $2 billion market cap. In 1996, the company quadrupled, to nearly 2,000 employees, and on Jan. 28 announced that it had earned $21 million on sales of $346 million, a 305% gain. For 1997, analysts expect sales to jump 45%, to more than $500 million.
All this has made Netscape the model for how high-tech companies--and other businesses--will run in the hyperfast Internet age. Speed is what Netscape is all about. The pace is relentless: Hack out software code all day and all night. Zap it onto the Web the instant it works. Something missing? Grab new technologies--and the students tinkering with them--right out of university labs. Or sign up a partner--today. Can't hire fast enough? Buy a whole company. Above all, be ready to change tactics before lunch. "We'll sacrifice almost anything for speed," says Chief Financial Officer Peter L.S. Currie.
The result: A year's worth of change happens in a couple of months--a pace known as "Internet Time." Netscape has distributed 50 million copies of Navigator in two years, making it the No.2 program in the world, right behind Windows. Netscape has also shipped more than 1 million server programs for setting up Web sites and internal corporate "intranets." Netscape's rise has been so stunning--and so threatening--to other software and computer companies that, as Eid E. Eid, vice-president for technology at software maker Corel Corp., says: "They've forced the whole industry to move very fast.
And that's the problem. The whole industry is operating on Internet Time--and focusing on the Web--putting Netscape in danger of being overwhelmed by the revolution it helped create. To Netscape's peril, nobody has adapted to the pace better than Microsoft Corp. Chairman William H. Gates III. Microsoft brought out its first Web browser, Internet Explorer, in August, 1995, and it's now on its third update, with a fourth on the way. The company has an estimated 25% of the market and could gain momentum rapidly once its browser is merged with Windows in mid-1997.
KEY ALLIES. Gates, meanwhile, has already orchestrated a sweeping overhaul of all Microsoft products to make sure they will work seamlessly with the Web. Huge chunks of the company's $2.1 billion research and development budget are being poured into Net products. Microsoft in 1996 spent $750 million to acquire or invest in 20 Internet-related companies and has won over some key allies from the Netscape camp, including AT&T, America Online, and PointCast. "The Internet is the most important thing going on for us. It's driving everything at Microsoft," Gates declared last year.
As Microsoft accelerated from a standing start on the Web, Netscape's prospects dimmed. The startup's stock plummeted from an all-time high of 87 in late 1995 to 57 by the end of 1996 (adjusted for a split). Microsoft continues to do everything it can to translate its dominance in personal computers to a commanding role in Internet software--not a farfetched goal, considering the company can simply include its Web software on the millions of machines that go out each year with Windows. "Whose hand would I rather play?" asks Microsoft Senior Vice-President Brad A. Silverberg, who heads the Internet client and applications group. "I'd rather play ours. I wouldn't want to trade places."
And Microsoft isn't the only threat. As Netscape rushes into new markets, such as groupware and other programs that big corporations use to conduct business on the Internet, the bar for doing business will rise. Groupware already is dominated by Lotus Development Corp., a subsidiary of IBM. Used to help workers collaborate across a network, groupware is so critical that corporations may take months to select it and often years to install it. More important, big corporations are looking for suppliers with staying power that can guarantee lavish support--a tough sell for a two-year-old startup. "Taking Lotus Notes head-on has been a difficult task for Microsoft," says Merrill Lynch analyst Bruce D. Smith. "I don't know why Netscape thinks it can do any better."
And the odds are getting worse: After a year-long crash effort, the IBM subsidiary is now selling an array of Web-based products. Lotus executives say installations of Notes jumped 115% in 1996, and this year they're planning a big marketing push for the new Web products. Lotus will outspend Netscape "by millions of dollars in advertising," vows Lotus President Jeffrey Papows. "The bloom is off the rose for Netscape."
Of course, Netscape has little choice but to move upstream from the browser--a product that is fast becoming a commodity. The browser wars will continue, but the real contest is shifting to more complex software, such as programs to run servers and intranets.
STRANGE GROUND. Problem is, the new battle is being fought on enemy turf. In the first wave of Internet sales, companies bought Navigator browsers to get their workers up on the Net and installed servers to run corporate Web sites--to distribute bulletins or product information. The next phase involves using Web technology for core operations. That's the home court of heavy hitters such as IBM and Oracle Corp. and the avowed target of Microsoft.
The big guys have time on their side: Corporations may take years to rejigger bread-and-butter applications and are likely to wait to see what IBM and the others come up with rather than rushing to the latest Netscape product. Barksdale has no illusions. "Now, in the second round," he says, "we get into more hand-to-hand fighting."
For this, Barksdale has his own lineup of products, starting this spring, including Web "infrastructure" programs. First up is Communicator, a $49 program that melds the Navigator browser with E-mail, scheduling, groupware, and Web document-creation programs. There's also an updated version of SuiteSpot, a $4,000 server package.
Netscape's boldest plan revolves around a program code-named Constellation, which is aimed at one-upping the next release of Windows. Like that program, Constellation is intended to become the new user interface: The browser is used to manage everything you do on your computer, finding and retrieving information and programs, whether they are stored on your PC or another computer on the network. If Constellation becomes the favored interface, Netscape hopes it can weaken the stronghold that Windows now has. Once customers get used to the Constellation interface, Netscape figures they'll buy applications written to work with it, not just those for Windows. Gates scoffs at the threat: "Are people willing to pay to get a second desktop" on top of Windows?
Netscape is betting on it. In fact, the company believes Constellation can help prevent Microsoft from setting the agenda on the Net. "This is about defining a new model of computing," says Jamie Lewis, president of Burton Group, a Midvale (Utah) market-research firm. "Netscape is trying to change the rules."
To do that, Netscape must execute its strategy flawlessly. If any of these new products is late, buggy, or doesn't live up to Netscape's promise, or if the market doesn't buy them quickly, the company could falter. Indeed, questions about Netscape's ability to carry out its ambitious agenda are giving investors the jitters. In early January, Netscape's stock took a 19% tumble in one day, to 48, after Deutsche Morgan Grenfell analyst J. William Gurley reduced his rating of Netscape shares to "accumulate" from "buy." His concern: Netscape's difficult transition into corporate software. The stock has drifted downward since, to 37, near its 52-week low.
It's not the first time Netscape stock has been sent on a hair-raising ride, and Barksdale knows it won't be the last. "When we issued Netscape stock, we gave out neck braces and seat belts," he jokes. Barksdale, 54, is a veteran of tumult. He started out as an IBM salesman, then helped Federal Express Corp. and McCaw Cellular Communications Inc. catapult to success. In both cases, the companies spied a new business first, put aside immediate profits, and made a grab for dominant market share.
That's Barksdale's game plan for Netscape, too. A smooth-talking Mississippi native, he's the perfect foil to the young uber-nerd Andreessen. Despite his folksy talk, the older man is also supercompetitive, a trait that his wife of 31 years, Sally, attributes to his growing up with five brothers. Barksdale spends his time inside and outside the company skillfully spinning pictures of the company's grand destiny.
He's not above using sweeping allegory to make his case. Microsoft, he once told new employees, is trying to lead customers "back into the cave," while "our job is to keep them in the sunlight." Barksdale also fired up the 120 recruits by explaining that every company needs a great rival to inspire it: "We went out and found the best competitor in the world, and his name is Bill Gates. We got a killer. Enjoy it!"
Above all, Barksdale is the guy who makes the trains run on time. Says John C. "Bud" Colligan, chairman of multimedia software company Macromedia Inc.: "I think the wheels would have come off without Jim Barksdale."
RESTLESS. Not that Barksdale is the only seasoned executive running Netscape. Marketing Vice-President Michael J. Homer battled Microsoft at Apple Computer Inc.; CFO Currie is a former dealmaker at McCaw and Morgan Stanley & Co.; and Eric Hahn, senior vice-president in charge of Netscape's Server Division, launched two startups--cc:Mail, which he sold to Lotus, and Collabra, which he sold to Netscape.
They oversee an ever expanding workforce of hyperkinetic Gen-Xers. The favorite company sport is Rollerblade hockey. To keep the restless natives happy at the company's two-year anniversary party last year, management supplied mechanical bronco rides and inflatable slides. "We have a hyperactive culture, so people can't sit still for very long," says Human Resources Vice-President Kandis Malefyt.
The demands of Netscape's growth don't allow much downtime, anyway. Webmaster Robert Andrews, who runs the Netscape Web site's backroom computers, recalls fixing a disk-drive problem via cell phone from a water-skiing boat.
Netscape has been this way since the beginning. Shortly after meeting and forming the company in April, 1994, Clark and Andreessen flew to the National Center for Supercomputing Applications at the University of Illinois and, within days, hired nearly the entire team that wrote Mosaic, the first widely used Web browser. There was reason to rush. Key Mosaic team members were about to graduate and were being courted by other companies, including Spry and Spyglass Inc., which had the license from NCSA to distribute Mosaic.
With Spyglass breathing down its neck, 20-hour days followed, and in a few months the first version of Navigator was completed. To stay ahead, Andreessen insisted that the company release a new version in three months and every three months thereafter. "We compromised on six months," says Schell--still an unheard-of pace in an industry used to two-year product cycles. Says Scott D. Cook, Intuit Inc.'s CEO: "Netscape almost wrote the book on speed in product cycles."
Another jaw-dropper: To get Netscape's software onto as many computers as possible as quickly as possible, Andreessen proposed giving the browser away free over the Web, the way Mosaic had been distributed. "I had fierce fights with Andreessen," recalls Sales Vice-President Conway Rulon-Miller, who heard about the plan at his first meeting after joining Netscape in October, 1994. "I said: `Excuse me, I might have trouble doing a revenue plan for you."'
Andreessen prevailed. On Oct. 14, 1994, just six months after Netscape started, a free test version of Navigator was posted on its Web site. Programmer Aleksandar K. Totic recalls watching those first downloads logged on a PC screen, accompanied by playfully programmed sounds such as frog croaks, glass breaking, and cannon shots. By 4 a.m., there was a cacophony. By spring, 1995, 6 million copies of Navigator had been downloaded. Today, the company still gives away trial copies of Navigator, but it gets 51% of its revenue from browser sales.
INSTANT FEEDBACK. Watching Navigator take off on the Web, Barksdale and his team realized that the new technology would fundamentally change how software makers do business. Instead of going through retail stores--where Microsoft and other big suppliers dominated the shelves--Netscape could use the Web to reach customers directly. There was no need to press disks, create packaging, or even advertise. Just post the product on the Net and let customers try it. And rather than spending a year or more to create an all-new program, Netscape figured it could post new features on the Net and get instant feedback from thousands of testers. Says Clark: "There's no way we could have done this any
In fact, there's no way the company could have come this far this fast without using the Web itself. The Web is not only a huge business opportunity, but it has given Netscape the means to develop, market, and sell its products at Net speed. Take Netscape's Web site, a great marketing vehicle--and a moneymaker. Unless they reprogram their machines, every time PC owners log on with Navigator, the first stop is the Netscape home page. That makes it one of the busiest on the Web--and a great place for Netscape to advertise products. With all that traffic, about 4 million visitors a day, the Netscape home page is the most sought-after Web advertising space, generating an estimated $18 million in fees for the first nine months of 1996.
Ad revenue may be the least of it, however. Some 500 sales leads stream in every day to the site--most of them from customers ready and willing to buy. From there, they are routed instantly via the Web to Netscape salespeople and outside resellers. "The hottest and best leads come off our Web site," says Netsales Vice-President William Kellinger. The site also functions as a critical link to software developers.
Internally, Netscape uses the Web to track projects and share fresh information on the competition. Netscape employees use trial versions of forthcoming programs to find the big bugs before customers do. Says Webmaster Andrews: "We eat our own dog food."
But even Netscape can't do everything in cyberspace. All around its headquarters in Mountain View, Calif., tractors are clearing land to make way for new buildings--about one a month or 1,000 square feet a day. Still, Netscape may come up hundreds of cubicles short for the influx of employees expected over the next nine months. The halls already overflow with young programmers who do what they can to make their new digs homey. One hallway alcove features a "shrine" to Bill Gates.
Usually, everybody's zooming too fast to notice the decor. There are impromptu meetings aimed at getting quick decisions. They call it "surround-sound" management: An issue comes up--say, what to charge for a new program--and somebody instantly calls a meeting of key people. They swarm on the problem for 20 minutes, come to a conclusion, and separate. "One Netscape person told me they make decisions about acquiring companies in five-minute hallway conversations," says Ashok Santhanam, president of Web consultant Inventa Corp.
That's an exaggeration, but not by much. With Microsoft aiming so squarely at its turf, Netscape has had to scramble to fill its technology gaps. Just a month after going public, Netscape bought Collabra for $185 million in stock--going from a handshake on Friday to a signed contract the next Wednesday. Now, it's the core of Netscape's groupware push. Last year, Netscape spent $160 million (in stock) to snap up three more software companies. Netcode contributed programming tools. InSoft's electronic conferencing software is part of Communicator. And Paper Software Inc., which specializes in user interface design, is key to the development of Constellation.
Netscape has also scrambled to line up partners to help sell its software. Its network (table, page 82) includes some of the computer industry's most influential players: IBM, Sun Microsystems, Oracle, Hewlett-Packard. To beef up its efforts in electronic commerce, it has formed a joint venture with General Electric Information Services called Actra Business Systems. Another joint venture, Navio Communications Inc., is developing software for consumer devices.
GROWING PAINS. It's not quite a unified front, however. Many Netscape partners have widely conflicting interests and are simultaneously working with Microsoft and other rivals. IBM has been a major supporter of Navigator, for instance, but there's palpable friction over the coming competition in groupware.
Keeping alliances untangled and partners happy is an increasingly difficult job for Netscape. Because management is so busy, even the closest partners sometimes feels neglected. "Getting agreements with Netscape is torturous," says Oracle CEO Lawrence J. Ellison. "Perhaps it's just growing pains." Company executives admit that they can't keep up. Sighs Netscape Fellow Tom Paquin: "We're still throwing things overboard because we just have too much to do."
The go-go pace that got Netscape this far could result in costly gaffes. At a meeting of 800 Netscapers in November, Barksdale told of a developer who said Microsoft seemed more interested in helping him make money than Netscape's harried troops. "That cannot be tolerated," he warned.
More and more, Netscape is finding that speed alone isn't the answer. To create industrial-strength products for the intranet market, for example, the company must spend longer in development and testing. When the groupware programs arrive this spring, they will have been in development for nearly a year and a half. The browser itself is getting more complicated--Communicator has a minimum of nine megabytes of code, nearly twice what Navigator now has. Further complicating matters, Netscape needs to blend a hodge-podge of products into a seamless package to compete with such programs as Microsoft Office 97. Communicator, which combines E-mail groupware and browsing, will be the first test. But just two months before its scheduled release, the trial version remains buggy and incomplete. Moreover, some Navigator customers may not want all the new features of Communicator, says Burton Group's Lewis.
Barksdale figures that most business customers will bite--partly because it won't cost them anything if they already have annual Navigator contracts that include free upgrades. And he has high hopes for Constellation, which he claims will let workers fetch files and programs--even Microsoft
applications--off a Netscape server from any computer using Communicator. "You'll have access to your data wherever you go," says
Is all this good enough to keep a step ahead of Microsoft and other rivals? It's already clear that Netscape will never again have the huge lead it enjoyed during its first two years. But analysts say the company is making the right moves, and if it can deliver on its promises, it will continue to top the A-list of Internet software companies for the next year, maybe longer. At a minimum, Netscape has a foot in the door of the corporate market. "Now, whenever somebody calls a dance, we get invited," says Barksdale.
And it's a nice party. The market for software that is used on corporate intranets alone is expected to explode to $10 billion by 2000. That gives Netscape a chance to make it into the software big leagues. In the meantime, that should keep Netscape's speedsters on their Rollerblades.By Robert D. Hof in Mountain View, Calif., with bureau reportsReturn to top