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Netscape's Second Wind


Information Technology: SOFTWARE

NETSCAPE'S SECOND WIND

A major coup has given it a push in the E-commerce market

James L. Barksdale, chief executive of Netscape Communications Corp., just invested $7.3 million of his own cash in his company--the first time the 56-year-old executive has added to the $100 million-plus worth of stock options he received as compensation. Why the sudden affection for Netscape shares? For the first time in months, Barksdale has something to crow about: He pulled off a major coup in May, persuading Citibank to spend more than $20 million on Netscape software for its online financial-services empire.

Not only is this Netscape's largest deal ever, but it comes at a crucial time for the four-year-old Internet pioneer. Since December, Netscape has reported $142 million in losses, laid off 400 people, and watched its stock price sink to the mid-teens. It's now trading around $24 per share, but still 70% off its peak. The Citibank deal--coupled with a surprising break-even second quarter--is a much needed dose of good news for the embattled company. "I feel much better about them now," says Hambrecht & Quist analyst Daniel H. Rimer, who has upped his recommendation on Netscape's stock from "hold" to "buy."PORTAL PLANS. While some analysts are taking Netscape off the critical list, it's too soon to check it out of the hospital altogether. The $534 million company's effort to transform its corporate Web site into an Internet portal for consumers places it in the path of powerhouses Yahoo! Inc. and America Online Inc. Even more crucial to Netscape's future, its corporate software and services business pits it against the likes of computing giants IBM and Microsoft Corp. Indeed, the company will live or die in the so-called enterprise market, which generated $96.1 million of its $127.2 million in revenues last quarter. Says SoundView Financial Group analyst Kris Tuttle: "It's an uphill battle in the enterprise."

Barksdale's battle plan: to keep the momentum going by landing more big software deals. He figures Netscape has an edge because it can offer both the software tools that companies need to build online businesses and the portal site--Netcenter--that can distribute their products and services. "The unique opportunity we have is to put these two things together," says Barksdale. "It's the boom that makes the Net economy take off."

The Netscape sales pitch now starts with a handful of new products stemming from its acquisitions last year of Kiva Software Corp. and Actra Inc. These include E-commerce software and a so-called application server program that can handle high-volume Web sites. E-commerce software is expected to grow from a $235 million U.S. market this year to $3.8 billion in 2002, according to Forrester Research Inc.

But in targeting E-commerce, Netscape is going after a market that some formidable rivals also covet. IBM, for one, has marshaled its considerable resources--including its 20,000 sales reps and a $100 million ad campaign--around Internet commerce. Big Blue is also planning on throwing its support behind Apache, a popular--and free--Web server program. And Microsoft is pushing its Windows NT operating system and BackOffice server software as a platform for E-commerce applications. Retailer Eddie Bauer Inc., for example, uses Microsoft's software to power its online store, even though executives say the software is not necessarily the best. "We have confidence they'll continuously improve and support it," says Judy Neuman, Bauer's vice-president of interactive media. "I know Microsoft will be here in 10 years."

That kind of confidence is critical in the corporate market--and something Netscape, as a relative newcomer, will have to build. Even Microsoft is still working on it. "Being an enterprise provider is tough," says Richard Tong, Microsoft's vice-president for applications marketing. "You can spend $1 billion and not make much progress."

Netscape doesn't have a billion to spend. It has no debt, $237 million in the bank, and deferred revenues of $139 million. But that pales in comparison with Microsoft's $12 billion war chest. Microsoft's riches give it another edge: It can bundle for free basic Internet software with NT and BackOffice, while Netscape charges for similar programs.

Without a huge cash hoard, Netscape is applying a laser-like focus to its business. Citibank is the prototype customer. It chose Netscape as its Net software supplier for a range of E-commerce tasks involving home and corporate banking, such as a system that allows corporate credit card customers to get statements online. One plus: Netscape embraces industry standards. "We believe they're a strong company and they'll turn their business around," says Leon Williams, an executive in Citibank's Advanced Development Group.

Netscape's own Netcenter site serves as a showcase for its software products--plus a chance to turn its 8 million visitors a day into online customers for Citibank and other Netscape partners. In the next six months, Netscape plans on adding a host of services--from office supplies and corporate travel services to trading communities for industries such as health care or auto parts. Almost everything will be run by partners, with Netscape serving as an aggregator that collects a slice of their ad or transaction revenues. "It's going to be a place where you can easily find people to do business with," says Netscape Senior Vice-President Marc Andreessen.DOING TOO MUCH? The power of the business portal isn't lost on early Internet users such as Federal Express Corp., Barksdale's former employer. FedEx has a shipping and order tracking service on Netcenter in addition to its own site. Now, it's considering buying Netscape's E-commerce application server, and directory products--and may expand its service offerings on Netcenter. "Net-scape's vision is right. They're not just planning their future around the browser," says Robert Carter, chief technology officer for parent company FDX Corp.

Wall Street is nodding its approval, too. Analysts say the company has survived its crisis and has put together a sound business plan. They expect Netscape to lose money in the current quarter and then start eking out tiny profits--finishing the fiscal year in January with a net loss of $52 million, according to Zack's Investment Research. Fiscal 1999 looks better. Mary A. McCaffrey of Bankers Trust New York Corp. predicts $721 million in revenues and net income of $23 million. "It's an execution issue now," she says.

Still, some observers fret that Netscape is spreading itself too thin. Forrester Research analyst Ted Schlader says Netscape should sell off its potentially valuable consumer portal and concentrate on a business-to-business site. "They're trying to do too much with one portal and that doesn't help them gain credibility in the enterprise," he says.

Barksdale is determined to make the two businesses fit together. Besides, he figures he doesn't need to vanquish giants such as IBM or Microsoft to succeed in an Internet software and services market that is expected to top $20 billion in the next half decade. "I'll take 10% of that," Barksdale quips. Easy to say. Now he's got to do it.By Steve Hamm in San Francisco, with bureau reportsReturn to top


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