The original Internet company is sprouting like the 3-year-old it is, showing annual growth rates of 80 percent, profitability, and a still-commanding majority in the browser market it helped create. Just last week, it pushed its latest product - the Netcaster push-media software - into full release, where it will piggyback on the Communicator browser. And then today, Netscape announced a new, high-powered initiative to retain its browser share.
But, only two years after one of the most spectacularly lucrative IPOs in memory, Netscape's playful toddlerhood is quickly becoming an uncomfortable adolescence. The child star of the Internet last October latched onto a new grown-up identity - as an enterprise software purveyor - and boasted that it could turn its strategy on a dime. Rolling out intranet/Internet server software packages relatively quickly, the company has won some big clients, and the admiration of many on Wall Street.
"We think it noteworthy that in three years, Netscape has gone from almost nothing to shipping products [like SuiteSpot 3.0 and Communicator] that compete with relative parity to established solutions like Microsoft Exchange and Lotus Domino/Notes," wrote Mary Meeker, who gazes upon the Internet crystal ball for Morgan Stanley, in her latest sales/earnings analysis of Netscape. Last month she forecast 62 percent annual growth - just a tad slower than the 80 percent growth between July 1996 and July 1997.
Following the money
However, a look at just where Netscape's money comes from these days calls into question how seriously the company is taken in the enterprise market. Since its inception, Netscape has had three basic revenue streams: server licensing, client licensing, and services, which includes advertising and partnership income as well as systems servicing for corporate clients. Surprisingly, the server business - where Netscape's new enterprise approach is supposed to attract fresh dollars - today brings in around one-third of total revenues, about the same level it had in late 1995.
Netscape Revenue Streams
Source: Netscape Company Reports
In dollar terms, there is no question that server income has skyrocketed - from US$11.7 million in the fourth quarter of 1995 to a healthy $46 million in the second quarter of this year. And server licensing revenues rose sequentially almost every quarter during that time period until a $600,000 drop in the past quarter. The apparent cause of that drop was Netscape's failure to ship its new server product, SuiteSpot 3.0, until late in the quarter.
Was it only a momentary setback? Netscape's sales may still be poised to shoot up again, particularly if the demand for Internet/intranet solutions is truly headed toward the phenomenal $10 billion market that some respected soothsayers forecast for 2000. "I'd be less optimistic if they needed 70 percent of the market," said Jamie Kiggen, an analyst at Cowen & Co., who rated Netscape a "strong buy" in his most recent report. But, he pointed out, "they only need to win one out of every five or six sales situations, get 15 or 20 percent of the market, and they could still be a couple-billion-dollar company."
Not every Netscape watcher evidences such overwhelming conviction, however. Dataquest, the San Jose-based market research firm, forecasts a significantly smaller $3 billion server market in 2001. And the Aberdeen Group, a computer industry research firm in Boston, argued in a recent report that Netscape's competitors - including Microsoft, IBM/Lotus, and Sun - already have a strong hold on the Fortune 1000 companies, leaving little room for the Internet darling to make a killing. Without some major technological shift in the industry, a change in infrastructure supplier dynamics, or some other weighty sea change, "the opportunity for Netscape to become a dominating influence on major corporate Internet infrastructure has been lost," the report concluded.
"The enterprise sector is an incredibly competitive marketplace," said Irving Wladawsky-Berger, general manager of IBM's Internet division, who tips his hat to Netscape for its achievements in defining electronic distribution of software, while questioning its chances for easy sales with the corporate types his company has dominated for decades. "We feel the competition and I'm sure Microsoft feels it and - being a small company - Netscape must surely feel it too," he said.
One place where Netscape could make a difference is in its relationship with independent software vendors - which these days are more often than not writing to either Microsoft standards or Java. With some cool Netscape-specific applications, the company could put itself on stronger competitive footing as a viable development platform. But Bruce Jacobsen, president of Progressive Networks, which makes the popular RealAudio and RealVideo plug-ins, claims that after asking for developer support, Netscape hasn't wooed the ISVs. In fact, the hard-sell presentation of its strategy shift to the enterprise market may have put them off.
"The way they said it, it sounded like they were exiting the Internet business - and they weren't aggressive enough about doing Reaganesque speech correction to assure people they aren't getting out of that space," Jacobsen said. Jacobsen claims his company is still an avid Netscape supporter, despite its decision to sell a 10 percent stake to Microsoft last month.
The browser wars, of course, gave Netscape its first real taste of competition - and showed it can take the heat. Now it's buttressing its forces with an ambitious plan it hopes will place its browser on as many as 100 million desktops, according to Mike Homer, Netscape's executive vice president of sales and marketing. Today, the company announced 100 industry partners will package the Navigator browser - now unbundled from the Communicator suite - with their products. The streamlined Navigator 4.0 will include Netcaster, as well as basic email and calendar software.
"We are going to rain browsers on people and let them make the choice," said Homer. "We are extremely confident that if we give users a choice they will keep choosing our software."
Even today Netscape has 70 percent of the market - an achievement as important as the consumer brand it created along the way. "We have the privilege of a hearing with just about every CIO in the country" to sell corporate products because of the consumer name the company has built, said Bob Lisbonne, Netscape's vice president of product marketing.
Still, Microsoft has slowly but steadily bitten into Netscape's browser share - and could really chomp away at it with its plan to incorporate the Internet Explorer browser into the platform with the next Windows release. Netscape's revenues from client licensing have waned since the madcap days of late last year, when its browsers brought in more than $58 million per quarter. The percentage of overall revenue derived from the browser is shrinking too. From the fourth quarter of 1995 through the fourth quarter of 1996, client licenses accounted for more than 50 percent of Netscape's revenues. Now the percentages have fallen to below 40 percent, with actual dollar sales of $52 million last quarter.
Profits for the picking
When cast as a sign of revenue diversification, that sounds like a positive change. But a quick look at the figures shows that in reslicing its revenue pie, Netscape has shifted a significant portion of its business not to enterprise server software, but to the easy money of services. Media partnerships and advertising on Netscape's homepage have been called the "low-hanging fruit" that the company plucks for big bucks.
Currently the company claims about 130 million daily pageviews on its site, the most heavily trafficked real estate on the Net. As much as 19 percent of the company's total revenues last quarter came from advertising and partnerships based on that traffic. Service revenues amounted to $5.8 million, or 13 percent of overall revenues in the fourth quarter of 1995, but have shot up to $36.5 million, or 27 percent of the total in the second quarter of 1997.
The easy media money prompted Greg Vogel, analyst at Montgomery Securities, to ask the $36 million question: "Is this a Yahoo or is this a software company?" The answer, responds Netscape, is both. A key element in creating Netcaster was attaching its channel menu to the Netscape homepage to keep driving traffic to the site.
The site's popularity - which makes for good branding and good moneymaking - is primarily due to the many Navigator and Communicator users who have never changed the default setting on their browsers. If Netscape's marketshare continues its slow decline, and users are offered other default homepages, the company will have a tough time matching the current quarterly growth rates of its now substantial ad revenues.
Yahoo, which agreed to pay a minimum of $10 million for the rights to the Netscape Guide button on the browser, recently announced it had cut its fee to a $4.7 million minimum, suggesting that it was getting less-than-expected traffic from the Netscape site. Netscape's Lisbonne denied this argument, saying traffic is growing.
Should traffic not reach expected levels (something the Aberdeen Group has forecast), Netscape will be forced to hustle, and pay for the marketing it has managed to get free up until now. Even with help from its well-trafficked site, the company has been laying out more dollars to feed its message to the corporate market.
Estimated 1996
Advertising Expenditures
- -IBM__$247.9__milMicrosoft.$157.5__milNetscape$8__mil Branding requires major ad spending. Netscape has some catching up to do.
Sources: Adscope, Competitive Media Reporting, Jupiter Communications
"Sales and marketing costs have grown a lot," Lisbonne said, as the company has jumped to serve the enterprise. He declined to offer a dollar amount for those increases, but said a substantial number of recent hires have been concentrated in that sector. Netscape's sales and marketing division now employs about 800 people, although the company won't say how many of those positions are new.
It did, however, recently announce a beefing up of its professional services division, from 150 consultants to some 600 by the end of 1998. Following the lead of Oracle and other providers of complex systems that make a good bit of cash helping customers figure out how to use the stuff it sells them, Netscape predicts revenues from professional services to make up 15 to 20 percent of the revenue pie by the end of next year. But those revenues presume success in enterprise sales.
The things that made Netscape successful as a Web start-up were its relatively simple, innovative technology; electronic distribution; and a brilliant sense of marketing. But now that it faces entrenched competitors with huge resources and developed infrastructures, those elements may not be as valuable.
"Today, what they are selling is mission-critical technology that companies depend on for the core of their business," said Jeff Papows, CEO of IBM's Lotus division, now one of Netscape's chief competitors. "Their entry into the market hasn't slowed us down any. They may not be making the kind of inroads they'd like to."
Special Report Coverage:
Part 1: Netscape Sheds Its Baby Skin
Part 2: Building the Networked Enterprise
Part 3: Not-So-Open Standards
Part 4: Playing Politics
Part 5: Netscape Work Culture
