A thunderbolt in Silicon Valley - Business - News - The Independent

A thunderbolt in Silicon Valley

After navigating a path to Internet stardom, Netscape finds itself threatened by a familiar rival. David Bowen reports

Wired-up clients of the Royal Bank of Scotland were delighted to learn 10 days ago that they can now run their accounts through the Internet. By dialling into the World Wide Web on their computers, they are now able to move money around, check a balance or pay standing orders.

RBS is the first British bank to offer an Internet banking service and the announcement was widely noted. Less noted were the ramifications of the deal for one of the most glamorous stocks ever. To use the system, RBS says, customers have to use computers running Windows 95 and an Internet Explorer "browser" - the software that allows you to use the World Wide Web. Both are Microsoft products. Surfers with Netscape Navigator, by far the most popular browser, are excluded: they need to "download" Microsoft's Explorer (for free) and use that instead.

If this is a minor inconvenience for the customers, it is more than that for Netscape, the phenomenon that symbolises the great Internet share rush. It is also a blow for Netscape's chairman, Jim Clark, who has seen the value of his holding fall by $630m in the past year (enough to buy The Body Shop). He could probably scrape along on the $585m his shares are still worth - but how long will that last? Deutsche Morgan Grenfell and Merrill Lynch have both downgraded the stock and some analysts are daring to ask the Big Question: Could Netscape, which was born on 4 April 1994, already be past middle age?

When Netscape's prospectus was published in July 1995, shares were priced at $12. This was doubled for the float the next month and by December the stock was worth $85. That was when market capitalisation hit $6.6bn - more than British Steel's or British Aerospace's - even though its turnover for the year, $85.4m, meant the American firm was smaller than the 1,000 biggest UK companies.

Since then Netscape has grown at a hectic pace. Last week it announced turnover for the fourth quarter of 1996 of $115m - 177 per cent up on the year before. Sales for the whole year were $346m and the company managed a modest profit of $20.9m.

Anywhere but Silicon Valley this would be a mark of wild success. But there is little elation in Mountain View, California, because the company's 1,500 employees know they are on the defensive. A year ago they had the Internet world by the short and curlies - the vast majority of browsers were Navigators and Netscape was moving rapidly into the new and exciting intranet market (internal computer networks that use Internet technology). The company was attracting the best talent in Silicon Valley and was introducing upgraded software every few weeks. It epitomised the fast forward world of the Internet where a "Web year" was about three weeks. Its technological genius, 24-year-old Marc Andreessen, made it onto the front page of all the business glossies.

Then Microsoft started to move. Bill Gates, previously a sceptic, decided the Internet was the technology of the future. He saw how successful Netscape was and noted that his own attempt at getting into the online world with the (non-Internet) Microsoft Network had been disastrous. He poured resources into Internet software and gradually closed the technological gap. "I used to always hear Netscape was better," says Chris Champion of the consultancy Yankee Group. "Now, sometimes you hear Netscape is better, sometimes Explorer."

Gates was not afraid to use his clout. Microsoft made deals with a string of telecom and Internet service companies in the United States and Europe. This ensured consumers were offered Explorer as their "default browser" and meant that when these companies were installing intranets, they would include Microsoft technology.

The RBS system illustrates another kind of deal. RBS says it chose to go with Microsoft on technical grounds but the relationship is cosy: bank customers get a discount when they buy some Microsoft software.

Perhaps most powerfully, Gates' giant has been incorporating Explorer in new versions of Windows. It will be a central feature of this year's release, Windows 97.

Not surprisingly, Netscape's hold on the market has been weakened by the onslaught. Last week a "browser census" of companies, by Zona Research, showed that 70 per cent use Netscape Navigator as their main browser, against 28 per cent who use Microsoft's Internet Explorer.

This sounds healthy enough for Netscape, until you consider that in August its share was 83 per cent and Microsoft's was only 8 per cent. At that rate of change, it will be a matter of months before Explorer has overhauled Navigator. What happens then? "It's possible Netscape could be steamrollered," one New York analyst says. Mr Champion is more optimistic, but is hardly bullish. "I would think Netscape would hold on to a 30 per cent share," he says.

No analyst has yet dared to put a "sell" rating on Netscape - the effect on the hyper-valued Internet sector would be disastrous. Some remain positive about the company, believing that the market is growing so fast that it must be able to increase profits, at least in the all-important short term.

But the information technology industry is increasingly negative. "I can't see why anyone would specify Netscape now," one consultant says. Keith Mallinson of Yankee Group makes the killer comparison, predicting: "It could end up being the Apple of the Internet market." Apple once dominated the personal computer market but has seen its share squeezed relentlessly by Microsoft-driven machines. The browser market is even more dangerous, Mr Mallinson says, because there may be room for only one player. "Netscape is number one now, but if it becomes number two it could lose it completely," he suggests.

Eric Broussard, Netscape's marketing manager for Europe, remains positive, but admits that Microsoft is a huge threat. "We think about it every day," he says. The company's strategy is to build its own alliances (with IBM for example) and to move into areas where it believes Microsoft will not follow - in particular, supplying Internet software to companies that use Macintosh or other non-Windows systems.

Internet Explorer is being incorporated into new versions of Windows so it would not, Netscape hopes, make sense for Gates to bother chasing this market. But if the folk from Mountain View are too successful, won't Microsoft once again turn the steamroller towards them? "That is a valid question," Mr Broussard admits.

The problem is that Microsoft could attempt to convert the Internet from an "open" system, which works on all computers, to a semi-closed one that works best with Windows and Internet Explorer. The RBS system needs software called ActiveX, but ActiveX is a proprietary Microsoft tool, which is why Netscape cannot include it in its own browser and why RBS customers cannot use Navigator.

Netscape desperately wants Microsoft to publish ActiveX as an open standard. "If it doesn't publish, there is a danger the Internet will become proprietary," Mr Broussard says.

It would, however, be premature to write Netscape off just yet. Apple has hung on partly because of its technology but also because it has one huge advantage over Microsoft: it is not Microsoft. Hatred of Gates is a widespread condition among the techo-community: it could be enough to make sure Netscape is allowed to survive and possibly even flourish.

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