Netscape: Down For The Count?

By JOSHUA QUITTNER

They always said they were doomed, the bright young hackers who made Netscape Communications the fastest-growing software company on the planet. It was their unofficial slogan: "We're doomed!" It was whispered over high fives in the hallway. It was the sign-off at all-hands meetings, the spoken and unspoken message of the day. "We're doomed!"

Such talk was partly the bravado of engineers who recognize that everything in the universe ends in entropy and disarray. It's also the organized religion of any successful start-up: We're working 120 hours a week, and we may be doomed even if we ship our code on time--but at least we're doomed together, so back to work we go.

What loomed largest in the minds of the Netscapers, however, was something very real and implacable: the bone-crushing giant from the north that could jump in any time and snatch away the revolutionary business it had built from nothing. Microsoft was its name.

As the world now knows, that's precisely what happened. Once the toast of Wall Street, Netscape appeared to be toast. Its historic browser--the software that took the cold gray wonkish world of the Internet and made it multimedia, rendering the Net usable by millions--had at its peak accounted for 85% of the market. Now it has, at best, a 55%-to-60% share, and that's slipping fast. Its stock, which once soared above $85 a share (adjusted for a 2-for-1 stock split), lost nearly half its value during a three-month period and hit bottom at $14.87. In January, Netscape laid off about 400 employees, nearly 15% of its work force. What choice did it have?

Since then, the company has made a number of moves to keep itself in the game, including a deal with search-engine firm Excite that will bring in $70 million over the next two years. But it's also been reduced to giving away its browser code for free in a last-ditch effort to enlist every anti-Microsoft hacker on the planet to do battle with Gates.

Some people say that perhaps the government stepped in too late, using the feisty start-up as a graphic illustration of Microsoft's anticompetitive might. Exhibit A: the fastest-growing software company in history. Exhibit B: the same start-up less than four years later, crushed like a June bug on the windshield of a great truck screaming along the highway at night.

Was Netscape always truly doomed? Talk to any successful start-up in Silicon Valley, and you hear the same story, of how one day Redmond comes to visit and makes an offer. "It was like the Mob," recalls Mark Andreessen, the college kid who helped found the company and who, when the boys from Redmond visited Netscape in April 1995, sat there silently transcribing the meeting on his ThinkPad. "It was an offer you can't refuse" is how Andreessen characterized it. His notes, which he turned over to investigators, showed up last week in the Department of Justice's complaint.

Microsoft had been dogging Netscape almost from Day One. In early 1994, according to Jim Clark, the maverick Stanford professor who co-founded the company, Microsoft wanted to license Netscape's code for $1 million. But Clark sent word that he wasn't "even remotely interested."

Several times over the next two years, however, Clark and his successor, Jim Barksdale, were persuaded to reconsider. At one point Microsoft offered $40 million in return for 15% to 20% of the company. But according to Netscape officials, the terms were always hopelessly unacceptable. In an early 1995 negotiation, for example, Netscape asked Microsoft for the advance information its programmers would need to make the Netscape browser run properly with Windows 95. According to Clark, Microsoft refused unless it got a piece of the company and a seat on the board. Netscape finally decided to go to the DOJ through its outside counsel, Gary Reback.

Microsoft remembers it differently. Dan Rosen, a top Gates lieutenant who attended the final round of negotiations, recalls the Netscapers as being tense and openly distrustful. He attributes the breakdown to the "culture" of Silicon Valley. "The antibodies floating around in Mountain View were just too powerful to allow even a sensible business deal to blossom," he says.

Perhaps if Netscape had agreed to license its code, the company would be in better shape today. But probably not. Microsoft ended up doing the deal with an outfit called Spyglass, whose code became the core of Internet Explorer. Spyglass has since left the PC browser business and is selling software for hand held devices and TV set-top boxes. It posted a $9.7 million loss last year. It was doomed.