Netscape Bear's Den
by Yi-Hsin Chang ([email protected])
In anticipation that my friend Rick will attempt to pun me to death, I thought of one that sums up my view of this Internet browser and enterprise software company: Netscape is a net from which you need to escape.
Next: The Bull Responds
First, a brief synopsis of Netscape's past. Originally named Mosaic Communications, Netscape went public in August 1995 and became one of the decade's hottest IPOs, especially considering that the company had never made money. The shares peaked at a high of $85 1/2 that December, and it's been rocky ever since. By March it had lost more than half of its value, and despite a few rallies upward, by February 1997 it started trading in the $20 range. This year has been even worse for the stock, which traded as low as $14 7/8 in late January -- an 82% drop from its high a little over two years before.
What caused the fastest-growing software company in history to lose steam and plummet? Well, as Rick suggested in a recent Daily Trouble on the subject, diehard Netscape fans (and Microsoft foes) such as himself blame Bill Gates & Co. for the Netscape's woes (along with everything else that's wrong with the world). While Microsoft has been taking market share in Internet browsers and enterprise software from Netscape, the one most to blame for the company's dismal position is Netscape itself.
Netscape's Navigator browser lost its dominance because Netscape did not prepare itself for competition. It did not use its lead to rapidly innovate and improve its browser to stay way ahead of any competition. That's how Microsoft was able to step in. Judged a superior product by PC Magazine, PC Week, CNet, and TechNet, as well as by the ordinary masses once blindly loyal to Netscape (including this Fool), Microsoft Internet Explorer has won market share as Netscape has lost ground.
Though it's still the most popular browser, Navigator's market share has dwindled to 50.5% in 1997 from 54.6% in 1996, according to International Data Corp. Another study by ZD Market Intelligence found that Netscape's market share dropped to 54% from 63%. Meanwhile, Microsoft's share jumped to 22.8% last year from 16.4%, according to IDC. That's not counting an additional 16.1% of the market through America Online, which chose Explorer as its Web browser over Navigator. Together that's nearly 40% of the market. Imagine, Netscape once commanded more than 80% of the browser market only to let it all slip away.
CEO Jim Barksdale recently was quoted by Red Herring magazine as saying that Netscape was no longer a browser company. "I get no revenue from our browser, so I can't be a browser company," he said, referring to the fact that, like Microsoft, Netscape is again giving away Navigator for free as it did in the beginning. The company is now more focused on its Internet enterprise server business. Problem is, Microsoft is in that business, too, and its Internet Information Server comes as part of Windows NT, the operating system of choice for most companies. According to Netcraft, a U.K. consultancy, Microsoft's share of the Web server market year grew last year to 22% from 9%, while Netscape's declined to 11% from 13%.
Plus, in this realm, Microsoft may be the least of Netscape's worries. Other formidable foes include "Big Blue" IBM (NSYE: IBM), Novell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %>, and Apache. So, even as Netscape cites studies showing that the intranet software market is expected to reach almost $10 billion by the year 2000, the question is, how much of that will the company be able to capture?
While Netscape tries to downplay its browser business (or more aptly, the fact that it is losing the browser war), Barksdale also says that Navigator is "very important" to promoting the Netscape brand as well as generating sales of enterprise servers and revenues from its Netcenter website. But let's face it, when people think of Netscape, they think of the Web browser, not the company's other products.
As for Netcenter being one of the most highly trafficked sites on the Web, I'm certainly not the first to point out that most of the site's visitors are there unintentionally because they haven't reset the home page from the default setting on Navigator. As a result, their eyes are trained on this site (and its ads) for a mere fraction of the time they spend on destination sites such as Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> or Mirabilis (ICQ), which they consciously choose to visit and revisit.
Of course, like so many other Internet plays, Netscape is trying to become more like an Internet portal a la Yahoo!, Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %>, or Infoseek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %>. Its recent partnership with Excite certainly is a catalyst for this desired transformation. But as Yahoo! CEO Tim Koogle told the Fool in a recent StockTalk interview, Netscape is crashing this party a little late. It's now trying to be in the business of content aggregation while still running an enterprise software business and trying to hang on to what's left of its browser business. While Netscape is spreading itself thin trying to cover all these areas, Yahoo!, Infoseek, et al. are focusing solely on developing their websites. Netscape actually missed the perfect opportunity to get a running start on these competitors three or four years ago when it dominated the browser market. Now it's playing catch-up against some very tough players.
The gloomy picture so far hasn't even included a glimpse of the company's income statement. Simply put: RED INK -- lots of it. For 1997, the company reported a net loss of $115.5 million, or $1.23 per share, including $108.9 million of purchased in-process research and development and merger-related charges and $23 million of restructuring costs.
Those already caught in Netscape's web will try to convince you that this is a growth story, that this is a great buying opportunity, that this is the comeback kid. Don't be fooled (lowercase f). Beware of the Net(scape) and plan your escape fast.