Internet Cuts Even Microsoft Down to Size

In the pitched battle that’s now being waged over Internet software standards, fledgling Netscape Communications is more than holding its own against giant Microsoft Corp.--at least so far.

The announcement Thursday by Visa International and MasterCard International that they had reached an agreement on security standards for monetary transactions over the Internet might look like a win for everyone, but it’s really a win for Netscape; Microsoft had allied itself with Visa and aimed to impose its own standard, but was finally forced by the banks to cut a deal with Netscape and its ally, MasterCard.

But another development Thursday showed just how volatile the Internet software struggle remains: Sources at Netscape and America Online, while denying a report that the two companies are in merger talks, confirmed that they are discussing an alliance under which AOL would agree to license Netscape’s popular Navigator software. AOL Chief Executive Steve Case might even take a seat on the Netscape board.

Such an alliance seems odd in certain respects: Netscape wants everyone to use Navigator and thus would not want to be perceived as a rival by AOL’s many competitors. But AOL, with more than 4 million subscribers, is now the dominant consumer online service and thus a potentially potent partner for Netscape in their mutual battle against Microsoft.

The intense struggle between Microsoft and Netscape will not only determine the fate of both companies as the Internet plays a bigger role in American lives, it also has ramifications for the entire computer industry. Microsoft was late in seeing the importance of the Internet and is now making a concerted effort to catch up, but it’s not clear that its dominance in desktop computer software will translate to the new medium.

The battle over security standards is a good illustration of the limits of Microsoft’s power.

Visa began working with Microsoft in November 1994 to create technology that would enable secure transactions over computer networks. But many merchant banks who sit on the boards of both Visa and MasterCard viewed the relationship as a threat.

“These guys were very paranoid that Microsoft was going to barge into their business,” said Gary Arlen, president of Arlen Communications, a Bethesda, Md., market research firm.

The fear among bankers was that Microsoft wanted to collect a fee on every transaction made using their software, something that Microsoft Senior Vice President Craig Mundie said was never its intention. “That was overblown,” he said. “We never expected any money from transactions to flow our way.”

MasterCard opted to work with Netscape. Last summer, the banks insisted that both sides resolve their differences and, more important, asserted control.

“The banks were very upset and annoyed at all the attention this dispute was getting,” said Magdalena Yesil, a vice president of CyberCash, a company that makes software for electronic transactions and works closely with many of the banks who sit on the Visa and MasterCard boards. “You had Netscape and Microsoft acting as adversaries, but what they forgot is that the real control was always with MasterCard and Visa.”

The dispute threatened to kill the market for electronic commerce before it had the chance to develop, Yesil said.

“The kind of posturing that was going on was very destructive to the development of commerce on the Internet,” she said. “With a standard, the floodgates for electronic commerce should now open.”

“It’s a major accomplishment just to get these people in the same room,” said Richard Lonergan, a Visa vice president and representative to the group that included Microsoft, Netscape and IBM. “It’s been an intense three months, but these parties were able to check their egos at the door and come up with what we think is very sound technology for conducting transactions on the Net.”

Microsoft said it will incur an additional cost to modify its technology, already being tested by selected customers, so that it meets the standard.