AOL, Netscape to Create Web Commerce Giant
America Online Inc. on Tuesday formally announced its plans to acquire Netscape Communications Corp. and a three-year alliance with Sun Microsystems Inc., setting the stage for the creation of an unequaled powerhouse in Internet commerce.
AOL said it will pay $4.2 billion in stock for Netscape, whose chief executive, James Barksdale, will leave his post but join AOL’s board of directors. Marc Andreessen, co-founder of Netscape and a principal inventor of its Web browser software, will take an as-yet-undefined role at AOL.
In outlining the terms of the deal, the world’s largest provider of online services said that Sun and AOL will jointly promote business software for server computers that run Web sites and manage electronic transactions. AOL will also develop consumer devices--such as phones, car computers and the screens behind airline seats--that use Sun’s Java and Jini software, programs for writing Internet applications and connecting devices to the Web.
“The ability to go to a company and get an end-to-end solution, not just software but hardware and the brands to drive an audience to the service, is what this is all about,” AOL Chief Executive Steve Case said in an interview.
This parallels Microsoft Corp.’s Internet strategy. But AOL downplayed the competition.
Case pledged to renew its agreement with Microsoft that makes the software giant’s Internet Explorer the default browser for new AOL users. In return, AOL receives prominent placement on the Windows 98 desktop screen.
“Nothing has really changed,” he said. “We recognize Microsoft is our major competitor.”
But analysts foresee increasingly intense competition between AOL and Microsoft as electronic commerce expands.
“It’s a very positive business combination for AOL” that enhances its competitive position, said David Readerman, an analyst with NationsBanc Montgomery Securities in San Francisco.
Part of the AOL-Sun strategy, said Sun Chief Operating Officer Ed Zander, will be to bring the Web to consumer electronics.
“The Web will be everywhere, in every device that has a microprocessor in it,” Zander said, predicting that Web-enabled consumer appliances will outsell PCs within three years.
The inclusion of Sun in the three-way deal is reminiscent of AOL’s 1997 purchase of rival online service CompuServe. AOL combined its network infrastructure with CompuServe’s and traded them to WorldCom in a complex cash-and-service agreement.
With AOL sharing Netscape’s server technology with Sun, AOL can focus on the consumer aspects of the deal with fewer distractions, said Gary Arlen, president of Arlen Communications, a new-media consulting firm in Bethesda, Md. Sun should also help AOL incorporate Java tools into its forthcoming AOL-TV, a possible competitor to Microsoft’s WebTV, he said.
But details of AOL’s “end-to-end” vision have yet to be articulated, provoking some skepticism that the team will be able to overcome aggressive competition from Microsoft and IBM.
“It’s long on concept and promise and short on deliverables,” said Readerman. The short-term competitive advantages seem more evident in AOL’s desire to extend its power as the biggest dog on the Web in terms of traffic and commerce. Netscape’s Netcenter, the fourth-most-visited Web site, according to the Internet rating firm Media Metrix, adds a large group of business users to AOL’s audience.
AOL plans to exploit economies of scale and cross-pollinate its major Web sites without destroying their distinct identities. “VH-1 and MTV can share the same production studios and produce very different entertainment. Netcenter and AOL.com can do the same,” said Mike Homer, executive vice president of Netscape and manager of Netcenter.
Jeff Mallett, chief operating officer of Yahoo Inc., widely considered the top Internet company until Tuesday, downplayed the Netscape-AOL combination.
“It doesn’t fundamentally shift the players that are best positioned to be the big winners over the next two to three years,” Mallett said, citing Microsoft, AOL and his own company as the strongest forces on the Web. “Darwin will reign supreme.”
Netscape will maintain its headquarters in Mountain View, Calif. Case said that any layoffs at Netscape are yet to be determined.
Also on Tuesday, Netscape reported net income of $2.7 million, including interest income, on $162 million in revenue for the third quarter ended Oct. 31, representing an 8% revenue increase over both the preceding quarter and the third quarter of 1997. The company has moved to replace income from its browser, which it began to distribute free early this year, with sales of business network software.
Shares in Dulles, Va.-based AOL rose $2.13 to $91.38 Tuesday on the New York Stock Exchange, a 52-week high, whiles shares of Palo Alto-based Sun gained $1.63 to close at $72.94 on Nasdaq, an all-time high. Netscape shares fell $2.06 to $39.88 on Nasdaq.
Times staff writer Karen Kaplan in Los Angeles contributed to this report.
