Showdown on the Web : Microsoft, Netscape Battle for Net Dominance

MOUNTAIN VIEW, Calif. —  The atmosphere is a bit tense these days at the Netscape Communications Corp. campus here, and it’s not hard to see why: The 2-year-old upstart, despite its remarkable success in establishing its software as the standard for the Internet, is now entering the critical phase of a life-and-death struggle with Microsoft Corp.

At stake is nothing less than control over software standards for the Internet--and the powerful influence over a wide range of next-generation computing technologies that such control would bring. Until recently, Netscape enjoyed a comfortable lead, but Microsoft, making an impressive recovery from some early stumbles, is quickly closing the gap.

In the past six months, Microsoft has released three new versions of Internet Explorer, its “browser” software for the World Wide Web, with the latest considered by many analysts to be nearly as good as Netscape’s Navigator. It has boosted its share of the browser market from close to zero to 7%, according to the market research firm Dataquest, and stands to gain even more via an agreement making Internet Explorer the preferred browser on America Online.

Microsoft is giving away its Internet “server” software for Internet host computers--where Netscape had once hoped to make most of its money--for free to anyone who buys its Windows NT software operating system, thus threatening one of Netscape’s most important long-term profit centers. Netscape shares dropped $4 last week to $58.25 on investor fears that earnings will fall short of expectations.

And more generally, the Redmond, Wash.-based giant has vowed to use every arrow in its overstuffed quiver--most importantly, the immense and growing base of computers that use its Windows operating system--to defeat one of the few companies that could seriously damage its sprawling empire.

“Look, they caught us by surprise at a time when we were very busy,” Steve Ballmer, Microsoft senior vice president, says of Netscape. “But we came from behind--far behind--in spreadsheets and word processors, and look where we are today. In Internet time, they are not that far ahead.”

At Netscape, whose second-quarter sales of $55 million were about one-fortieth those of Microsoft, the tone is simultaneously dismissive and defensive. “Everything Microsoft does is to boost Windows or Back Office because that’s where the money is coming from,” says Netscape co-founder Marc Andreessen. “But that cripples their ability to compete.”

Netscape President Jim Barksdale strikes a less combative note: “I don’t know why they think they need to put us out of business to be successful,” he says. “We’re just a small outfit compared to a company with the size and breadth of Microsoft.”

As the two companies battle for market share--and for the nebulous but important psychological edge that’s known in the business as mind-share--they’re running every play in the marketing book.

On the day Netscape was holding an important technical briefing last month, for example, Microsoft manager Michael Hebert was phoning reporters and vowing to expose “the Netscape myth.”

“Netscape is trying to build a really broad set of products with a small group of engineers,” Hebert said conspiratorially. “They really don’t have good quality-assurance procedures in place.”

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When pressed, though, Hebert couldn’t cite any examples of faulty products having slipped through Netscape quality control. “I don’t want to give any specifics because to be honest, I don’t know of any,” he conceded.

Microsoft recently hired a little-known market research firm to “prove” that Netscape’s browser is not as popular as commonly thought. Predictably, the Microsoft-commissioned report put Netscape’s share at 60% rather than the roughly 80% reported by the top market research firms like Dataquest.

Netscape quickly lashed back with its own study, which determined that its browser was not only the Internet leader, but the most popular single piece of computer software of all time. Both companies posted their findings on the Web, where they joined a set of warring white papers that each uses to tout its own products and strategies while denigrating their rivals’.

More concretely, Microsoft scored a coup with the America Online deal, under which Internet Explorer will be the preferred browser for more than 5 million AOL members, in exchange for Microsoft’s giving AOL a preferred placement in Windows 95. No one was more surprised by that agreement than Netscape, which had tried to cut a similar deal with AOL, even offering a board seat and an equity investment.

“When something like this happens, you find out who your real friends are,” Andreessen said afterward.

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Still, Netscape retains some formidable strengths. The company has in effect pioneered a whole new way of operating in the software business, improving its products on almost a weekly basis and posting the new versions on the Internet, rather than working months or even years on major new releases. The notion of a finished piece of software packaged it in a colorful box--Microsoft’s specialty--is slowly becoming passe.

That has helped Netscape to stay ahead of its rival with a superior set of products. And it also boasts a strong relationships with the software companies that are developing new kinds of products and services for the Internet.

“They’ve been in this business for two years, and they’ve learned what these people need,” says Chris LeToq, a market researcher at Dataquest.

Although browsers are important--Netscape gets about 60% of its revenue today from Navigator--much of the money in the future will be made in selling server software, which is used to create Internet Web sites and to build the internal corporate networks known as intranets.

A recent study conducted by Forrester Research of Cambridge, Mass., indicates that 89% of Fortune 500 companies plan to set up an intranet sometime during the next year. Of those who have done so already, two-thirds have purchased Netscape’s server, according to International Data Corp., and some observers think Netscape has a good shot at retaining that share.

“While Microsoft is just getting up to speed on the Internet, Netscape is drilling down with very specific solutions for vertical markets,” says Hamish Forsythe, a vice-president at mFactory, a designer of multimedia development tools.

In the long run, Netscape’s success may depend on whether the Internet really results in a whole new way of computing, one that renders the high-powered desktop computers of today less important as more and more functions migrate to the network.

Companies, including Sun Microsystems, Oracle Corp. and Apple Computer, are developing low-cost “network computers” designed specifically for surfing the Internet--and such machines will essentially use an Internet browser instead of Windows.

But whether network computers will ever catch on is a matter of heated debate. In the meantime, few are willing to predict whether Netscape will be able to hold off its formidable rival. Fewer still envy the task.

Julie Pitta can be reached via e-mail at Pittaj@aol.com