Does Netscape Set the Technological, Social, and Financial Tone - Essay Example

Netscape IPO At about the time of the initial public offering of Netscape Communications on August 1995, the Internet as a worldwide phenomenon was at the cusp of being born. Ten years later -2005 - would be described as the stage when the Internet was what the PC was in 1990 (Kalgaard n.p.) According to Fortune Magazine, Netscape "more than any other company, set the technological, social, and financial tone of the Internet age" (Lashinsky n.p.). If anything, the whole industry that sprang up in the wake after the IPO was due to the fever-pitch excitement generated by the company's main product - Netscape Navigator, the web browser that allowed people from any corner of the globe to bring the Internet on one's fingertips. It was also a seminal moment when people would start investing in companies that were not only virtually start-ups, but those with no record of profitability to show for. That Netscape would now be in the dustbin of history, having been demolished by Microsoft during the browser war when it buckled under the killer strategy of Bill Gates' bundled Windows operating system with the its browser, Internet Explorer and having bought by AOL in March 1999 - many questions still abound on what went wrong, and what could have been avoided. The company was led by both the talented (Marc Andreessen and the experienced manager (Jim Clark) and had the backing of the well-known venture capitalists in Silicon Valley. No less than Morgan Stanley would be the lead underwriters for its IPO. In the end, the dilemma faced by the board of directors of whether to give in its Wall Street underwriters' proposal of raising the initial stock price form $14 to $28 and increasing the number of shares to 5 million due to favorable response to the investment roadshow or risk a public verdict of opportunism for doing so (Backstrand 7)- was rendered moot and academic. Netscape opened to an overwhelming response from investors who took the stock price to as much as $75 after a delayed opening of $71 per share. On the other hand, the question of whether the investors made a good decision in paying so much for the stock an untested company had to place it in the context of the condition of the industry, Netscape's company strategy and how IPOs in general fare as investments. Condition of the industry: In the mid-nineties, the Internet industry was at the start of its boom period. There were no clear indicators where it would be headed - a condition that had been comparably described when the PC was thought of in the early 1980s when the IPO of Apple Computers mirrored the wildly exuberant public reception of Netscape's IPO (Blodget n.p.). There were various theories of what the Internet would be - some thought that it would be like glamorized surfing of TV shows and those who would be winners in the era would those sites that would offer great design and content (Blodget n.p.). Fast forward to a decade later - the winners would be a search engine called Google, a book seller now an around retailer, Amazon.com and an on-line community of buyers and sellers called ebay.com. Netscape was proclaimed a winner too soon in the game, like Apple was. Though Apple Computers remains as a company today, the big winners of the IPO era of the PC industry were those who entered it later in the phase - as could be seen in Microsoft IPO in 1986 and Dell in 1988 (Blodget n.p.). The Internet community more than ten years ago was miniscule (57 million users according to the International Data Corporation) compared to what it is today, but even by then, it was growing by leaps and bounds. The web browser market in 1994 was dominated by the Mosaic web browser program that was created by Netscape co-founder, the 23-year old Marc Andreessen (Backstrand 3). When Andreesen teamed up with middle-aged Jim Clark, the founder of Silicon Graphics, Netscape successfully set a new industry standard through its Netscape Navigator program and wrestled market leadership from Mosaic. Netscape's share of the market by 2005 was at 75% while Mosaic, which had been renamed Spyglass was greatly reduced from 60% to a mere 5%. However, the PC software industry led by Microsoft, other companies selling services on-line like AOL, server vendors were potential competitors to Netscape. Spyglass also fought back by differentiating its strategy from Netscape. Instead of concentrating on companies in general, Spyglass began selling its web browser code to other software companies who wanted to "incorporate it into their own programs" (Backstrand 3). Spyglass was the reason why Microsoft was able to develop its own web browser, that would be soon be known as Internet Explorer as Microsoft was one of Spyglass' software clients (Backstrand 3). Microsoft, at that time already with more than two decades of experience in the PC software market would become the biggest competition for Netscape. At the time of Netscape's IPO, Microsoft was just about to release its Windows 95 operating system that was bundled with web browser that it had developed from Spyglass software code (Backstrand 3). Other Netscape competitors included America Online and Prodigy with their own web browsers, while Compuserve also developed its own web browser from Spyglass licenced code. While these on-line service providers had considerable subscriber base which combined stood at 8 million, the growth of the World Wide Web community in general powered by Netscape Navigator was so much more overwhelming. Condition of the company Netscape Communications at around its IPO was a young company, only 16 months in operation was headed by people who had both the talent for software, marketing and management. By all indications, before the IPO triggered a frenzy, the people who worked for them were mostly motivated by loyalty and the dream to change the world through this thing called the Internet. Netscape's main software products were used to power the communications and commerce on the growing network in the World Wide Web and private Internet Protocols (IP) networks. Its banner product was the popular web browser program called the Netscape Navigator which made up 65% of the company's revenues by June 1995, up from 49% the previous quarter (Backstrand 1). The rest of the earnings came from Netscape's integrated and server applications (28% in 1995) and consulting services. Netscape was selling from the start, but it was spending so much money on research and development, sales and marketing so that operating expenses just ate away at their sales revenues (Backstrand: Exhibit 1, p.8). However, it was evident that revenue growth was explosive. From less than a million dollars in gross profit in 1994 (April to December), the company clocked a revenue growth of 28-fold to almost fifteen million dollars in only six months from January to June in 1995. On the other hand, expenses from the start was shooting through the roofs with the company spending more than nine million dollars the first year of operations and more than nineteen million dollars in six months the following year in 1995. Key issues facing the company: The key issues facing the company had to do of course with how to finance its explosive growth and how to be in a better position to compete with older and bigger rivals such as Microsoft and AOL. It needed as much as $1.8 billion over ten years (Welch 2). Other rationales for an IPO would be to provide exit and value for the founders, create war chest for future acquisitions and strategic alliances and also as marketing vehicle for the company and its products (Welch 2). Fortunately at that time, a wave of successful IPOs had the company thinking that it was the right time to ask the public to invest. Already, Netscape had financing from Kleiner, Perkins, Caufield & Byers, a venture capital firm, Adobe Systems and five other media companies (Backstrand 6). But these were not enough as could be seen on how in two years, operating expenses had shot through the roof. On July 17, 1995, investment bankers Morgan Stanley and H&Q issued a preliminary offering price of $12 to 14 for about 3.5 million shares based on Netscape future prospects, its financial performance, the Internet industry and its competitors (Backstrand 6). What followed next was a roadshow for potential investors, especially the large investors to drum up interest for the IPO. According to the underwriters, the roadshow was an overwhelming success that they had to recommend an increase of the IPO share price from $14 to $28. The decision rested with the Board of Netscape whether to heed the call of Wall Street or heed the call of experience. Recommendation: Many factors would have to be taken into consideration if Netscape would have avoided its fate of one of the shortest case of corporate oblivion. What went wrong Even if financing came by way of other avenues, these would have not been enough for the company to be able to face the onslaught of competition as already Microsoft was already ready with own web browser bundled with its operating system. But Netscape's management may have been wise to have waited just a bit for at least a few years before going the IPO route. A look at the historical data of the IPO market from 1990 to 1994 showed that the average age of companies were at six to seven years (Backstrand: Exhibit 4, p. 11). It would have also been wise, had the company at least waited for a few years when the company's track record of profitability had been established. In hindsight, the Internet companies which had successfully lasted the bust era were companies that waited such as Google, which came out with its own IPO in 2004 at which time it had already clocked seven years of existence and with profitable track record and earlier, Yahoo, with several years of experience behind it before having its own IPO in 2000. Google in its IPO in 2004 was differentiated by its auction-type of IPO which the founders said would allow the company to pursue a long-term path and allow actual demand of shares determine its actual price (Reeves n.p.). On the other hand, investors who bought into Netscape and other Internet offerings had to question if IPOs were good investments afterall. In the case of Netscape's IPO, it would be hard to clearly see if the extremely enthusiastic response to the IPO was a case of greed of the company's early owners and investment bankers as the protagonists or a case of normal boom and boom cycle in any industry. These two factors could have been behind the bust. For instance, it must be noted that not only the owners had an interest in making millions in the IPO - Morgan Stanley as the underwriters for the Netscape IPO stood to gain "$9.8 million or 7% of every share sold" (Backstrand 6). So small investors especially may have to wary if investment bankers or underwriters who usually do the marketing of IPOs have too much a stake in making the IPO a success. IPOs according to one research as cited by an article in 1998 disappoint by the third quarter and that long-term investments are the only way to go (IPOs: Good Investment or Wall Street Scam n.p.). According to the same article, the main beneficiaries of IPOs are investment bankers, venture capitalists, and the big investors of brokerage houses. For the small-time investor, therefore, extra caution must be practiced in putting their money in IPOs. Works Cited: Backstrand, Kendall. Netscape's Initial Public Offering. Revised May 16, 1997. Harvard Business School. Copyright 1996 by the President and Fellows of Harvard College. Blodget, Henry. Irreplaceable Exuberance. The New York Times. 30 August 2005. 07 December 2007. IPOs: Good Investments or Wall Street Scam 09 June, 1998. 07 December 2007 Karlgaard, Rich. The Ghost of Netscape. Netword . 9 August 2005. 06 December 2007 Lashinsky, Adam. Remembering Netscape: The Birth of the Web. Fortune Magazine. 25 July 2005. 06 December 2007 Reeves, Scott. Google's Flop, Fub and Bomb. Forbes.com. 17 September 2004. 07 December 2007. Welch, Jonathan. Netscape's IPO 1995 Key Points. No date. 07 December 2007. http://money.cnn.com/magazines/fortune/fortune_archive/2005/07/25/8266639/index.htm http://www.news.com/2100-1024-5201978.html MLA 6 pages 8 sources Read More