Excerpt from new book on AOL: How MS "sold" IE

Rohit Khare (rohit@uci.edu)
Thu, 02 Jul 1998 17:05:46 -0700

Netscape lost on hubris points;
Microsoft won through vicious cross-subsidy;
AOL blinked on its committment to destroy MSN

Two years later:
Netscape lost the business entirely and want's AOL's
Microsoft's content business still want to kill AOL -- and are
[I.e. expedia, carpoint, sidewalk]
And still, something like 80% of AOL users never leave the home port onto the Web.



How Steve Case Bought a Browser and Changed the World (Wide Web)

One day in 1996, America Online CEO Steve Case decided to buy a browser. Case held a
bake-off between Microsoft's Bill Gates and Netscape's Jim Barksdale and, in two days of
intrigue, crafted a deal that would shape the future of all three companies.

By Kara Swisher

When America Online began shopping in earnest for software to replace its own
much-criticized Web browser, it turned at first to the hottest company around at the time,
Netscape Communications, before an unlikely suitor appeared on the scene.

The following is adapted from aol.com: How Steve Case Beat Bill Gates, Nailed the Netheads
and Made Millions in the War for the Web (Random House/Times Business) by Wall Street
Journal reporter Kara Swisher. The book details AOL's birth out of the ashes of Control Video
Corporation's failed online gaming service in 1985 with the help of a low-level marketing
assistant named Steve Case and its subsequent transformation into the most popular online
service in the U.S., with more than 14 million members today.

As 1996 began, no company represented the promise of the Internet more than Netscape
Communications. After its hugely successful posting of the Navigator browser in the fall of
1994, the company's software claimed an incredible 80 percent of the market. Netscape's
prospects had improved even more with the hiring of James Barksdale as its chief executive
officer in January 1995. Getting Barksdale, who had earned a sterling reputation with his
stewardship of McCaw Cellular Communications, was considered another home run for

With its initial public offering of 5 million shares at $28 each, on Aug. 9, 1995, Netscape
cemented its position. Its stock doubled by the day's end. With only negligible revenues, the
company (taking all shares into account) was instantly worth $3 billion.

Despite a rebuff in 1994, America Online CEO Steve Case still desperately wanted to find a
way to link Netscape with AOL. By the end of 1995, he was once again in discussions about
licensing Netscape's browser technology.

A proposal made sense because Netscape was the creator of the Web's hottest software.
Case figured that AOL might throw out its BookLink browser and replace it with Navigator.
This "best-of-breed" strategy was quickly creating a smarter path for AOL. Rather than trying
to do everything by itself, AOL could be on the cutting edge of the Internet by incorporating its
most popular tools within the service.

In addition, many AOL executives felt a kinship with Netscape and its feisty, entrepreneurial
culture since it was now doing battle with Microsoft, the biggest software company in the
world. After its December 1995 Internet conversion, Microsoft had committed itself to the
browser market with a vengeance. Its Internet Explorer (IE) was offered free to all. Netscape,
not AOL, was now in Gates' crosshairs. How far would Bill Gates go for business?

Right to the doorstep of Steve Case's AOL which the Microsoft Network (MSN) was designed
in 1994 to vanquish. Much to Case's surprise, Gates called Case before the Comdex
conference in November 1995 a year after launching the "AOL Killer" at the same gathering
and invited him to come to the West and talk about AOL using the Microsoft browser. The
browser market was now more important to Gates than MSN.

To Microsoft, winning the browser war was critical. Netscape's browser had the potential to
be an operating system, a danger to Microsoft's flagship Windows product. "To maintain our
leadership, it was important that we build a better browser than Netscape, and get people to
try it and hopefully use it regularly. AOL was the No. 1 Internet service provider," said Brad
Chase, the Microsoft executive charged by Gates to get AOL to use Internet Explorer.
"Clearly, then, the opportunity to promote IE to its 6 million users would be a big win for us."

At first, such an idea was anathema to AOL execs. "Everybody wanted Netscape," said Ted
Leonsis, now president of AOL Studios. "And, after what we had just been through with MSN,
the idea of doing a deal with Microsoft was just out of the question."

Jean Villanueva, formerly AOL's VP of corporate communications, was also an early
Netscape backer. "The deal was Netscape's to lose. We had been talking with them forever.
They were dominant. We needed to get what the market wanted, so we felt we had to go to
Netscape," she noted. "Most importantly, we saw ourselves as smaller companies, fighting
the same foe Microsoft."

Case calculated that Netscape would be more than thrilled to do a deal with AOL. It would get
its browser into the hands of AOL's millions of members on a daily basis, and would tweak
Microsoft in the process. In January 1996, Case traveled to California for a dinner at
Barksdale's house. He hoped to cut a deal that would link the two companies' fates.

Case's proposal was to replace BookLink with Navigator as AOL's principal browser. But he
also felt that Netscape had not taken advantage of its Web site: Tens of millions of users
crossed through daily, yet Netscape had put up only a few press releases. Why not have AOL
which knew content better than Netscape did take over the programming and ad sales for
the Netscape home page? Finally, to underscore how important the relationship would be for
the two companies, Case asked Barksdale for a Netscape board seat.

Two weeks later, Case had his answer: Netscape wasn't interested in Case's plan. Barksdale
told Case that AOL could buy Netscape's browser, most certainly, but that was all. "It was a
period [when] the press was predicting AOL's doomsday and, I think, Netscape thought AOL
would become irrelevant. They thought if they had MCI, AT&T and Netcom using Netscape,
they'd be fine in the consumer space," said Case. "They had no desire to treat us as a
partner; they only wanted to treat us like a customer."

Case decided to conduct a "bake-off" between Netscape's Navigator and Microsoft's
Explorer. David Cole, AOL's Internet head, led an effort in which the entire executive team
looked at the two deals from a variety of perspectives price, technology issues and simple
company rapport.

From the start, Case and most of the AOL executives were still predisposed to Netscape
and, more to the point, against Microsoft. When Brad Chase first visited AOL's Virginia offices
to talk about Explorer, his chances were broadcast quickly to him. "I went up to the
receptionist and signed in and she looked at me and said, 'Microsoft, oooooh,'" he recalled.

Luckily for Chase, neither Cole nor David Colburn one of AOL's top deal-making executives,
who was assigned to coordinate the browser project was leaning toward anyone. Given to
wearing cowboy boots and a few days' stubble, Colburn styled himself as a kind of maverick
at AOL. "I basically looked at what was the better deal for AOL, what would give us the most
advantages," he said. "I didn't care about what the hell Silicon Valley thought, or that
Microsoft was the Antichrist, or that Netscape was so cool. I only thought, Who's got what we

He quickly found that Netscape did not have what AOL needed, and Microsoft did. On almost
every issue, he said, "It seemed like Netscape was taking things off the table, while Microsoft
kept putting them on."

There was price: Netscape insisted that AOL pay millions of dollars for the browser on a
per-user basis, like all of its customers because it was not in the business of giving its
software away to big corporate users. Microsoft looking to extend its browser market share
quickly was offering it to AOL for free, even though Microsoft had to pay Spyglass a fee for
each copy shipped. And Microsoft had licensed the IE code from Spyglass for millions of

There was technology: Netscape did not want to change Navigator in any substantial way to
accommodate AOL, and wanted Navigator to sit on top of AOL, directing users to the Netscape
site as they entered the Web. But AOL wanted to deliver to the consumer a customized
browser that was seamlessly integrated into the service in much the same way that BookLink
was, with no barrier separating the service from the Internet. "With the Netscape browser,
users would absolutely know they were leaving AOL to go to the Web, which meant we
handed our members over to them," said Colburn. On the other hand, Microsoft was willing to
change the browser in any way that was amenable to its service design, making it easier to

And there was rapport: "Netscape thought we had nowhere else to go," said Colburn. "It was
like, 'AOL has to do a deal with us, because (1) we're the leading browser, and (2) Microsoft is
its archenemy.'" Microsoft, again, seemed to bend over backward to get the AOL business.
There was even a full-scale press on Case by Gates himself. "I went after the AOL
business," said Gates in a later interview.

Exactly how much he was willing to do became clear when Gates put on the table the ultimate
deal-maker an information folder on the Windows 95 desktop, with an AOL registration icon
inside. Gates' move was bitterly opposed by MSN executives for good reason. Although not
displayed as prominently as the MSN logo, the AOL symbol was hard to pass up. This is
precisely what Case had been seeking since MSN was announced in late 1994, and it
effectively eroded the major marketing advantage MSN had over AOL. (And, to Microsoft's
advantage, it eliminated the Justice Department's main problem with its bundling practices
concerning MSN.)

In weekly meetings through February and early March, AOL's executives went around and
around about which company was better to do business with. Throughout 1995, they had
charged up AOL by making Bill Gates the enemy. Could they really make a deal with
Microsoft when part of it MSN was still dedicated to knocking AOL off?

And yet, if this deal was made, the software part of Microsoft was actually going to help AOL
knock MSN off. The executives argued back and forth, but Case finally made the decision. It
was time to change direction again.

The better deal would clearly be with Microsoft, Case told a gathering of his executives. The
onetime online nemesis Ted Leonsis had likened to a dinosaur from Jurassic Park at a
company pep rally the year before would become a major technology partner. "There's good
news and bad news," Case joked in his deadpan style. "The good news is, we'll get the deal.
The bad news is, we'll have to kill Ted."

Case still hoped he could pull off a double deal involving both Netscape and Microsoft or
even a quadruple deal, because AOL was also talking with AT&T about putting AOL's icon on
its new WorldNet Internet service, and with Sun Microsystems about licensing its equally hot
Java software technologies. Such a string of deals in a short time labeled "March Madness"
internally would make AOL a definitive force on the Internet, thought Case.

On March 7, 1996, AOL began the fury with yet another deal. AOL was to take in the 147,000
subscribers to Apple's soon-to-be defunct eWorld online service, and Apple agreed to
include AOL software on all Macintosh computers.

But the real action began on Monday, March 11, when AOL announced an alliance with
Netscape. Colburn and AOL executives had spent the weekend negotiating the deal. Under the
agreement, AOL would license Netscape Navigator client software technology for all its
services most immediately, for GNN [Global Network Navigator] and AOL would have a
prominent presence on the Netscape Web site.

On the same day, AOL inked the deal with AT&T without revealing the Netscape
announcement. AT&T officials were irked because the same-day timing diminished the
interest in their own AOL alliance. [Earlier this month, AT&T reportedly made an unsuccessful
bid to buy the company.]

Netscape wasted no time in declaring victory, and began to spin the deal to the press off the
record as a slap at Microsoft. On the record, the Netscape execs were more matter of fact.
"This agreement enables Netscape to immediately extend its reach into the consumer market
by providing AOL's 5 million customers with access to Netscape Navigator," said Barksdale.

Case seemed equally thrilled. "This announcement is as much about the future of our industry
as it is about the vision of each of our companies."

But each company's vision was different, it was soon revealed. The Netscape officials did not
seem to know, when they made the announcement, that they would not be AOL's primary
browser partner. There was no exclusivity to the Netscape contract, and Colburn had
immediately turned his attention to finishing up the even bigger deal with Microsoft. It took
until 2 a.m. on March 12 to reach the agreement, but when it was signed, Microsoft's Internet
Explorer would be AOL's principal browser.

Before the press releases went out, Case called Barksdale to inform him of the deal. It was a
short conversation. "I'm sorry, Jim," Case said. "I understand," said the courtly Barksdale,
though Netscape sources said he felt completely sandbagged by AOL. He had known that
AOL and Microsoft were talking, but had no idea how serious the discussions had become.

Soon, Case was on a conference call with reporters and his new and unlikely confrere, Bill
Gates. "Microsoft will become our primary technology partner in this Internet space," Case
told the reporters, who were incredulous that a turnabout had brought the two bitter rivals into
business together.

And, although he stressed that Microsoft was still "hard-core" about MSN, Gates also noted
that AOL had "created the most successful consumer online experience, and we are excited
about making this available to the millions of people who use Windows." It was a statement
few people ever expected him to make.

After the conference call, Case jetted off to meet his new partner at a Microsoft developer
conference being held in San Francisco. As they waited backstage at the event the next day,
Brad Chase joked to Case, "We don't want to be seen with you! There are MSN people over
there!" In fact, Case was the surprise guest at the conference. He appeared with Gates on
stage as part of an elaborate photo opportunity meant to signal how important the deal was to

It all put Case in a daze. "I could never have imagined myself standing there with Gates
because of our history with Microsoft, but I thought it was best for AOL, so we did it," recalled
Case. "But it was definitely bizarre."

And more than a little odd to Netscape officials, too. Case's eagerness to improve AOL's Web
image left a trail of bad feelings with the one company Case had long hoped would be AOL's
closest comrade. To Netscape, Case turned out to be a double-talking opportunist for striking
one deal right after the next.

Their pique was a bit disingenuous. Netscape had been well aware that Microsoft was in talks
with AOL. An article in The Wall Street Journal on March 7 was titled: "Microsoft Seeking to
Derail AOL Talks With Netscape." And, Colburn insisted, he had warned Netscape of the
problems AOL had with its offer and had called his Netscape contact immediately after the
deal was struck.

Yet, on the day the Microsoft deal was announced, Netscape officials insisted to the press
that the Microsoft/AOL pact was not bigger than its own, though it clearly was. Later, when it
became clear that Microsoft had outmaneuvered Netscape, Netscape's chairman, Jim Clark,
noted politely to the media that Case was "like a chameleon like any good businessman who
will change to suit the needs of the market."

Privately, though, Netscape executives were livid and told anyone in the industry who would
listen that Case had double-crossed them. To several financial analysts and industry
players, Netscape's top officials characterized AOL as "sleazy" and "slimy" for its actions.
They implied that AOL had not acted honorably.

Case felt he had given Netscape as many chances as he could. "It always seemed to me like
AOL should work with Netscape. But then the heart went one way and the mind another. The
mind won, because the heart kept getting stabbed," he said. "I would characterize AOL's
relationship with Netscape as multiple attempts to try and work together that haven't been
successful, and the vast majority of responsibility falls on their shoulders."

Wall Street certainly seemed to approve of AOL's new spouse. On the day of the Microsoft
Internet Explorer announcement, AOL stock rose 15 percent and closed at $55.50.

As it turned out, AOL's defection was a definitive blunder for Netscape in its war against
Microsoft. Helped by the millions of AOL customers using its browser, Microsoft continued to
make important gains in market share over the next several years.

While the software giant's tactics have come under investigation by the Justice Department
this year, in the meantime Microsoft has forced Netscape to change its strategy, including a
recent decision to make the Navigator browser free and to give away its source code. In yet
another irony, Netscape finally paid heed to Steve Case's advice: Today, executives hope its
"portal" strategy will allow them to bring the company back to its former glory by offering
e-mail, e-commerce, and content in effect, by creating a sort of AOL of the Web.

And two of Netscape's competitors in this arena? AOL and Microsoft, of course.