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Double Dealmaking in the Browser Wars (A)
For months, the upstart Netscape Communications Corporation had battled the Microsoft Corporation over which browser the accounting giant KPMG would select for its internal use. On June 2, 1997, Netscape CEO Jim Barksdale finally heard the gratifying words that capped the see-saw dealmaking process: “You've re-won the business,” said Roger Siboni, Deputy Chairman of KPMG. “And I'd like to extend my personal invitation for you to give the keynote speech at our annual meeting in Orlando, Florida.” Delighted at the news, and visualizing the army of KPMG accountants, tax people, and consultants he’d be triumphantly addressing in August, the Netscape CEO thanked Mr. Siboni, and put down the phone. This was a crucial beachhead for Netscape in its quest for the corporate market. Netscape had initially won the KPMG contract, but Microsoft’s persistence had pried it back open. Beating back Microsoft’s latest challenge marked a great success for Netscape. This victory stood in sharp contrast to a far less happy dealmaking episode the previous year in which Netscape had tilted against mighty Microsoft for AOL’s browser business. In a sequence that gave some industry observers virtual whiplash, a pathbreaking Netscape deal with AOL had been announced, only to be undercut the very next day by Microsoft. Netscape’s ultimate loss in the AOL battle helped to define an Internet dealmaking ethos that the normally sober Wall Street Journal likened to Melrose Place in which “no player sleeps alone and no back goes unstabbed.”1 Barksdale’s mind drifted back to the trials and tribulations of the AOL saga.

The Netscape Story
The popularization of the Internet in the 1990s heralded a new age in digital communications. At the forefront of this dramatic technological shift was the Mosaic browser, a software application that unleashed the power of the World Wide Web. By late 1994 over a million copies of Mosaic were in use. But this innovative program had not been developed as a consumer product for the mass market. It contained bugs, it was difficult to use, and it had a slow download rate. Numerous software companies recognized the vast commercial potential of a user-friendly browser offering easy access to the Web.2 Every PC owner, 300 million in all, was a likely customer. Despite intense competition, Netscape’s Navigator browser quickly emerged as a clear winner. (See Exhibit 1 for a primer on the Internet, the Web, and associated technologies.) Netscape was founded in April 1994 as Mosaic Communications Corporation by 49-year-old Jim Clark and 23-year-old Marc Andreessen. Clark had previously been chairman of Silicon Graphics, a highly-successful digital imaging company. Andreessen was a leading programmer in the development of the Mosaic browser. In January 1995, Jim Barksdale became president and CEO of the renamed Netscape Communications Corporation. Having earned a strong reputation as the CEO of McCaw Cellular, Barksdale was named by Time magazine to be in “the varsity squad of American management.”3 Scarcely one-and-a-half years later, at the beginning of 1996, Netscape had a market capitalization of $3.6 billion - making it one of the most successful software companies in history.
Professor James K. Sebenius prepared this case, with extensive assistance from Research Associate David Metcalfe, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. This case is entirely based on public sources. Copyright © 1999 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1

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Reported revenues for 1995 were $85 million and for 1996 were $346 million. Approximately 700 employees worked for the company primarily at its Mountain View headquarters in California. Andreessen headed the Netscape programming team which released a beta (trial) version of the Navigator 1.0 browser in October 1994. Six weeks later 1.5 million copies had been downloaded from the Internet.4 The commercial release came in mid-December 1994. Two months later Navigator had a 60% market share.5 This startling success was propelled by Navigator’s universally-recognized superiority over other browsers, its low cost distribution over the Internet, and by Netscape’s aggressive pricing policy. Navigator was free for academic use and for consumers but cost $39 per copy for commercial use with a 90-day free trial period. Netscape’s first-mover advantage, coupled with the technical excellence of its browser, gave it an estimated 70-85% share of the installed browser base in April 1996.6 By this time about 40 million copies of Navigator had been downloaded. (Exhibit 2a traces browser market share 1994-1998, and Exhibit 2b logs the number of Navigator programs downloaded.) Netscape’s original strategy was to make its browser ubiquitous in the consumer market, build up the Netscape brand name, and leverage this to sell Netscape web servers to corporations which wanted to offer applications, content and services to the rapidly growing installed browser base.7 Netscape’s hugely popular Initial Public Offering in August 1995 was part of this strategy. Apart from raising capital, it was also designed to raise the profile of Netscape in the business world. The initial price set at $28 per share more than doubled to $58 per share by the end of the first day and hit an all-time high of $174 per share on December 6, 1995. But a public listing, combined with sky-high expectations on Wall Street, put Netscape under intense pressure to meet quarterly earnings targets.8 (See Exhibits 3a and 3b for 1995-1997 market values and stock prices of AOL, Microsoft and Netscape.) In a fast-moving environment, Netscape’s strategy evolved continuously. Initially, server sales to corporations were expected to be the major revenue stream, but browser sales soon took on this role and the revenues were used to fuel spectacular growth.9 In 1996 Netscape's strategic focus switched to the corporation. Netscape targeted two markets: the lucrative emerging market for Intranets and Extranets; and the more mature market, dominated by Novell, for enterprise software such as electronic mail and groupware. To sell successfully in the corporate market Netscape had to prove it was financially healthy since corporations would incur huge costs if Netscape collapsed and they had to switch to new software.10 From day one, Netscape knew that Microsoft was its most dangerous competitor. Netscape’s competitive strategy was to offer cross-platform, cross-device, network-centric solutions that Microsoft would not want to imitate because of its vested interest in proprietary platforms and its need to have customers pay for upgrades. In the words of Jim Barksdale: “The possibility of a vast library of applications written in Java or other OS-neutral languages, coupled with independent user interfaces and platforms such as those provided by Navigator, posed a serious threat to the [Microsoft] Windows monopoly.”11 The view from the other side was stated succinctly by a senior Microsoft employee: “If there was ever a bullet with Microsoft’s name on it, [Navigator] is it.”12

The Microsoft Story
In an oft-told story, Microsoft Corporation, the world’s largest software company, was founded in 1975 by Bill Gates and Paul Allen. After the introduction of the IBM personal computer in 1981, Microsoft built up a dominant position in PC operating systems. In 1995 Microsoft operating systems shipped preloaded on about 90% of all PCs with sales of around 50 million copies per year.13 At the beginning of 1996 Microsoft had a market capitalization of $57 billion, revenues for 1996 were $14.5 billion, it had $8 billion in cash, and 18,000 employees. Its huge market value was based on ownership of the Windows license and other software sales. In 1995-6 Microsoft was dedicated to making Windows 95 and Windows NT ubiquitous. This meant converting users of nonMicrosoft platforms and ensuring users with MS-DOS and Windows 3.1 paid for Windows 95 upgrades. In the opinion of many observers, Microsoft's market dominance, its rough treatment of
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competitors, and its harsh attitude toward partners had won it few friends. In the computer industry there was deep, broad-based, publicly acknowledged animosity toward Microsoft.14 Bill Gates, among others, was surprised by the exponential growth of the Web, but soon recognized the challenge it posed to Microsoft’s operating system monopoly. In December 1994, trying to catch up, Microsoft bought a license from Spyglass to develop and commercialize a browser. In August 1995, Internet Explorer 1.0 was first released bundled with Windows 95. Taking a leaf from Netscape’s book, Internet Explorer was free for consumers and free to corporate clients as well. Distribution to every PC user was assured by bundling it with Windows and by offering it free on the Internet. Despite costless distribution and zero-pricing, Internet Explorer versions 1.0 and 2.0 (released in November 1995) largely flopped. Consumers preferred Navigator because it was a much better product and was also free. Corporations preferred Navigator because it had better functionality and most crucially, it would work across multiple operating systems. Free copies of Internet Explorer for Windows 95 were problematic to corporations that also used Windows 3.1 and Macintosh operating systems, or non-PC platforms like UNIX. Not until January 1996 were Windows 3.1 and Macintosh versions of Internet Explorer 2.0 released. During 1996 Internet Explorer 3.0—released in August 1996—began to take market share from Navigator. Microsoft was also competing in the online service business. In 1993 Bill Gates put Russ Siegelman in charge of developing Microsoft Network or MSN—a proprietary online service. Late to the game, it had to catch up with, and compete against its well-established rivals America On-Line and Compuserve, and did so by pouring hundreds of millions of dollars into the project. Like Internet Explorer the client software for MSN was integrated into Windows and was first released in August 1995. Bundling MSN with Windows 95 placed the MSN icon on the desktop of approximately 50 million new personal computers every year.15 This virtually costless distribution channel allowed PC users to become MSN subscribers with the click of a button.16 In the software industry, the Windows desktop was considered to be the most valuable real estate in the world. Bill Gates chose Pearl Harbor Day, December 7, 1995 to declare that Microsoft was “hard-core about the Internet” and set out a strategy of embracing existing Internet and web technologies, and extending them with Microsoft technologies. Over the next five days Netscape’s market capitalization fell 28%. The ‘Internet Day’ announcement marked a radical reversal in Microsoft's corporate strategy. Winning the browser war with Netscape became an overriding priority.17 Gates believed that Navigator and the cross-platform, open code vision it embodied put Microsoft’s “core assets at risk.”18 Microsoft’s initial objective was to capture at least 30% of the browser market. This would be enough to convince programmers and web masters to design applications and websites compatible with Internet Explorer as well as Navigator.19 It would stop Navigator from becoming ubiquitous. If Microsoft could pull this off, then it would be well- positioned to fight a long-term war of attrition in which the Redmond firm’s superior resources could be decisive. To forestall Netscape in this early phase, Microsoft’s intention was to, “flood the market with free Internet software and squeeze Netscape until they run out of cash.”20 In the words of Bill Gates: “Our business model works even if all Internet software is free [because] we are still selling operating systems [...]. What does Netscape’s business model look like? Not very good.”21

The AOL Story
America On-Line started out as an on-line service provider using the Internet to provide content, chat rooms, news, electronic mail, and Web access to fee-paying subscribers. After completing its IPO in 1992, AOL was valued at $66 million. By spring 1996 its valuation had rocketed up to $3.9 billion. In the same year AOL had annual revenues of $1.1 billion, by February it claimed over 5 million subscribers, and new subscribers were flocking to the service at the rate of 250,000 per month. Dramatic growth in the subscriber base was being driven by improved content, faster access and an expensive marketing campaign.22

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Despite this rosy picture, the media—and in particular information technology journalists—dubbed AOL and other online services “the Internet for dummies.” The consensus among the digerati was that these technological dinosaurs would be swept away as their subscribers switched their loyalty to the Web. In January 1996, a Newsweek article proclaimed: “The online services [...] are enjoying the most transitory of successes. Every day the Net gets closer to filling its ambitious promise, their clock ticks closer to midnight.”23 Steve Case, CEO of AOL, had courted Netscape since the day it was born. In 1994, prior to Netscape’s first round of financing, Case spoke to Jim Clark about AOL buying a stake in the new company. At the last minute Clark turned him down fearing that it would constrain Netscape’s ability to forge deals with AOL’s competitors. Although Case felt he had been “left at the altar,” relations between the two companies remained positive, and Case remained interested in an alliance with Netscape.24 By contrast, AOL’s relationship with Microsoft was overwhelmingly hostile. In the early 1990s, Paul Allen, co-founder of Microsoft, had been the single largest shareholder in AOL with a 29% stake. Allen wanted to take over AOL but was stopped in his tracks by Steve Case. At the time, Bill Gates turned the heat up on Steve Case, telling him: “I can buy 20% of you or I can buy all of you. Or I can go into this business myself and bury you.”25 Case was rattled by this thinly veiled threat, but held his nerve. In September 1994, a disgruntled Paul Allen sold his shares in AOL.26 Two months later Microsoft unveiled MSN and became AOL’s most formidable direct competitor. In response, AOL management staged a “corporate rally” to prepare its employees for the impending battle. Senior Vice-President Ted Leonsis urged AOL employees to: “Make your pledge that you will help destroy the beast [of Redmond].”27 Steve Case fired off the first shot in the battle when he publicly declared that bundling MSN with Windows 95 was anti-competitive. AOL subsequently made a formal complaint to the Department of Justice.28 Gates was demonized within AOL and a hostile relationship developed between the companies.

Double Dealmaking: Netscape, AOL, and Microsoft
The exponential growth in the Web forced AOL to offer a browser to its subscribers. In November 1994 it bought BookLink Technologies which produced a mid-range browser. But AOL lacked the financial resources and programming expertise to develop BookLink into a prize-winning browser. By late-1995 AOL desperately needed the cachet of a cutting-edge browser to shed its damaging image as the “Internet for dummies.” A newly arrived executive, David Colburn, was put in charge of negotiating browser licensing deals. He felt that the brand name, market dominance, and best-of-breed functionality of Navigator made it “an obvious choice for AOL licensing.”29 In November 1995, Bill Gates invited Steve Case to Redmond, to talk about AOL using Microsoft’s browser, but Case was strongly pro-Netscape and anti-Microsoft. “The deal was Netscape’s to lose,” said Jean Villanueva, a senior executive at AOL, “We had been talking with them forever. They were dominant. We needed to get what the market wanted. Most importantly, we saw ourselves as smaller companies, fighting the same foe—Microsoft”30. Steve Case desperately wanted to license the Navigator browser because a link to Netscape would gild AOL’s tarnished technological image.31 In January 1996, Case flew to California to have dinner at Barksdale’s home. Case proposed that Netscape produce a componentized version of Navigator (integrated into AOL’s client software rather than being a stand-alone program) which would become the principal browser for AOL’s subscribers. This would instantaneously give Netscape 5 million more users and block Microsoft’s attempts to grow its market share. Case wanted AOL to take over the programming and advertising of Netscape’s highly popular but massively underexploited website. Together, AOL and Netscape could capitalize on the millions of hits on the Netscape homepage. After making his pitch, Case underlined the seriousness of his offer and the depth of the partnership that would be involved by asking Barksdale for a seat on the Netscape board.32 Barksdale discussed the proposal with Netscape management. The engineers weren’t keen on producing an “AOL-version” of Navigator especially given their new focus on enterprise software.
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AOL’s offer to run the Netscape website didn’t seem attractive because online services were being written off as yesterday’s technology. Given this tepid response, two weeks later Barksdale told Case that his proposed partnership was a nonstarter. AOL would be a good distribution channel for Navigator33 but no more than that, and they would have to pay Netscape for each browser even though AOL would be giving them away for free. Case was disappointed. Netscape’s flat rejection of his initiative triggered a major rethink among AOL management as to what their best options were and how the most valuable deal could be crafted. Most AOL executives were loathe to license Internet Explorer from “the beast of Redmond” and a Microsoft deal seemed very unlikely given their direct competition with MSN. But AOL’s lead negotiator, David Colburn, who had only joined the firm in September 1995, was not imbued with a deep hostility toward Microsoft. “I basically looked at what was the better deal for AOL, what would give us the most advantages,” Colburn said later. “I didn’t care what the hell Silicon Valley thought, or that Microsoft was the anti-Christ, or that Netscape was so cool. I only thought, Who’s got what we need?”34 Internal meetings helped Colburn define AOL’s initial interests. AOL wanted to provide its subscribers with a cutting-edge browser, license browsers at the lowest possible cost, integrate the browser code into the AOL client software to maintain an AOL “feel,” and ensure the browser was interoperable with Windows 95.35 AOL also wanted to implement its new browser as soon as possible. Under Colburn’s guidance AOL conducted intense discussions with both Microsoft and Netscape throughout February 1996. Dealmaking came to a head in March 1996. At the time, it was common knowledge that Microsoft was seeking to derail the AOL-Netscape talks but Netscape was confident about closing the deal and stopping Microsoft from winning the business.36 Everything seemed to be in its favor: AOL people disliked Microsoft; Bill Gates would never do a deal with AOL because of its investment in MSN; Navigator was by far and away the best browser and Navigator commanded at least 75% of the browser market; AOL needed a technological boost that only Netscape could provide. A delighted Netscape team clinched the deal with AOL on March 11. Just as Barksdale planned, AOL would pay Netscape a significant per copy fee to license Navigator which would become the “preferred” browser for AOL subscribers under a non-exclusive agreement. In return, AOL would have a prominent presence on the Netscape website and both companies would engage in cross-promotional activities. Until Netscape produced a componentized browser integrated into the AOL client software, Navigator would only be used for AOL’s tiny Internet subsidiary Global Network Navigator. The financial markets applauded the deal: that day AOL stock rose 10% and Netscape’s climbed 15%. This was a sweet victory for relatively small Netscape - whose confidence some said bordered on arrogance - over the unpopular industry Goliath, Microsoft. But a dramatic reversal of fortune was about to occur. The very evening Netscape executives were celebrating their success, AOL inked a much bigger deal with Microsoft that largely undermined the Netscape-AOL agreement. According to its multi-year agreement with Microsoft, AOL would “seamlessly integrate” Internet Explorer into its client software, and Explorer would become the “default” browser for AOL's five million subscribers.37 The AOL client software would be bundled with Windows 95 and an AOL icon would appear in a specially-designed “Online Services” folder positioned adjacent to the MSN icon on the Windows desktop.38 Both companies also agreed to conduct joint marketing and cooperative engineering activities.39 When the AOL-Microsoft deal was announced on March 12, it was a stunning turnaround. Suddenly, the commanding image of Navigator’s position as AOL’s “preferred” browser melted away. The cold reality was that Microsoft’s Explorer, now selected as AOL’s “default” browser, would be but one click away for AOL users, while Navigator would languish in relative obscurity for the majority of the online service’s clients. For Steve Case, the deal was a sweet one. Explorer, the second best browser, would be fully integrated into AOL's software and would be available to all its subscribers by the summer of 1996. AOL would not have to pay Microsoft a penny for Explorer - saving it millions. AOL client software would be bundled with Windows 95 allowing costless distribution to 50 million PC users a year. This free distribution and promotion via Windows represented a marketing coup because, until now, AOL had had to spend $40-$80 to attract each new subscriber through its distinctive policy of “carpet
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bombing” the country with floppy disks.40 AOL negotiator David Colburn said, “[the deal] offered AOL an opportunity to achieve a form of distribution and promotion in Windows 95 and on its desktop that [...] was of immense value to AOL [...] The willingness of Microsoft to bundle AOL in some form with the Windows operating system was a critically important competitive factor that was impossible for Netscape to match.”41 But Microsoft was only willing to do this if Explorer was the exclusive AOL browser. In the words of David Colburn, “Microsoft [...] attempted to secure exclusive distribution and promotion of Internet Explorer, with no or few exceptions for distribution or promotion of a competitive browser. AOL ultimately agreed to these restrictions in order to obtain bundling with Windows and placement in the Online Services Folder [...] Microsoft has sought to strictly enforce these restrictions. ”42 The AOL-Microsoft browser deal diluted the primary competitive threat to AOL’s core business - the MSN icon on the Windows desktop. In broader strategic terms, increasing Explorer’s market share would also stop Netscape from getting a monopoly over Web technology which could be disastrous for AOL in the long-run. After the financial markets digested the news, AOL’s stock jumped 18%. Between Friday March, 8, and the market close on March, 13, AOL stock had risen a massive 31%. For Microsoft the deal was also sweet - although Bill Gates had been forced to make what many had assumed to be unthinkable tradeoffs in crafting his dealmaking strategy. The biggest win for Microsoft was that Explorer would be the virtually exclusive “default” browser for AOL's rapidly growing subscriber base.43 Shutting Netscape out of this large market segment was a triumph not to be underestimated. The deal would give a huge lift to Microsoft's strategic objective of achieving a 30% share of the browser market. Adding an “Online Services” folder to the Windows desktop also eliminated part of the Department of Justice's case against Microsoft for abusing its operating system monopoly by bundling its own services while excluding those of its competitors'.44 MSN was a casualty of the AOL-Microsoft deal. Demonstrating daring strategic flexibility, Gates had in effect sacrificed much of his firm’s huge investment in MSN to fight Netscape’s threat to Microsoft’s core assets. Bill Gates told the press 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.”45 As Microsoft stock climbed 6%, it was the Redmond firm’s turn to celebrate. Though putting a brave public face on this débâcle, Netscape management were stunned and disgusted by the AOL-Microsoft deal which had immediately precipitated a 6% drop in Netscape’s stock price. It didn’t seem possible that AOL, which had courted Netscape for so long, would roll them over so callously in favor of their erstwhile sworn enemy. Who could have predicted that Microsoft would sacrifice hundreds of millions of dollars invested in MSN just to get the browser deal with AOL? Didn’t AOL realize that Navigator was universally acclaimed as the best browser and had 75% market share? How had the terms of their deal turned out to be so flimsy? How had the apparent value of Navigator's “preferred” status been rendered purely semantic? How was it that Navigator was effectively relegated to AOL’s small Internet subsidiary GNN?46 Disbelief soon turned into pique and anger. Behind closed doors, Netscape executives were livid and told many people in the industry that Steve Case had “double-crossed them”.47 Four months later Microsoft began to dilute the value of the “Online Services” folder, releasing AOL from some of the exclusivity constraints in the contract. Ever hopeful, Steve Case invited Jim Barksdale and Ram Shriram to devise a new partnership. Yet again his proposals were rebuffed by Netscape’s technology team led by Marc Andreessen.48

The KPMG Story
From early 1996, Netscape focused on the corporate market and the potential of Intranets, Extranets and enterprise software. Barksdale and Andreessen believed their cross-platform software gave them a significant competitive advantage in competing for big corporate accounts - even in head-to-head bids against Microsoft. According to Andreessen, “Anytime we run into Microsoft in a Fortune 1000 account, if we do a decent job of presenting our arguments and actually making the sale and wrapping the services around it and providing it as a solution, we tend to win [...] a very high percentage [of the contracts]. We have a natural advantage.”49 Netscape hoped to exploit its natural advantage to seal an agreement with KPMG.
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KPMG Peat Marwick LLP is the American arm of the global accounting, tax, and consulting behemoth. In 1998 the international group had sales of $10.6 billion, 85,300 employees and operations in 800 cities worldwide. The US branch of KPMG, had 1996 revenues of $2.5 billion, 1,400 partners and a total of 17,000 employees in 120 cities. Its services include assurance and advisory work, tax, audit and a variety of consulting businesses. KPMG caters to the whole gamut of industry sectors including financial services, manufacturing, consumer markets, health care, the public sector, communications and entertainment. Its client list is a roll call of the world’s blue chip companies (see Exhibit 4 for a representative list of KPMG's corporate clients). In 1996, KPMG decided that it wanted to install an Intranet—an internal computer network based on Internet protocols—allowing its employees to share documents, exchange electronic mail, connect with clients, and automate business processes over a secure network. KPMG considered knowledge management to be a core capability for achieving competitive advantage. In late 1996, KPMG was lagging behind its competitors in technology. Allen Frank, Chief Technology Officer, and Roger Siboni, the Chief Operating Officer, wanted to leapfrog over their rivals by using Intranet and data warehousing technologies.50 During the fall of 1996 they tested competing technology solutions including offerings from Netscape and Microsoft.

The KPMG-Netscape Deal
On January 20, 1997 KPMG announced a comprehensive deal with Netscape.51 KPMG had chosen Netscape because at a low overall cost it offered superior cross-platform technology that allowed computers running a mix of Windows 3.1, Windows 95, Macintosh and UNIX operating systems to communicate. Opting for Microsoft would have obliged KPMG to upgrade all its software to the new Microsoft standard which would have been prohibitively expensive.52 Netscape’s strategy to support the entire installed base of client operating systems was a significant point of leverage for Netscape in negotiating the deal.53 (Exhibit 5 gives a breakdown of installed operating systems 19961998. Exhibit 6 presents a schedule of browser release dates demonstrating the late arrival of Explorer for non-Windows 95 systems). Under the deal KPMG immediately licensed and paid for 17,000 copies of Navigator and planned to install an Intranet using Communicator and SuiteSpot.54 KPMG also planned to implement the Netscape solution on a worldwide basis adding another 59,000 Navigator users.55 The in-house component was just the tip of the iceberg because KPMG agreed to resell, recommend and support sales of Netscape’s browsers, servers and enterprise software.56 KPMGs impressive list of corporate clients and an Intranet market forecasted to be worth $4 billion in 199757 promised Netscape “a bonanza of additional business.”58 One drawback was that the deal was non-exclusive. Mr. Frank, CTO and architect of the deal on KPMG’s side, commented: “We don’t own stock in any company. We have relationships with Netscape and we have relationships with other companies.”59 Frank left KPMG the very next week to set up his own business.60

Microsoft’s Reaction61
The KPMG-Netscape deal put Microsoft in a tailspin. Ian Rogoff, Microsoft’s manager for large corporate accounts, admitted questions were being asked at the highest levels: “What did we do wrong? Why did KPMG select Netscape?” “The questions came from Jeff Raikes, Mr. Rogoff’s fiercely competitive boss and one of Mr. Gates’s chief lieutenants. Microsoft sees Netscape’s lead in the Internet-browser market as one of its most serious challenges. Eager to see if the Netscape deal could be broken, Mr. Raikes gathered intelligence from his sister, who happened to be a KPMG consultant. She suggested calling Mr. Siboni. Mr. Siboni agreed to a half-hour breakfast at the Ritz-Carlton hotel in New York in February, a meeting that stretched to two hours. The two men challenged each other. Mr. Raikes said Microsoft hadn’t got a fair shake in the software competition and asked Mr. Siboni, “Are you guys just contrarians?” Mr. Siboni, keenly aware of Microsoft’s reputation for driving one-sided deals, retorted, “You guys don’t know how to partner with anybody.” But in the end, Mr. Siboni was intrigued
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enough to agree to re-evaluate KPMG’s commitment to Netscape, by holding a competitive “bakeoff” between the two companies’ products. Given the news, Mr. Barksdale at Netscape reassembled his team to again make his company’s case. KPMG’s technical experts, who earlier selected Netscape, were suspicious and hostile about Microsoft. “The last time I checked, Microsoft hasn’t invented anything,” one former top aide to Mr. Siboni says. “All they do is marketing and copying.” To counter such attitudes, Mr. Raikes invited Mr. Siboni and his team in March to the executive briefing center on Microsoft’s Redmond, Washington, campus. Mr. Raikes played two of Microsoft’s trump cards: first, a 45-minute private audience with the world’s richest man and most powerful high-tech tycoon, Mr. Gates; and second, a proposal to make KPMG not just Microsoft’s customer, but its partner. Mr. Rogoff, who had been skiing at Lake Tahoe, took a day off from his vacation. He flew to Redmond and outlined plans for a joint KPMG-Microsoft effort to capitalize on the sales momentum of Microsoft’s Windows NT operating system. Mr. Rogoff proposed a joint effort to serve corporate customers interested in electronic commerce and the automation of sales-force procedures, areas in which KPMG specializes. Partners such as KPMG are important to both Microsoft and Netscape, which are seeking to expand sales to large corporate customers. Unlike rivals such as International Business Machines and Oracle, neither software company has large staffs of in-house consultants to help big corporations convert operations to Internet-based systems. That presents an opportunity for “system integrators,” such as KPMG, to reap large consulting fees. Mr. Siboni was intrigued, but concerned that gearing up for a joint venture with Microsoft would be expensive for KPMG. First, KPMG had to decide which company’s technology to use for its own needs, a move that would determine KPMG’s credibility in pitching software systems to its customers—known in the industry as “eating your own dog food.” Leaving Redmond, Mr. Siboni’s team still had reservations as to whether Microsoft’s products would meet their internal needs. Microsoft’s products ran primarily on the company’s Windows 95 and Windows NT operating systems; KPMG’s system included computers running Apple Computer’s Macintosh operating system as well as older versions of Windows. While Netscape offered software that could tie together KPMG’s diverse computers, going with Microsoft would require extensive software and hardware upgrades. Mr. Siboni confirm[ed] that the overall costs of Netscape’s software would be several million dollars less than Microsoft’s. KPMG’s technical team, which was already installing what would eventually be 22,000 Netscape Internet browsers for KPMG’s U.S. employees, gave Netscape ‘s products high marks. And Netscape offered a better chance for KPMG to stay on its internal schedule to have the full system in place by June 1998. At the end of the bake-off in April, Mr. Siboni called Mr. Barksdale in April with good news. ‘You guys have done very well. I think it’s going to go your way,’ Mr. Siboni told him. Then he added with a laugh, ‘You would be amazed at how hard these Microsoft guys are working.’ On June 2, Mr. Siboni again called Mr. Barksdale to tell him Netscape had “rewon” KPMG’s business. “Terrific,” Mr. Barksdale said. Mr. Siboni invited Mr. Barksdale to deliver the keynote address at the huge accounting firm’s annual meeting in Florida on August 7, 1997. But Mr. Siboni asked Mr. Barksdale to keep their conversation quiet for a week to give him time to inform KPMG’s overseas partners and break the news to Microsoft. “That call is going to be more difficult,” Mr. Siboni [. . .] told Mr. Barksdale.”

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Exhibit 1

The Internet, The Web and Associated Technologies.

The Internet is a global interlinked network connecting thousands of public and private computer networks using open standards like HTML, HTTP, FTP and TCP/IP. Open standards allow communication between computers with different operating systems. The World Wide Web uses the communications infrastructure of the Internet to connect web browsers with web servers. Browsers are client applications sitting on PC desktops. They can request information from a web server located with a website address called an URL, the server replies with the requested information, and the browser allows the user to read this information. Every PC user who wants to “surf the net” requires a browser. The client/server combination is the basic architecture of web technology. Online Service Providers (OSPs) such as AOL and Compuserve also use the Internet. But rather than offering free access to free information on the Web, they have a proprietary service for fee-paying subscribers. Subscribers do not need web browsers to access their OSPs homepage. Instead they need the OSP’s client software loaded on their PCs. Online services began to operate commercially in 1991 and can be considered as a complement to the Web. Hard on the heels of the Internet came Intranets and Extranets. Intranets are private computer networks fenced-off from the Internet by “firewalls” but using web client/server technology. An Intranet allows secure communication within a corporation between a wide range of operating systems. Many corporations have implemented Intranets to facilitate communication, collaboration and business process re-engineering. Extranets extend the private network to a corporation’s strategic partners. They can enhance communication, improve supply chain management, and deliver business-to-business electronic commerce. Web software represents a major break with conventional PC software because it is networkcentric, cross-platform and extensively based on open code. Open code refers to “free” technologies in the public domain that can be integrated into software programs without paying a license fee to the owner of the code. The Navigator browser can run on all PC operating systems (Windows 95, Windows 3.1, MacOS) as well as non-PC operating systems (UNIX, Windows NT, Linux). Browsers share characteristics with operating systems because network-centric applications can be launched from the browser platform,62 but the browser cannot function without an operating system and is not a substitute for it.63 Software for the Web is largely based on the open standards Java programming language developed by Sun Microsystems. Java raised the possibility of “creating open, networkbased, cross-platform applications that would make complex operating systems—the foundation of Microsoft’s power—a thing of the past.”64

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Double Dealmaking in the Browser Wars (A)

Exhibit 2a

Browser Market Share (%)

100 90 80 70 60 50 40 30 20 10 0 1994 1995 Navigator Apr-96 Aug-96 Internet Explorer Jan-97 Other Sep-97

Sources:

AdKnowledge, Dataquest, ZD Market Intelligence, and Zona Research.

Exhibit 2b Copies of Navigator Downloaded (millions)
80 70 60 50 40 30 20 10 0

Source:

Netscape Web site.

10

May-96

Nov-95

May-97

Sep-96

Sep-95

Mar-96

Nov-96

Sep-97

Jan-96

Mar-97

Jul-96

Jan-97

Jul-97

800-050

-11-

Exhibit 3a

Market Values ($ millions) for America Online, Microsoft and Netscape: August 1995-August 1997

Market Value ($ millions)

200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

9/8/95

9/9/95

9/1/96

9/2/96

9/3/96

9/4/96

9/5/96

9/6/96

9/7/96

9/8/96

9/9/96

9/1/97

9/2/97

9/3/97

9/4/97

9/5/97

9/6/97

9/7/97

9/10/95

9/11/95

9/12/95

9/10/96

9/11/96

America Online Inc

Microsoft Corporation

Netscape Communications Corporation

Source:

CRSP.

9/12/96

9/8/97

800-050

-12-

Exhibit 3b

Adjusted Closing Price ($) for America Online, Microsoft and Netscape: August 1995-August 1997

Adjusted Closing Price ($)

350

300

250

200

150

100

50

0

9/8/95

9/9/95

9/1/96

9/2/96

9/3/96

9/4/96

9/5/96

9/6/96

9/7/96

9/8/96

9/9/96

9/1/97

9/2/97

9/3/97

9/4/97

9/5/97

9/6/97

9/7/97

9/10/95

9/11/95

9/12/95

9/10/96

9/11/96

America Online Inc.

Microsoft Corporation

Netscape Communications Corporation

Source:

CRSP.

9/12/96

9/8/97

Double Dealmaking in the Browser Wars (A)

800-050

Exhibit 4
AKZO Banc One

Representative List of KPMG Corporate Clients
Gillette Hasbro Hewlett-Packard Honda Motor Hyatt Hotels IBM Revlon Rite Aid Rubbermaid Samsonite Siemens Sony Southwestern Bell Spiegel Travelers Group US Navy US Senate US Airways Xerox

Bankers Trust Beckman BellSouth Bertelsmann Cargill CBS Chase Manhattan Cisco Systems Citicorp CSFB CVS Deutsche Bank EDS Fannie Mae Federal Express Fujitsu GE Capital General Electric

Exhibit 5

Installed Base of Top Four Operating Systems in the United States (%)
1996 1997 16.7 40.2 26.8 9.0 1998 11.6 21.5 51.4 9.2

DOS Windows 3.x Windows 95 MacOS

22.2 49.2 9.8 9.6

Source:

Adapted from ZD Market Intelligence, “Technology User Profile 1996–1998.”

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Double Dealmaking in the Browser Wars (A)

Exhibit 6

Netscape and Microsoft Browser Release Schedules

Commercial Release Navigator 1.0 Explorer 1.0 Explorer 2.0 Explorer 2.0 Navigator 2.0 Explorer 3.0 Navigator 3.0 Communicator 4.0 Navigator 4.0 December 1994 August 1995 November 1995 January 1996 February 1996 August 1996 August 1996 April 1997 August 1997

PC O/S Compatible All Windows 95 Windows 95 Windows 3.1 & MacOS All All All All All

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Endnotes

1 2

“David vs. Goliath on the Net,” The Wall Street Journal, April 28, 1996.

Michael A. Cusumano & David B. Yoffie, Competing on Internet Time. Lessons from Netscape and Its Battle with Microsoft (New York: The Free Press, 1998), pp. 95-97.
3 4 5 6

Ibid., p. 48. “Beyond Browsing,” Computer Business Review, December 1, 1995. Cusumano and Yoffie, op. cit., p. 96.

Jim Barksdale Deposition in Civil Action 98-1232 United States of America vs. Microsoft Corporation, p. 23.

7 The basic Communications server cost $1,500, the premium Commerce server was $5,000. Source: Cusumano and Yoffie, op. cit., p. 98. 8 9

Alex Edelstein of Netscape quoted in Cusumano and Yoffie, p.141. Jim Barksdale Deposition, op. cit., p. 19. Cusumano and Yoffie, op. cit., p.131. Jim Barksdale Deposition, op. cit., p. 47. Quoted in Cusumano and Yoffie, op. cit., p. 145. Ibid., p.107. Ibid., pp.135-136. Dataquest: 46 million copies of Windows 95 sold in 1996; 53 million copies sold in 1997.

10 11 12 13 14 15 16

David Colburn Deposition in Civil Action 98-1232 United States of America vs. Microsoft Corporation.
17 18 19 20

Cusumano and Yoffie, op. cit., p. 111. Bill Gates speaking in spring 1996 quoted in Cusumano and Yoffie, op. cit., p. 112. Cusumano and Yoffie, op. cit., p. 111.

Microsoft representative quoted in a letter dated August 12, 1996 sent by attorney Gary Reback to Joel Klein head of the Department of Justice’s anti-trust division, see Cusumano and Yoffie, op. cit., p. 153. Bill Gates in a Financial Times interview quoted in David Kaplan, The Silicon Boys (New York: Morrow, 1999), p. 24.
22 Kara Swisher, AOL.COM: How Steve Case beat Bill Gates, Nailed the Netheads and Made Millions in the War for the Web (New York: Times Business, 1998), p. 130. 23 24 25 26 21

Ibid., p. 132. Ibid., p. 114. Ibid., p. xv. Media Daily, January 19, 1994.
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27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Swisher, op. cit., p. 108. Ibid., p. 121. David Colburn Deposition, op. cit., p.7. Swisher, op. cit., p. 135. Ibid., p. 134. Ibid., pp. 135-136. Jim Barksdale Desposition, op. cit., p. 75. Swisher, op. cit., p. 136. David Colburn Deposition, op. cit., p. 12. “Microsoft Seeking To Derail AOL Talks With Netscape,” The Wall Street Journal, March 7, 1996. “America Online Inks Deal With Microsoft and Sun,” Newsbytes News Network, March 13, 1996. “Microsoft, AOL Make A Deal,” Information Week, March 18, 1996, p. 15. “America Online Inks Deal With Microsoft and Sun,” Newsbytes News Network, March 13, 1996. David Colburn Deposition, op. cit., p. 6. Ibid., p. 8. Ibid., p. 10. Kaplan, op. cit., p. 278. Swisher, op. cit., p. 138. Conference call with reporters on March 12, 1996 quoted in Swisher, op. cit., p. 140. “America Online Inks Deal With Microsoft and Sun,” Newsbytes News Network, March 13, 1996. Swisher, op. cit., p. 141. Cusumano and Yoffie, op. cit., pp.115-118. Cusumano and Yoffie, op. cit., p.127. Maryam Alavi, “KPMG U.S.: One Giant Brain.” HBS case No. 937-108, 1997.

51 “Internet Allies. Netscape, KPMG join forces to build Internet beachhead,” Telephony, February 3, 1997. 52 53 54 55

Cusumano and Yoffie, op. cit., p.123. Ibid., p.124. Jim Barksdale Desposition, op. cit., p. 99.

“Despite the Celebrations KPMG Dumps 17,000 Lotus Seats for Netscape,” Computergram International, January 29, 1997.
56

“KPMG becomes a Netscape Preferred Global Systems Integration Partner,” Business Wire, January 23, 1997. Cusumano and Yoffie, op. cit., p. 30. “Microsoft’s Persistence Costs Netscape Dearly,” The Wall Street Journal, November 13, 1997.

57 58

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59 60 61

“Netscape Takes On Rivals in KPMG Deal,” New York Times, January 21, 1997. Maryam Alavi, “KPMG U.S.: One Giant Brain.” HBS case No. 937-108, 1997.

The following entire section is taken directly from, “Microsoft’s Persistence Costs Netscape Dearly,” by David Bank, The Wall Street Journal, November 13, 1997. It is reprinted by permission of Dow Jones and Co.
62 63 64

Jim Barksdale Deposition, op. cit., p. 46. David Colburn Deposition, op. cit., p. 4. Cusumano and Yoffie, op. cit., p. 107.

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