November 23, 1998

AOL's Overnight Landscaping

by Nico Detourn (TMF Nico)

(November 23, 1998) /FoolWire/ -- Several days of mounting speculation reached a major plateau this morning as America Online (NYSE: AOL) and Netscape Communications Corp. (Nasdaq: NSCP) confirmed they were in talks regarding "a possible business combination." Few firm details are available as of this moment. Netscape did, however, refer in a press release to a "proposed merger" involving a stock-for-stock pooling-of-interest transaction with Netscape shareholders receiving 0.45 shares of AOL common stock for each Netscape share held. AOL confirmed at the same time that it and Sun Microsystems (Nasdaq: SUNW) are exploring an agreement to develop and market e-commerce and new Internet devices involving Netscape's products. Sun has not yet spoken officially on the matter, and both AOL and Netscape caution that "There can be no assurance that an agreement will be reached or a transaction consummated." Stocks of the three companies were up in heavy trading this morning.

As first reported in last Wednesday's Wall Street Journal, the broad outline of the deal would have AOL taking over operations of Netscape's Netcenter Web portal as well as Netscape's browser software, which has approximately 50% market share. Sun would take over Netscape's enterprise software operations, to whatever extent these pieces of Netscape can be cleanly divided. Perhaps most intriguing in all this is the possibility that America Online would replace the Microsoft (Nasdaq: MSFT) browser with newly acquired Netscape technology on its flagship AOL service. The mere hint of such a move naturally raises the specter of the Wrath of Microsoft, bringing out strong emotions on all sides. For its part, Microsoft's general counsel William Neukom said any such deal shows that competitors have "the ability and the resources to change the competitive landscape overnight," and thus "pulls the rug out" from under the government's anti-trust case against the software giant.

Overnight landscaping, indeed. The removal of Netscape from the scene -- as a company, if not as a name -- alone carries mythic overtones. And however it shakes out, a deal involving the pieces apparently on the table will forever change the shape of cyberspace. Possibilities for the recombination of those pieces are many and complex. So too are the implications for the supporting players in this drama, most notably Yahoo (Nasdaq: YHOO), Lycos (Nasdaq: LCOS), Excite (Nasdaq: XCIT) and Infoseek (Nasdaq: SEEK), who will now compete with a more powerful and resource-rich AOL, as well as the omnipresent Microsoft, for online traffic and the advertising and e-commerce revenues such traffic promises.

And what of AOL and Microsoft, the twin suns of the online world? Will a deal of this sort increase the tension and rivalry between them, as might first be anticipated? Or is AOL doing Mr. Softy an indirect service, as Microsoft's Neukom suggested, by demonstrating the competitive health of the industry? Does this deal once again place America Online in Microsoft's cross hairs, with the "browser war" merely shifted to a different battle field? Questions on questions. And without a deal even announced. The one thing we can know for certain is that things will only get more interesting as details emerge, and the next transitional shape of the Internet comes into focus.

Related Links:
-- Internet Stocks message board
-- AOL message board
-- Netscape message board
-- Netscape press release