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November 24, 1998

AOL TO STICK WITH IE DESPITE BUYING NETSCAPE

By CBR Staff Writer

With a flurry of marketing-speak, Netscape Communications Corp yesterday agreed to be subsumed into the world’s leading consumer online service provider, America Online Inc, in a deal valuing Netscape at $4.2bn. It remains to be seen how comfortably the California code-jockeys at Netscape will sit with the Virginia-based would- be media barons, but one thing’s for certain, the acquisition of Netscape does not mean its browser will necessarily gain much market share from being pushed at AOL users. They will continue to use Microsoft Corp’s Internet Explorer as AOL believes it is crucial that it remains as a feature on the Windows desktop, which is part of the licensing deal between Microsoft and AOL that expires at the end of this year. That’s the same reason AOL senior VP David Colburn cited for AOL tapping IE when he testified recently in the Microsoft antitrust case (10/29/98). AOL founder and chief executive Steve Case says that AOL has an option to use another browser so long as it notifies Microsoft by the end of the year: it’s our option, not Microsoft’s, he says. However, AOL has no intention of exercising that option at present, he says, although presumably that could change. The target for Netscape’s browser appears to be the instant messaging user base AOL got when it acquired Israeli company Mirabilis Ltd for its ICQ system in June. Case said the 20 million or so ICQ members (AOL has only 14 million members of its regular service) are more web-savvy than the AOL users, and the company intends to encourage them to download the Netscape browser. Case says that AOL users often don’t even know when they’re connected to AOL or connected to the web. AOL appears to have plans to establish ICQ as a separate portal, giving it a stable of three major portals: AOL.com, Netscape.com and ICQ.com. AOL president and COO, Bob Pittman, says the acquisition of Netscape is in keeping with AOL’s multiple-brand strategy. He says the Netcenter audience will be additive to AOL’s overall user base because, while AOL has the lead during the evening when users are at home, Netscape brings a significant presence among users at work. As expected, the deal was for 0.45 AOL shares for each Netscape share, valuing Netscape at $40.16 per share. In addition, AOL will guarantee Sun Microsystems Inc $500m in equipment and service revenues spread evenly over a three-year period and in return Sun will pay AOL-Netscape $350m over the same period to license Netscape software for joint development purposes. Sun’s side of the deal is laid out in a separate story today. The deal is not expected to close until late Spring of 1999. Netscape’s shares closed down $2.0625, or 34.9% at $39.875, while AOL finished up $2.75, or 3.1% at $92.00. Netscape will continue as a separate unit of AOL, as CompuServe has done previously. It will remain at its Mountain View, California base. Netscape CEO Jim Barksdale will join the AOL board but will have no role in day-to-day running of Netscape. Netscape COO Barry Ariko becomes the COO of Netscape’s business software unit while Mike Homer, the executive VP and general manager of the Netcenter portal, keeps the same title. Both men report to Bob Pittman, who will remain at the Dulles, Virginia AOL headquarters. As for Netscape co-founder and internet poster child Marc Andreessen, Barksdale said he will be Netscape CTO until the deal closes and after that he will have a role that we’re working out now. When asked about possible staff reductions at both companies, Case said it is a little premature to talk about that. Sun CEO Scott McNealy insists Sun was not really interested in buying Netscape itself at any point, as has been rumored many times. Netscape is very much a traffic and services play, he says and Sun did not want compete with its ISP customers: we don’t want to aggravate AOL or any other service provider, he says. On a similar theme, McNealy says ISPs would be uncomfortable going to AOL to buy Netscape servers, and under Sun’s development and distribution deal for the Solaris-based servers, they don’t have to call on AOL to get any of that. Microsoft’s general counsel Bill Neukom issued a statement as soon as the deal was announced saying that the deal shows how the competitive landscape in this industry can change overnight, making government regulation unnecessary and counter-productive. Predictably enough, he rounded off with a plea for the Department of Justice to drop the antitrust case: the government should drop this case and stop wasting taxpayer dollars and let the industry compete in the marketplace with technology and customer service.

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