The raw basics are as follows. AOL will purchase
Netscape in a stock swap worth somewhere around $4.2 billion. In addition, AOL has cut a
deal with Sun Microsystems. AOL will buy $500 million from Sun who will pay $350 million
in licensing and marketing fees to AOL while they pursue joint development projects.
The deal puts two of the top sites on the web, AOL and Netcenter, under the AOL
umbrella. Together they reach about 70% of those who access the net. AOL users are mostly
individual consumers checking it at night. For Netscape, it's folks logging on from
businesses during the day.
Netscape brings along browser and server software, including some under development.
They gain financial strength for development. Jim Barksdale will have a seat on the AOL
board. Marc Andreesen will probably come out of this with some sort of "Technology
Officer" position.
AOL and Sun will work to develop Java and other technology that will be useful on
portable devices like pagers, wireless phones, and just about anything else that's got
computer chips, which is just about everything.
In addition, Sun provides a solid engineering reputation along with strict attention to
quality. They also have an effective sales force of about 7000 folks.
What the Deal is Not
Most of the stories on this deal have been pretty good, but there are some common
stupidities that bear pointing out.
First, AOL did not buy Sun. It didn't even buy a piece of Sun. This is an alliance
where both parties are fully independent companies.
Second, AOL is not "taking over" Netscape in the sense of changing the brand
or the culture. At least that's the plan. A little further down, we'll look at what's
likely, but it won't be an AOL sign on the Netscape building.
Coverage in the business press has been pretty good, but coverage in the computer and
networking press seems to suffer from a serious case of success envy Stories from computer
and networking publications were almost universal in their need to take at least one cheap
shot at AOL.
Fact is, AOL is not a software or computer company. AOL is a media a marketing company.
If you understand that, it makes analyzing these deals just a bit easier.
Mergers: Dangerous Waters
When I was a Marine, I learned that a leader's job was to accomplish the mission and
care for the people. Those two components, mission and people, are essential to analyzing
any business situation, including mergers. Remember, though that mergers have one key
characteristic: they usually don't work.
The consulting firm, A. T. Kearney examined 115 multi-billion dollar mergers that
happened between 1993 and 1996 all around the world. They found that 58% failed to create
substantial returns for shareholders.
Hewitt Associates found that 69 percent of the companies they surveyed who had been
involved in "business combinations" named "integrating organizational
cultures" as the major challenge of a merger.
In my own experience, I used to do some work for Chevron. Chevron had acquired Gulf Oil
years before, but, even so, the two cultures and people remained separate. Former Gulf
folks would sit together in meetings and training sessions. Some even wore old Gulf Oil
belt buckles or carried Gulf Oil cups, just to let you know they were Gulf People.
So, we know that mergers are tough. What about this merger and the additional
complication of the Sun/AOL deal? For that we'll use my usual strategic analysis
questions.
Strategic Objectives
AOL appears to have the strategic objective of becoming the dominant player in the
networked world of the Digital Age. Bill Gates, at Microsoft, has used the slogan
"Embrace and extend," meaning embrace the net and extend out from the desktop.
If Case has a comparable slogan, it might be "AOL everywhere," meaning on the
net, on the desktop, on your pager and digital phone, at home, at work, and en route.
It seems to me that the two giants are each starting from their strengths -- AOL from
the net and Microsoft from its ubiquitous operating system.
The alliance with Sun and the support of Java will let AOL get onto lots of platforms
it might not reach otherwise. Using Netscape, AOL can continue to develop software for the
business and ecommerce part of the world.
The fit of strategic objectives looks excellent.
Strengths and People and Culture
The people and culture aspect is a little dicier. AOL has had almost anything but a
reputation for top technology. Usable, yes. Easy, yes. But not reliable and not for
business.
Sun will bring a solid engineering and business sales component to the team. Netscape,
though, could be a problem. One reason for that is structural. AOL will own Netscape, but
just have to work with Sun.
But the other reason stems from Netscape's disturbing tendency to adolescent strutting
and preening. In the beginning, there may have been good reason for that. Netscape did
some neat stuff, produced some good products, was a "cool" place to work.
Those days have been gone for a while. I'm reminded of a story about the great baseball
pitcher, Dizzy Dean. He was talking one day about how good he was and was accused of
bragging by a younger (and lesser) player. Dean's response? "If you can do it, son,
it ain't bragging." Netscape simply has been able to do it for a while, but they
don't seem to have shut up.
AOL's challenge will be to harness that arrogance to good purpose, maintain a culture
of achievement and supply resources and strategic guidance. It won' be easy. One way this
deal could come apart quickly is if top programmers at Netscape decide to walk. They'll
certainly be recruited and the pay, perks and signing bonuses will be there. How can AOL
get them to stay?
Know this -- if top Netscape programmers start heading off down the anchor rope, the
deal is in trouble.
Process
AOL says it will maintain Netscape's culture intact. They won't move the headquarters
or change the way things are done. Will they be true to their word? The best way to guess
I to look at how AOL has handled its two major acquisitions so far.
Let's look first at the most recent acquisition, the firm Mirabilis. They're a small
Israeli firm with a culture that seems much like Netscape, except without all the noise.
Mirabilis makes a chat software called ICQ (I Seek You) that looks a lot like the Instant
Messaging feature on AOL.
Mirabilis has pretty much been successful and has pretty much been left alone. This
bodes well for Netscape folks as long as they perform as well as the folks at Mirabilis
have been performing.
AOL's other acquisition has been CompuServe, once the online service it was chasing in
the race for more members. CompuServe, too, has been left alone, but not quite the way
Mirabilis has been. At CompuServe there have been layoffs.
Look for the role of Marc Andreesen to be a bellwether. If AOL can harness his
considerable technological talents and giant reputation, they should be able to attract
and keep top programming talent, no matter how eccentric. AOL has the distinct advantage
here of being a winner and most folks would like nothing better than to do exciting work
on a winning team.
Expect good things if Andreesen helps drive technological development, especially when
harnessed to the resources Sun brings to the party. On the other hand, if AOL can't render
his lack of business sense irrelevant, everybody could be in for trouble.
Expect AOL to give the techies at Netscape their head, as long as they produce results.
They've proved they can do it, they just need to prove it again. And again.
Exciting and Dangerous Possibilities
The big, exciting possibility is that all of this will work. AOL could be a serious
rival to Microsoft, but developing in ways that encourage open technology and ubiquitous
communications and computing. The combination of AOL, Sun and Netscape could really
accelerate the move to portable net computing while keeping Bill Gates from becoming the
Master of the Universe.
Other, lesser, possibilities include the following.
I expect AOL to develop it's markets much like a cable TV company, adding channels, but
letting the channels have their own brand identity, while finding ways for them to work
together. I figure it will lay out this way.
AOL's online service will continue to be the premier way that folks get online for the
first time and the premier way for those who want ease over power. Netscape will continue
to develop enterprise and ecommerce software using AOL resources and Sun resources in
development and marketing. Netscape will also continue to develop the Netcenter
"portal" as a business destination on the net. Plan on AOL and Netcenter making
joint pitches for some ad dollars.
I expect AOL to bring out the new CIS in a position somewhere between plain old
Internet service provider (ISP) service and the AOL online service. Look for more
information features than AOL and a more grown up atmosphere, but greater ease of use than
a person would normally expect from a standard ISP. CompuServe will be a bridge service
between AOL and the raw net.
Because there's a gap in the market, I think AOL will develop a service to sign up
college students when their school account days are done. They'll have greater
sophistication than AOL's regular subscribers so a different service is called for.
Sun will work with AOL to develop Java applications for portable gear like pagers, cell
phones, personal information managers, etc. Mirabilis will continue development of ICQ,
plugging it into various AOL offerings.
What to Expect
I think AOL can bring this off, but it's not a sure thing by any means. For one thing,
Case seems on the right track by maintaining individual cultures and developing individual
brands. The problems will show up in two areas.
There may be problems, as I noted above, in retaining top programming talent,
especially from Netscape.
There may be problems in coordinating all these enterprises. In fact,
"coordinating" may be too rigorous a goal since AOL is facing a task that's a
lot like herding cats.
I think Case has shown that he's got the right stuff to do the job, but it's also
possible that he and AOL can do everything right and still have things turn to mud in
their hands. The world is like that some days.
This article originally appeared in Wally Bock's Monday Memo newsletter in 1998.
