Netscape, AOL Union Spells Electronic Commerce Bliss

By Nick WakemanNetscape Communications Corp. executives have a clear picture of their company after its purchase by America Online: a powerhouse with instant sway in the booming government electronic commerce market. The impact of the acquisition of Netscape by online services giant AOL will be felt within 90 days of the completed deal, Peter Thorp, Netscape vice president for government sales, told Washington Technology last week. "We are going to bring our enterprise software together with their infrastructure, their backbone and their vision of getting into the EC space," he said. "We are going to be talking about [government] deals with seven and eight figures."The $4.2 billion purchase, announced Nov. 24, is expected to close in the spring. The buy will broaden the electronic commerce reach of Dulles, Va.-based AOL, which had revenue of $2.6 billion in 1998, by adding Netscape's enterprisewide Internet software products and its hugely popular Netcenter Internet portal site, according to analysts.Software like Netscape's is critical as the government shifts to an electronic commerce environment, said William Wyman, an analyst with Legg Mason Inc. of Baltimore. "The U.S. government is one of the biggest, if not the biggest, purchaser of products in the world," he said. The government market has been a bright spot for Netscape, which saw its 1998 revenue slip to $447.8 million from last year's $534 million as its business model moved beyond selling Internet browsers to enterprisewide software products. Revenue from the government jumped from about $22 million in 1997 to more than $40 million in 1998, said Thorp.Thorp expects such growth to continue under AOL, which will operate Netscape as a subsidiary. He sees increasing opportunities with numerous agencies, including the General Services Administration, Postal Service and Department of Defense agencies such as the Defense Logistics Agency."Deals are going to happen that specifically wouldn't have happened without AOL," Thorp said. The Department of Defense represents over half of Netscape's customer base; major civilian customers include the U.S. Postal Service, the departments of Justice and Treasury and intelligence agencies, Thorp said. Both Netscape and AOL have a proven ability to attract "eyeballs," or viewers, to their respective services, but Netscape also has the development expertise to bring enterprisewide Internet products to customers, he said.The government electronic commerce market is expected to go from a simmer to a rolling boil very quickly, analysts said. Market research firm Input of Vienna, Va., predicts the market will jump from $280 million in 1998 to $365 million in 2003.Pushing federal electronic commerce are congressional mandates and agency initiatives to do more business over the Internet. "Every agency is headed in that direction," said Robert Dornan, senior vice president of market research firm Federal Sources Inc. of McLean, Va."A real area of focus for Netscape has been business-to-business commerce," said John Menkart, director of federal sales for Netscape. "So what we see is more catalog hosting, electronic transactions and [electronic data interchange] on the Internet as really the next big stage for the combined company."Thorp said he sees agencies developing Internet applications for both internal and external users. For example, the Postal Service could develop a Web page where businesses could check on the status of packages and order postage, while postal employees use the Web to track trucks, monitor routes and manage fuel consumption.Agencies also are looking to use Web-based solutions to expand their EDI capabilities, Menkart said. Traditional EDI requires special networks and equipment, but Web-based products can be used by anyone with a browser, he said.In conjunction with the deal to buy Netscape, AOL has entered into a three-year development and marketing pact with Sun Microsystems Inc. of Mountain View, Calif., to jointly work on electronic commerce and Web-enabled technologies. Sun also will use Netscape products on its hardware.The linking of AOL and Netscape and their alliance with Sun will create an attractive partner for systems integrators, Thorp said. "People are going to want to be in a position to partner with this team," he said. "It could be a very good play for people who want to do things early with us."The company already has relationships with integrators such as Computer Sciences Corp., Electronic Data Systems Corp. and Science Applications International Corp., but e-commerce projects will require more partnerships, he said. "We are not just talking about putting in a browser," he said.Menkart said: "Netscape is a product company, and the integrators are the people that know the most about the [agency's] environment." AOL's deal with Netscape and Sun shows the forward thinking of the three companies, said Dawn Simon, an equity analyst with the investment firm Brown Brothers, Harriman of New York. E-commerce systems are becoming much more complicated as organizations attempt to link more and more systems together, she said."The place where you normally run into trouble is where the operating system and the software clash, and each company points a finger at the other," she said. But with AOL, Netscape and Sun working together, a more integrated, end-to-end solution is possible."They are thinking ahead and trying to alleviate many of the stress points and many of the fears for implementing e-commerce," Simon said."This is a deal made in heaven," said Steven Frenkel, an analyst with the investment firm, Joseph Stevens & Co. of New York. "And it is a torpedo right in Microsoft's belly."While AOL picks up access to more enterprisewide products and customers, Netscape gets the security of being an AOL subsidiary, analysts said."I think people were concerned about Netscape's long-term future," Dornan said. "This gives them the solid backing of a large, reputable outfit like AOL that can pump some more investment into them."