Google: Just like Netscape

Editor’s note: Russ McGuire is the online director of Business Reform Magazine. Each issue of Business Reform features practical advice on operating successfully in business while glorifying God.

In the past few weeks, buzz has started to grow about the IPO (initial public offering) market, and these days, that automatically sparks speculation about a Google IPO. Many are hoping for a Google offering to launch the kind of wild, wealth-creating stock market rides that were born out of Netscape’s IPO in August of 1995. I believe that a Google IPO would likely be very successful. However, I think it’s also important to understand that Google’s long-term prospects are frighteningly similar to Netscape’s demise.

This past Wednesday, two real estate companies completed successful initial public stock offerings. American Financial Realty Trust raised $699 million and their stock jumped 14% in the first day of trading. Maguire Properties raised $694 million. That stock held its value during the first day. Two more IPOs are scheduled for this week: Axis Capital and Molina Healthcare. USA Today quoted Morningnotes.com President Ben Holmes enthusing about the completed deals: “IPOs have been greenlighted. These are exciting deals.”

For about a year, investors have been hopefully looking westward to search-engine leader Google. As Paul R. La Monica expressed in his CNN/Money column: “What the sector needs now (beside love, sweet love of course) is a Google IPO.” The sector he’s talking about is technology stocks, and what everyone is hoping for is the kind of go-go tech stock market we saw emerge after Netscape’s IPO.

Of course, there are many differences between a potential Google IPO and Netscape’s IPO. For starters, we’ve already had the Internet bubble burst and investors hopefully will be wary of backing a new flood of new companies built on a cool idea rather than a sound business strategy. And that points to the biggest difference between Google and Netscape – Google is profitable! Of course, as a private company, they don’t publish their financial results, but Google CEO Eric Schmidt has publicly confirmed his company’s profitability. Furthermore, while Netscape was creating a new market and actually created the front edge of what became the huge growth wave in the Internet (the total number of Internet web surfers multiplied many times over during the past 8 years), Google has entered and won a relatively mature market which, today, sees relatively moderate growth.

However, I believe the most sobering comparison for Google is in trying to determine why it is immune from the kind of competitive onslaught that Microsoft used to kill Netscape.

Netscape effectively no longer exists. America Online purchased the remnants of the company in 1998 and it still exists as a small division within AOL/Time Warner. However, AOL itself recently signed an agreement with Microsoft to replace the Netscape browser technology with Microsoft’s Internet Explorer in the America Online service. You can certainly argue that Netscape’s browser technology was better than Microsoft’s, and you can certainly argue that Mozilla, the open source project that was birthed from Netscape’s technology will continue to outpace Microsoft, but you can’t refute the truth that the company that was born in 1994 and IPOed in 1995 fell victim to a cruel (and later judged illegal) competitive onslaught by the most powerful technology company in the world.

What would keep Microsoft from stealing Google’s market position?

Google’s initial strength came from their development of new software technology to significantly improve Internet search results. Their successful implementation of this technology, combined with very successful marketing have allowed them to become the dominant Internet search engine, and one of the most popular destinations on the Internet. They have successfully translated those assets into a successful business model, primarily by selling paid placement ads in a way that effectively serves the needs of both advertisers and searchers. Their brand is extremely strong and they are beginning to leverage that brand strength into new areas, including news aggregation, shopping price comparisons, and online publishing. However, the health of the company depends on their search dominance.

The above description could have, with just a few minor changes, been used to describe Netscape at the end of 1995. By the end of 1998, the company was running out of money and desperate for a buyer. What happened? I think we all know the answer. Microsoft decided to focus on the Internet opportunity. They poured their extensive research and development resources into developing software that could compete with Netscape. They used their dominance in desktop software to (illegally) displace Netscape as the obvious best choice for consumers needing a browser. By the time they were caught and punished for their misdeeds, Netscape was gone. As of February of this year, according to OneStat, Microsoft’s Internet Explorer has 95% of the browser market, compared to Netscape’s 2.9%.

Could Microsoft do the same to Google?

Could Microsoft develop software technology to create a search service that could compete with Google? Most likely – they have the resources.

Can Microsoft compete with Google in brand strength and business savvy? Undoubtedly.

Can Microsoft establish as strong of a web presence as Google? According to Alexa, MSN.com is the 2nd most popular site on the web. Google is ranked 5th.

Can Microsoft develop an advertising model that works as effectively for both consumers and advertisers as Google’s? They probably don’t need to – they can either continue to use Overture’s equivalent service, or they could acquire Overture.

Can Microsoft pursue extending their strength into new products the way that Google has? Microsoft has been extending from strength into new opportunity since the day that MS Basic was first released.

Can Microsoft use their desktop dominance to crush Google the way they crushed Netscape?

Microsoft technically could make Internet Explorer automatically use Microsoft’s own search engine instead of being open to the search engines of Google and others. However, this would undoubtedly be immediately challenged in court. Additionally, Microsoft themselves have hindered this possibility by slowing the release of new versions of Internet Explorer.

However, I’m sure that, if Microsoft wants to win the search battle, they will find a way to leverage their market strength to make it happen. They will choose a strategy that isn’t blatantly anti-competitive, or at least that takes years to settle in court. I’m sure they’ve learned a few lessons from their Justice Department dealings to date and will apply those learnings in future activities.

So – in short, there’s really nothing defensible about Google’s position. If Microsoft wants to beat them the way they beat Netscape, they will.

The question is, would Microsoft want to own the search space?

In the case of Netscape, the combination of the Netscape browser and Sun’s Java technology represented a fundamental threat to Microsoft’s core operating system and application businesses. Bill Gates made “winning the Internet” a literal do-or-die requirement. It is unclear how Google can represent a similar threat to Microsoft.

Microsoft’s survival threat today comes from the open source movement, and unlike the Internet, open source lacks a central target equivalent to Netscape. Are there links between Google and open source? Sure. But wiping out Google wouldn’t kill the open source movement. (Making linux a non-viable operating system might, but that’s a different story…)

Since search merely represents an attractive opportunity and not a dangerous threat, I’m guessing it won’t be worth any bet-the-company moves from Microsoft. It may still make sense for Microsoft to acquire Overture or spruce up the MSN search capability or more tightly integrate Microsoft’s search capabilities into Internet Explorer, Windows, and Office. But it’s unlikely that Microsoft would seek to crush Google.

However, anyone anxious to invest in a Google IPO should keep in mind what really happened to Netscape, and the reality that Google could, very easily face the same fate.

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Russ McGuire is Online Director for Business Reform. Prior to joining Business
Reform, Mr. McGuire spent over twenty years in technology industries, performing various roles from writing mission critical software for the nuclear power and defense industries to developing core business strategies in the telecom industry. Mr. McGuire is currently focused on helping businesspeople apply God’s eternal truths to their real-world business challenges through Business Reform’s online services. He can be reached at [email protected].