America Online's purchase of Netscape Communications Corp. will have huge consequences for the future of computing. And that can only mean one thing: Microsoft Corp. has much at stake.< America Online today agreed to buy Netscape Communications Corp. in a $4.21 billion deal that could shift the balance of power on the Internet while improving and expanding service for its millions of subscribers.
AOL could become a dominating force on the Internet by simply combining the strength of its 14 million members with Netscape's industry-leading software that allows users to access the World Wide Web.
At the same time, AOL -- with its novice-friendly controls and tightly packaged service and entertainment offerings -- could also emerge as a chief nemesis for Microsoft Corp.
"The acquisition of Netscape is a big step forward for America Online that will greatly accelerate our business momentum," AOL Chairman Steve Case said today.
"Netscape has played a key role in helping consumers benefit from the enormous power of the Internet, and we share the same mission."
Under the deal, AOL, based in Dulles, Va., is expected to operate Netscape as a separate division in Mountain View, Calif. Netscape would cease to exist as an independent entity.
"This exciting partnership enables us to deliver even better and more complete products and services to both existing and new customers," said Netscape Chief Executive Officer James Barksdale, who will join AOL's board of directors under the agreement.
Netscape shareholders will receive 0.45 shares of AOL stock for each of the 99.5 million outstanding shares of Netscape stock.
The agreement also includes Sun Microsystems. Under a three-year deal, Sun will distribute Netscape's business-level "server" software, and AOL will use Sun's Java programming technology -- which lets programs run on a variety of types of computers -- to offer AOL services on what the company called "next-generation Internet devices."
The alliance poses new competition for Microsoft, whose own business tactics against Netscape were so aggressive that the federal government is suing Microsoft for alleged antitrust violations.
Microsoft's Internet software competes against Netscape's, and its Microsoft Network online service rivals AOL, although MSN has been far less successful.
Sun competes against Microsoft in several areas, from rival operating systems to its Java technology that runs programs on many types of computers, not just those using Microsoft's Windows.
All three companies share a general disdain toward Microsoft and are testifying on behalf of the government at Microsoft's antitrust trial in Washington.
At the trial today, Microsoft attorneys urged the government to drop its antitrust suit, arguing that the announced merger of America Online and Netscape undercut claims about Microsoft's anti-competitive behavior.
"The government's case was groundless from the outset," said Microsoft general counsel Bill Neukom. "This deal announced this morning drives home the central point -- that the marketplace can take much better care of consumers than can the government seeking to regulate high technology."
Justice Department attorneys had no immediate response to Neukom's comments, but they predicted Monday that the merger would have little effect on the civil case.
"The issue in this case is whether Microsoft has a monopoly of the operating system and whether Microsoft improperly used its monopoly power to forestall its competition," said government attorney David Boies. "That issue is going to exist regardless of whether one of the companies gets acquired by another company."
Meanwhile, a Washington public-interest group run by Ralph Nader, the Consumer Project on Technology, promised to protest the AOL-Netscape deal.
The group's director, Jamie Love, said its opposition in part stems from the market for Internet software -- generally split among Netscape and Microsoft -- already being too concentrated.
It also objected because many of the nation's hundreds of private Internet providers currently distribute Netscape's browser for licensing fees. Under the deal, those providers would indirectly be funding AOL, among their greatest rivals, by paying it fees for Netscape's software.
AOL has enjoyed phenomenal success and surprising customer loyalty in the face of periodic service outages, price increases and notoriously inferior Internet connections. The acquisition of Netscape may justify that loyalty and help AOL build upon it.
"The Web via AOL is a painful experience," said Tim Sloan, an analyst with Aberdeen Group in Boston. "If anyone can help them fix that, it'd be Netscape."
Currently, AOL is the top Web property, attracting more than 30 million unique visitors per month, while runner-up Yahoo Inc. pulls in some 29 million, according to Media Metrix, a New York-based Internet rating service.
But Yahoo is generally viewed as the stronger Web presence because so many of AOL's visitors are the service's members who must dial into AOL and go through it to reach the Web.
Netscape offers enticing assets -- more than 20 million unique visitors per month, strong business-to-business commerce features and tight integration with the industry-leading Netscape Navigator browser.
If AOL can skillfully integrate them with its own "you've-got-mail" brand of familiarity, it could rapidly overtake Yahoo, some analysts say.
The deal also could provide a check on Microsoft's growing power on the Web -- in part because despite years of efforts to build its own Web presence, the software giant has lagged behind the industry leaders.
Meanwhile, Yahoo and Microsoft remain formidable competitors with deep enough pockets to buy their way out of many a competitive disadvantage.
Another danger: AOL still needs Microsoft. And buying Netscape, the company that provoked the Justice Department lawsuit against the software giant, could earn AOL a terrifying enemy.
"Maybe it alienates Microsoft too much," said Chris Charron, an analyst with Forrester in Boston. "AOL still needs a relationship with a company that controls half the browser (market)."