On November 24, 1998, America Online purchased Netscape, the pioneering web browser maker and dotcom darling, for $4.2 billion. In this blog post, we will try to figure out why AOL bought Netscape.
An odd matchup
The matchup between AOL and Netscape never made perfect sense. AOL was an Internet service provider, but they distributed Microsoft Internet Explorer on their CDs. This was a concession to Microsoft.
Microsoft had its own competitor to AOL, which they called MSN. Windows 95 came bundled with MSN from the very start. Using a monopoly in operating systems to get a monopoly in online services is illegal, and AOL knew it. So it wasn’t difficult to get Microsoft to distribute AOL with later builds of Windows 95 alongside MSN. The concession Microsoft wanted was that AOL would continue to use, distribute, and promote Internet Explorer.
Using a monopoly in operating systems to get a monopoly in online services is illegal, but apparently using the threat of using a monopoly in operating systems to get concessions in order to get a monopoly in web browsers isn’t illegal. Or maybe this is a case of justice being for whoever can afford it. AOL could afford it. Netscape, not so much. AOL knew something about that.
The AOL alliance with Sun Microsystems
The key to the deal may have actually been Sun Microsystems. Netscape had two products. It made a web browser, but it also made a web server. AOL wasn’t interested in producing, distributing, and selling web server software. But Sun Microsystems was. AOL partnered with Sun to buy that part of the Netscape business.
It’s easy to forget this now, but at the time, Sun seemed like one of the most likely candidates to break up the Microsoft monopoly on operating systems. Their plan involved Sun’s theory was they could build inexpensive, low power computers based on its Java technology that could provide a graphical experience with lower overhead than Windows. The cover story of the January 1997 issue of Byte magazine explored this concept.
If Sun was going to flood the market with inexpensive computers for the home, AOL wanted in on it. They wanted those computers to run AOL. So part of the deal was that Sun would include AOL in its plans, and in return, AOL would buy software and equipment from Sun. If it had panned out, that might have been worth $4.2 billion to AOL.
What went wrong?
The market soon did get flooded with inexpensive Internet-capable computers for the home. But they ran Windows. In late 1998, Emachines introduced its first $399 computers. At that price, Internet service providers could afford to subsidize the purchase price in order to grow the market. And they did.
Meanwhile, the idea that Java could be more more efficient, faster, less buggy, and more secure than Windows didn’t exactly pan out.
So that’s why you may very well know someone who had an Emachines PC around the turn of the century, but don’t know anyone who had a Sun Java powered lightweight computer/appliance thingy that ran AOL. I guarantee you don’t know anyone who had one of those because that product didn’t materialize.
In the end, AOL paid $4.2 billion for a white elephant. They hoped they could slow Netscape’s decline in market share and gain something by bundling AOL Instant Messenger along with it, to better compete with instant messaging software from Yahoo and Microsoft.
I don’t think anyone will argue with me if I say AOL didn’t extract $4.2 billion worth of value from the Netscape purchase, and it was an inglorious end for the IPO that launched the dotcom boom. In the end, AOL cut bait by open sourcing the code, which created the Mozilla Foundation. Mozilla Firefox is the direct result of this effort. Today, Firefox is a minority browser, but it is the only browser that isn’t controlled to a large extent by either Google or Apple.
The Netscape deal was a bad deal for AOL, but we don’t really think about it much. The Time Warner deal overshadows it, as one of the worst mergers of all time.
David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.