AOL and Netscape vs. Microsoft

01/23/02

 

AOL has entered a suit (for jury trial), on behalf of its Netscape acquisition, against Microsoft.  AOL claims since Microsoft was judged to have used its monopoly powers in the operating system market into the browser market that AOL/Netscape can claim damages for its losses to Netscape Navigator in that market, as well as collateral damages to other Netscape software opportunities lost.

 

Claims

 

Whether a court will find that Thomas Penfield Jackson’s findings of law and fact (which were confirmed by the appeals court) can be extended to support AOL’s claims is a matter for the legal system. At issue will be:

 

Will the court allow AOL/Netscape’s claim for the PC/Intel market to stand (it’s pretty broad) or will they require it to be narrowed.

 

How did AOL value Netscape’s browser when it purchased the firm for $4.2 billion in 1998?  If it booked Navigator at zero, for the purposes of the acquisition, it might be difficult to claim damages now.  We asked AOL’s John Buckley how Netscape had valued Navigator at the time of acquisition, but he said that would be a matter that would be established later, in court.

 

How does AOL justify its own decision to use Microsoft’s Internet Explorer (IE) browser rather than Netscape Navigator, both before and after the Netscape acquisition.  Buckley pointed out that AOL chose IE in 1996 in exchange for a premium position on the Windows screen, providing market access to a market Microsoft controlled through its operating system monopoly.  In 1998, when AOL acquired Netscape, it was still contractually obliged to continue using IE in exchange for the Windows screen position (even if it might have preferred to switch to its own Navigator).  Incidentally, AOL believes that contract is still in place; Microsoft claims it ended in 2001.

 

Damages

 

More interesting to us, I think, is the question of why AOL did this now, more than three years after its Netscape acquisition and what punishment or damages might be appropriate.  AOL has not asked for a specific amount, but is requesting both damages for a variety of actual and potential business Netscape might have had as well as for a tripling of damages, awarded in particularly severe cases as punishment and prevention.  Amounts as high as $12 billion are being bandied about, (not by AOL).

 

It is certainly true that Netscape entered the browser market before Microsoft and therefore enjoyed a large market share at one time.  Today, Microsoft includes Internet Explorer, their browser, with the Windows operating system, and has an 80 to 90% market share.

 

But how the market got from its early stage to where it is now, over a period of about seven years, is quite another story.

 

Microsoft’s first attempts at browsers were not nearly as successful as the highly rated Netscape Navigator and were not important in the marketplace until they improved markedly. 

 

By 1996, when AOL could have chosen Netscape or Microsoft as its browser, it was already an important player with many customers.  Certainly, getting onto the Windows desktop was an important marketing advantage, but AOL marketed by sending out millions of sign-up diskettes (later CD’s) and could easily have chosen to extend Navigator’s marketing by including it in their advertising kit.  

 

We spoke with Microsoft spokesperson Jim Desler who said that, of course, from a legal standpoint it’s a separate case, but that the timing seems strange.

 

"MS is working very hard to resolve the legal matters in front of us (that is, the penalty phase of the antitrust case).  We're still in the Tunney Act process (when public comment can occur; this will be ended in another week or so). AOL may be trying to influence that process or act behind the scenes with the non-settling states,” Desler stated.  He continued, “It's good for the industry to move beyond these legal matters and focus on building great products. That's what the industry needs.” 

 

Dealer declined to characterize AOL’s motives. He claims that Microsoft has made an extra effort in working with AOL on such issues as interoperability and coordinating instant messaging, and at every turn AOL has refused Microsoft’s overtures. “Moving forward,” Desler said, “we're still interested in working with AOL on items of concern to our mutual customers.  It's important that we work together to provide those customers with a positive experience.”

 

Some on-line sources have compared this suit to a low-cost lottery ticket like this article from TCS Tech Central Station: http://www.techcentralstation.com/1051/ techwrapper.jsp?PID=1051-250&CID=1051-012302E.  They seem to mean that AOL is taking advantage of the government’s considerable investment in the Microsoft antitrust litigation and then piggybacking its civil litigation on at the end, at a much smaller cost, assuming the courts will accept the previous rulings as a given.

 

Antitrust Remedies:  The Problem Is The Time Lag

 

Antitrust cases of any kind are always problematic in that remedies come so far behind any actual damage (in time) that they are rarely actually remedies at all.  Let us look at a few possible remedies from that point of view.

 

If AOL got the court to provide injunctive relief (which it has asked for), it might require Microsoft to provide versions of Windows without IE and other add-in applications (e.g., instant messaging).  This would permit AOL a vanilla platform on which to offer its own software, but would require OEM’s, VAR’s, retail stores, or (most important) users to separately acquire, install, and integrate two increasingly complicated pieces of software.  Someone would have to pay for that – and it wouldn’t be AOL.  Is that a consumer benefit?

 

Netscape’s Navigator software has been shamefully neglected in the three+ years since AOL bought it.  It is unlikely that it could win back significant market share without a major investment in time and money to bring it “up to standard.”  Does AOL intend to do this?  Why would they expect anyone to buy it otherwise?  And if they have no intention of doing so, what is the point of injunctive relief?  Shouldn’t we just pay them for whatever loss they can prove and move on?

 

AOL may be able to prove that Netscape suffered a financial loss when Microsoft was able to convince the market that browsers should be free.  We might argue that browsers are really part of the user interface to the operating system as the Internet became another environment to interoperate with – but that’s another battle.  The courts have already ruled that Microsoft had the right to integrate the browser (or anything else, it seems) into the operating system.  It is possible that a jury might choose to award some monetary damages to AOL on behalf of Netscape here (never mind the logic of why Netscape, which got $4.2 billion from AOL, suffered any loss at all).

 

The line I’m really not willing to cross is the notion that somehow Netscape or AOL would have been able to sell lots of server software if they had done better in the browser market if only Microsoft wasn’t forcing them out by leveraging its monopoly in the operating systems market.  This flies in the face of reality. 

 

(1) 

Netscape did a terrible job of marketing its server software, suffering always from a lack of focus, a constant rearrangement of its goals, and a lack of appropriate consulting or technical resources to support customers who might have wanted to buy and implement its products.  (Lotus was fond of saying that they (meaning IBM) had more technical staff in Columbus, Ohio than Netscape had in the entire company.)  

(2) 

AOL did virtually nothing to market its Netscape software after the acquisition, turning the job over to Sun as a partner.  The kindest thing I can say here is to repeat the words of Scott McNealy, Sun’s CEO.  He likes to say that Sun is in the business of selling servers, not software.  From his point of view, software exists to drive demand for more servers.  This is not a good way to drive market share in the software business.  AOL has recently turned over all of the server software assets from its Netscape acquisition to Sun as their owner.   

(3)

This is not a two-horse race, between Netscape and Microsoft.  There are lots of other software vendors in the server software business and quite a few of them do BETTER than Microsoft.  Consider BEA and IBM in the Web Application Server business, for example.  If others can be successful in competing against Microsoft in this segment, perhaps Netscape’s problem was about software or management or timing, not about monopoly practices.  

 

 

Customer Friendly Solutions

 

Frankly, I am bored with vendors who pursue their own interests and then claim they are doing it all for the customers.  If AOL and Microsoft had the customers’ best interests in mind, they would sit down and figure out how to insure maximum interoperability between Windows, Internet Explorer, and AOL, with its more than 30 million users. 

 

If Microsoft is found to be guilty of having damaged Netscape in the past then the court should find appropriate monetary charges to cure those damages.  Such damages should take into account that Netscape was well compensated for its initial efforts by its sale to AOL and that some value for the Navigator browser may have been established in that transaction. 

 

It is not acceptable to further complicate the way customers do their work, to interfere with the settlement of existing legal cases, or to pretend that we can set back the clock, rewind, and replay a software industry that is already well established to some other and different conclusion.

 

Software companies should be about building great software, not about hiring great lawyers and winning cases. 


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