VIRTUAL MERGER

November 24, 1998
		Internet giants AOL and Netscape Corp. announced that the two companies will merge. Jim Lehrer and guests discuss what impact the $4.2 billion deal will have on the hi-tech industry. Also, participate in an Online Forum on this topic.

Online Forum What will be the impact of the proposed AOL/Netscape merger? Nov. 12, 1998: Discussion on the Microsoft trial. May 26, 1998: Is the Justice Department stifling or protecting innovation? May 18, 1998: George Gilder and Paul Gillin help put the Microsoft suit in historical perspective. Feb. 19, 1997: AOL attempts to keep up with growing demand for time online. Sept. 20, 1996: Tom Bearden reports on the growing browser war between Netscape and Microsoft. Browse the NewsHour's coverage of cyberspace and business.     Netscape America Online Sun Microsystems Yahoo!'s coverage of the Netscape/AOL deal	JIM LEHRER: Today's big online software deal. John McChesney is covering the story for National Public Radio; David Yoffie is a professor at the Harvard Business School, co-author of the book Competing on Internet Time; Andrew Shapiro is director of the Aspen Institute's Internet Policy Project. John, first, let's begin with some basics. Tell us about America Online. What exactly does it do?
	America Online.
	JOHN McCHESNEY: America Online is the biggest online commercial online service right now, has 14 million subscribers, as you pointed out. It has its own control space, which is not part of the Internet, where you can get all kinds of services, all kinds of content, different magazines, newspapers, and so on. That's its contained world. It also is a gateway to the Internet, and it allows you to go out on to the big broad Internet and look at other things. JIM LEHRER: Is it a large company in terms of – in its field, is it a bit player? JOHN McCHESNEY: It is the largest commercial online service. It has the most Internet subscribers, if you want to put them as Internet subscribers, 14 million people – is the biggest. Microsoft's network, for example, has only 2 million subscribers. So that puts it in some perspective. They're now even bigger, having bought this -- JIM LEHRER: Netscape. JOHN McCHESNEY: Having bought Netscape. JIM LEHRER: All right, now, Netscape was a software company. Tell us about them. JOHN McCHESNEY: Well, Netscape makes still a very popular Internet browser called the Netscape Navigator. It has a very popular Internet portal site, one of these big super sites, made big by the fact that most of us don't change our default browser site, and so when we launch our browser, we get pointed right at this portal sites. That's the Netscape NetCenter, 20 million visitors every month – JIM LEHRER: I think you're going to have to explain that to me. I mean, if you turn on – I know when I turn on to go on the Internet, I get on into a browser and the browser does all of that, and whether it's – JOHN McCHESNEY: You click on the browser, and if you haven't changed anything in the browser, say it's a Netscape browser, you land on the Netscape NetCenter automatically. It just takes you there automatically. You have to go in and fiddle with it in order to point it somewhere else. Say you wanted to go to your own Web site, make that your home page, you'd have to go in and tinker with it yourself. Most people don't do that. They leave it alone. They end up on Microsoft's super site or they end up on Netscape's or they end up on Yahoo, if they go in and fool around with it.
	The $4.2 billion deal.
	JIM LEHRER: Now put these two together. What exactly now is America Online going to get for its $4.2 billion? JOHN McCHESNEY: It gets that popular browser. That's a very important thing. It's still half of the market out there for Internet browsers. The other half is Microsoft's Internet Explorer. It gets that super site, that Internet portal site, as they're called in the jargon of the industry. That adds a lot of eyeballs to its daily Internet viewing, and those eyeballs are worth a lot of money. There's one estimate by Forester Research that AOL will now garner 35 percent of all advertising revenues on the Internet. That's a big deal. It will also get the software -- JIM LEHRER: Why will they do that – just by buying Netscape – how will that happen? JOHN McCHESNEY: Well, they have a lot of advertising dollars within their own service right now. They can command 14 million subscribers, advertisers will pay for that. Now with the 20 million people who visit -- JIM LEHRER: And we ought to keep that in perspective. That compares say with -- the daily circulation of the New York Times is something at a million. JOHN McCHESNEY: Yes. JIM LEHRER: And a television network at any given time in – ten/fifteen million, probably in that same range, right? JOHN McCHESNEY: Right. So you're talking a lot of people here. And the advertisers will pay for that. 35 percent of ad revenues on the Internet is a big deal. Internet commerce, which they emphasized this afternoon in their news conference, that this is all aimed at Internet commerce, allowing people to establish businesses on that Net Center and on AOL's site, there's an estimate that by 2003 about $3 trillion worth of business will be done on the Internet. That's about 5 percent of all sales worldwide. So it's pretty big business we're talking about.
	Good for the consumer?
	JIM LEHRER: All right. Now, Mr. Yoffie, beginning with you, now, is this a good thing for people like us who use the Internet and are customers, or potential customers? DAVID YOFFIE: I think it's a good thing for consumers in general. For the most important reason, it provides real competition to Microsoft. If we didn't have this merger, one possibility was that Microsoft would simply become the dominant browser and the dominant default page, and most of us would just end up going directly to Microsoft for all of our content on the Internet. JIM LEHRER: How does this change that? DAVID YOFFIE: Just as we heard, by combining AOL with Netscape, potentially you're able to drive at least of the half the users of the Internet today to their combined site. And it strengthens the competition to Microsoft because it strengthens the ability of Netscape and Net Center to add more content and to add more value for most consumers. JIM LEHRER: Now, Mr. Shapiro, there are some potential down sides to this as well, are there not? ANDREW SHAPIRO: I think there are some down sides. I mean, an Internet world that is dominated by Microsoft and America Online in some ways is kind of like a culinary world being dominated by McDonald's and Burger King. One of the promises about the Internet industry is that it wouldn't have all of the consolidation, the conglomeratization that is so common in other media and information industries. There was the hope and the notion that we might have truly robust competition. Obviously, in a real politic sense, this is a good thing in terms of we have a huge Goliath in Microsoft. And we do need more competition and the fact that AOL will have the strength of Netscape is a good thing in that sense. But in an ideal picture, would we really want a world in which there are two or three or even just four major companies controlling a resource that's as important as the Internet? I don't think so. We want to have even a more robust and diverse marketplace than that.
	The competition.
	JIM LEHRER: Mr. Shapiro, is it correct to say then that the fact of this merger means it's even more unlikely that there would be a third and a fourth and a fifth competitor with Microsoft? ANDREW SHAPIRO: Well, there are people saying now with AOL taking over Netscape and Yahoo being added to the picture, we may get increasingly back to the model that we had in television and not the cable world of today but a few major networks. The question is: What kind of world do we want to have with these new resources? And I think we can strive to have even more competition, so that new entrants can really get into the market. And while I think this deal is a good thing for now, it certainly – I mean, Microsoft is trying to make the argument that, you know, the fact that AOL and Netscape and Sun can do this deal is proof that there really is fluidity in this industry. I don't think that's the case. If anything, it shows, in fact, how desperate we are to try to come up with some competition in this market. And there actually needs to be more than there's going to be after this deal. JIM LEHRER: Mr. Yoffie, what's your view of that? DAVID YOFFIE: I don't think the Internet is going to be anywhere near as concentrated as we just heard, that there may well be only three big portals, but there will still probably be two or three other portals that will become major -- JIM LEHRER: What would be the third? DAVID YOFFIE: Well, we have AOL, Yahoo, and Microsoft. JIM LEHRER: Okay. All right. DAVID YOFFIE: And then we might add Excite and perhaps Lycos, and there are still a few others like Snap, which is combined with NBC, and Infoseek, which is now combined with Disney. And all of those together are going to provide a variety of services that will provide the entry point for many people doing Internet. So we may have three big ones, but we're going to have a lot of smaller ones that will be more focused. They will still provide a lot of competition on the Internet more generally. In addition, I don't think Microsoft is going to get off the hook quite so easily with the Department of Justice. Even though Microsoft would like to claim that this now absolves them from any guilt or difficulty, the reality is that Microsoft still is potentially liable for using its market power to put Netscape into the position where it had to get acquired by AOL today. JIM LEHRER: Mr. Shapiro, do you see that differently? ANDREW SHAPIRO: Well, the only thing I see differently about it is that I tend to look at this in what you might call aspirational terms. And I think that the idea of having three portals frankly doesn't live up to the full potential of the Internet. I mean, frankly, we're only five years into this. The fact that we're resigned to saying, hey, at least there will be three portals and a couple of other spaces that people can use as gateways to the Net, the whole idea of the Internet was that individuals would be empowered to be able to create content and be accessible to everyone. And frankly, I think what we're seeing here is what I would think of as a sort of media domination theory based on paths of least resistance. When you go to these different portals, the question is whether you're going to just stay there and visit the content they want you to visit, which is an issue that's being litigated in the Microsoft case with regard to the desktop, or whether there's really going to be an abundance of content, of diverse content that people can get their hands on.
	Anti-trust roadblocks?
	JIM LEHRER: John McChesney, back to you for a moment – with this difference of views in mind, take us through what the procedures will be to determine whether or not there is, in fact, this merger between Netscape and America Online. Are there antitrust provisions that have to be coped with, do all these concerns have to be dealt with? JOHN McCHESNEY: It will be reviewed by the Federal Trade Commission and the Justice Department. But most people I've talked to don't think that there will be any danger of it being turned down by them. On the one hand, they can point to it and say, this increases competition in the marketplace out there – and that's something we want to do. It doesn't decrease competition. And on the point these two gentlemen were just talking about, it's important to understand, I think, that in this portal business, what we call the portal business, only 15 percent of Internet traffic goes through those portals. The other 85 percent is attached to other pages on the Internet. JIM LEHRER: Like what? Give us -- JOHN McCHESNEY: So it's not a concentrated thing. JIM LEHRER: You mean, say, if you go to the NewsHour Online – Online NewsHour, you go directly there -- JOHN McCHESNEY: Right. You might set that as your default home page. JIM LEHRER: Right. JOHN McCHESNEY: I set NPR as my default home page. JIM LEHRER: That's mine, is the NewsHour. Right. JOHN McCHESNEY: So a lot of people don't use those portal sites. JIM LEHRER: And you can go from there to anywhere else. You don't have to necessarily go through these other ones. JOHN McCHESNEY: These companies are doing everything they can to create what they call sticky applications – one of my favorite words – so that you will stay -- JIM LEHRER: What in the world is that? JOHN McCHESNEY: Well, it's a content or a game or something that keeps you inside their site and not – and you're not enticed to go wandering off in the rest of the Internet.
	Sun Microsystems.
	JIM LEHRER: Now, they mentioned -- I think it was Mr. Yoffie mentioned the Sun Microsystems part of this too. Explain what that is. There was another piece of this. JOHN McCHESNEY: Sun gets to license Netscape's -- JIM LEHRER: First of all tell us, tell us what Sun Microsystems is. What kind of company is it? JOHN McCHESNEY: They make computers, and they make software. They make a system called Solaris and they make computer chips. Most of those are used on high-end work stations in companies. We don't see many of them. They run on UNIX operating system, an operating system that most of us don't use. They also make Java, which is a hot new Internet software language. What Sun will get is they'll get the license, what's called the back end e-com – or electronic commerce software from Netscape. And they will develop that and expand it and sell it to other companies so that these three companies will be able to provide what they call an end-to-end business relationship. They can set up electronic shops for people who want to set up shops, and they can do it from the whole – through the whole business. And Sun also gets to use Java, which is – its software language – to put that on Netscape's Navigator. And AOL will get to use Java probably to develop a set top box to compete with Microsoft's WebTV – this is a little box that you put on top of your television set and it allows you to browse the Internet using TV. JIM LEHRER: Instead of the computer. JOHN McCHESNEY: Yes. And AOL will get to develop something – some device like that, probably using Java, and other handheld devices, other kinds of things, which you can access AOL all over the world using your little Palm Pilot or cell phone. JIM LEHRER: Mr. Yoffie, how would you fit the Sun piece of this into this? DAVID YOFFIE: One of AOL's biggest difficulties is that they're a consumer marketing company. They are used to dealing with a very broad base of consumers, and they don't know very much about the enterprise software business and selling to large corporations. So it is very important for them to get Sun into the deal to help them maintain the largest piece of Netscape's business. $400 million of Netscape's revenues comes from this kind of software, not from their Internet portal. And for the acquisition to make sense, to spend $4 billion, you needed to get a company like Sun involved. But one of the things we have to remember is that Netscape's real competitive advantage in the marketplace has been that it's been platform independent, meaning it didn't depend on any particular operating system or any particular software. And the problem that we're going to see in this merger is that Sun obviously wants to push its own software, Solaris, and we have to make sure that Netscape doesn't end up becoming a captive of Solaris. Otherwise, we'll destroy a lot of the value in the company.
	Java's virtual machine.
	JIM LEHRER: Mr. Shapiro, your view of the Sun part of this. ANDREW SHAPIRO: I think it's a very positive deal for Sun. They get into the enterprise business further with Netscape with the deal. They're also going to get support for Java, which you know – this may all sound like Greek to people at home, but -- JIM LEHRER: Not just those at home, Mr. Shapiro, but -- ANDREW SHAPIRO: Java is a very important technology because it doesn't rely essentially on the Windows monopoly. And in that sense it's the real competitor of Microsoft. The fact that this deal gives Java a boost is a good thing for consumers. The other thing I should mention is that although AOL is winning in this deal, the real winner might be Netscape because this is an exit strategy for them. They've been clobbered by Microsoft recently in the browser war. And this is an exit strategy for them and their investors. JIM LEHRER: Well, thank you all three, gentlemen. I think I understood a good 50 percent – high of 50 percent of what you said. But this is – this is the world, the new world, and we all need to understand it. Thank you very much.

REGIONS TOPICS RECENT PROGRAMS ABOUT US FEEDBACK SUBSCRIPTIONS / FEEDS:

Support the kind of journalism done by the NewsHour...Become a member of your local PBS station.
PBS Online Privacy Policy Copyright ©1996- MacNeil/Lehrer Productions. All Rights Reserved.