Competing On Internet Time

Lessons From Netscape and Its Battle With Microsoft

David B. Yoffie, Michael A. Cusumano

• Publisher: Free Press
• Year: 1998
• Print ISBN: 9780684863450
• eBook ISBN: 9780684831121
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

Competing on Internet time means competitive advantage can be won and lost overnight. In this penetrating analysis of strategy-making and product innovation in the dynamic markets of commercial cyberspace, bestselling Microsoft Secrets co-author Michael Cusumano and top competitive strategy expert David Yoffie draw vital lessons from Netscape, the first pure Internet company, and how it has employed the techniques of "judo strategy" in its pitched battle with Microsoft, the world's largest software producer.
From on-site observation and more than 50 in-depth interviews at Netscape and other companies, Cusumano and Yoffie construct a blueprint meticulously detailing how the fastest-growing software company in history has competed on Internet time by moving rapidly to new products and markets, staying flexible, and exploiting leverage that uses the weight of its giant rival Microsoft against it. The main source of Netscape's leverage, they argue, has been its skill in designing products that run on multiple operating systems. Microsoft has responded with judo techniques in kind.
Managers in every high-tech industry will discover a wealth of new ideas on how to create and scale-up a new company quickly; how to compete in fast-paced, unpredictable industries; and how to design products for rapidly evolving markets. The lessons that Cusumano and Yoffie derive from Netscape's contest with Microsoft go far beyond start-ups and Internet software. Small companies in any industry and powerful, established firms alike will welcome the principles the authors formulate from this David-and-Goliath-like struggle. Competing on Internet Time is essential and instructive reading for all managers, engineers, and entrepreneurs who want to succeed in ultra-fast-paced markets.

Chapter One

INTRODUCTION

Competing in the Age of the Internet

OCCASIONALLY, THE WORLD experiences a technological revolution that changes the way people live and interact. Ancient peoples experienced the emergence of agriculture, irrigation, and civil engineering. These developments led to the creation of cities and urban culture. Medieval peoples experienced the invention of the printing press. This technology gradually made books, magazines, newspapers, and the printed word–information–ubiquitous. Early modern Europeans championed the Industrial Revolution and new fields of science and engineering. New inventions, such as engines and factories, substituted mechanical devices and inanimate power for animal and human labor. Technology then progressed dramatically after the mid-19th century. The world has recently seen, in relatively rapid succession, the emergence of the telegraph, the telephone, radio, automobiles, airplanes, television, and the computer–to name the better-known inventions in communications and transportation.

And now we have the Internet. The Internet is a network of computers, tens of millions of them, large and small, around the world. More accurately, it is a network of networks, based on a set of software technologies that drive computer hardware to send, receive, and locate “packets” of information traveling a worldwide electronic highway at lightning speed.¹ The Internet has launched a technological revolution that is changing the way individuals, as well as organizations, live and interact. Imagine combining the power of the printing press (and most of the newspapers and magazines on earth) with the power and speed of the telegraph, telephone, radio, television, and computer. Then make this package easy to use and cheap enough for the mass market. You would then have the potential of the Internet in its most usable form, the World Wide Web (known as “the Web” for short).

We are not exaggerating when we say that the Internet and the World Wide Web, with the browser as its user interface, are revolutionizing mass communications, as well as mass networking technology. It is unlike anything we have seen before. The Internet has the potential to link easily and almost instantaneously every computing device with every database with every person who has access to a communications device (telephone, cable, satellite, etc.). As a consequence, the Internet is recasting the most traditional organizations, ranging from the U.S. Internal Revenue Service to your local grocery store. Tens of thousands of companies, both large and small, have created Web sites through which you can purchase goods and services or receive valuable (and not so valuable) information. This means that consumers can do common tasks on the Internet, such as ordering groceries or books and searching for stock prices. They can also do far more complex tasks, such as creating ideal travel itineraries, getting investment or medical advice, or holding a videoconference while sharing documents with people around the world. For anyone in the industrialized world, and for many people in developing countries, access to this great wealth of information and services is already available. The cost is usually the price of a personal computer (PC) or a cheaper device like a handheld computer, a TV set-top box, or the new network computer, as well as a local phone call and a charge of a few dollars per month.

THE AGE OF THE INTERNET

To understand the managerial and competitive implications of the Internet, we draw lessons from the experiences of Netscape Communications Corporation, the fastest-growing software company in history. After Netscape’s explosion on the scene in 1994, it became synonymous with the Web. One year later, Netscape gained even greater–if unwanted–notoriety when Microsoft Corporation, the world’s largest company dedicated to software production, challenged Netscape to a life-or-death battle. Together, these two companies are struggling to control key components of the Internet, including browsers, which provide a graphical user interface to the Web; servers, which are special software programs that run on powerful PCs or mainframes and deliver, or “serve,” information (including pictures or sound) to the browsers; and portals, Web sites like Yahoo! and AOL.com (America Online) that aggregate information and become the jumping-off point for users surfing the Web.

It seems hard to believe that Netscape and the World Wide Web were not even on the horizon a decade ago, and the Internet was a little-known curiosity. The Internet began in the late 1960s as an arcane network connecting university and government computers. Scientists wanted to exchange data and electronic mail. Government officials wanted to be able to communicate if a nuclear war caused conventional communications technologies to collapse. The Internet remained the province of these small groups for 20 years. Then, in 1989, Tim Berners-Lee, a British researcher at the European Laboratory for Particle Physics (CERN) outside Geneva, created a system that would make it easier for scientists to use the Internet to share information. Berners-Lee defined the core elements of the Web–a text formatting system (Hypertext Markup Language or HTML), a communications standard (Hypertext Transfer Protocol or HTTP), and an addressing scheme to locate Web sites (Uniform Resource Locators or URLs). Then he built a rudimentary browser.² In 1993, a handful of students working for the National Center for Supercomputing Applications (NCSA) at the University of Illinois took Berners-Lee’s invention, integrated graphics and multimedia features into the browser, and made it run on mass-market computing platforms, such as Windows and the Macintosh. The result was Mosaic, a wildly popular toy and information access tool. Most of the browsers available today, including Netscape’s Navigator and Microsoft’s Internet Explorer, have descended in some way from NCSA’s Mosaic.

Mosaic launched a wave of innovation that led, in turn, to an everexpanding technological alphabet soup. People working with the Internet have had to learn new concepts and new vocabularies almost daily. In addition to HTTP and HTML, two other early standards that defined how the Internet could send and receive information were FTP (File Transfer Protocol) and TCP/IP (Transmission Control Protocol/Internet Protocol). Many other standards quickly emerged for sending data and even video pictures and telephone conversations across the Internet. The proliferation of these technologies is testimony to the dynamism of the Web. More important evidence, however, is the explosion of Internet-based software and services in just a few short years. Utilizing the technologies of the Web, some companies have quickly grown to hundreds and even thousands of employees, hundreds of millions of dollars in revenues, and billions of dollars in market value. The “Internet future” has been unfolding so fast that managers in the industry tell us they cannot confidently predict exactly what products and features to build, what technologies to use, or what customers will buy more than six months to a year in advance. Nevertheless, many products that companies want to create, such as new operating systems, browsers, servers, or groupware applications such as electronic mail and electronic bulletin boards, take 18 months or more to design, build, and test.

Life was not like this before! In past decades, many companies extolled the virtues of long-term planning–looking forward five to 10 years into the future. Compared to today, companies also took their time in product development. For example, Microsoft launched an operating system for IBM-compatible PCs, called MS-DOS, in 1981 and only made evolutionary changes in this technology until 1990, when it introduced Windows 3.0. Apple unveiled the Macintosh computer in 1984, and 14 years later, it had yet to deliver any breakthrough changes to its software technology.

Not only has the technology been moving fast, but the number of users has been growing geometrically each year. In 1993, the primary users of the Internet were scientists, professors, and engineers at university and government labs and a handful of corporations. By 1998, there were 130 million users from all walks of life.³ Web commerce also exploded from nothing in 1993 to $22 billion in 1998, with predictions of hundreds of billions of dollars early in the next century.⁴ This rapid expansion of the network is a classic example of what economists describe as “positive feedback loops,” “increasing returns,” and “network externalities.”⁵ Behind the jargon, the dynamics are easy to follow. As more people and organizations connect to the Internet, more people and organizations create more tools and applications that make the Internet even more useful. And the more users, as well as tools and applications, there are, the more valuable connecting to the Internet becomes. As a result, more people start connecting, more tools and applications appear, and even more people sign on, ad infinitum. The technology community likes to describe this phenomenon as Metcalfe’s Law, which states that the usefulness of a network, like the Internet, grows exponentially as the number of users grows.⁶ If a company could control a significant piece of the network or the technology, the potential returns would grow exponentially as well.

These competitive dynamics naturally lead managers to race for market share. Companies hope to grab the biggest share of customers, set the standard for the market, and reap huge benefits down the road. This psychology puts a huge premium on speed. This is especially true for firms that are using the Internet or racing to add to its capabilities. In the past, for example, AT&T might have taken a decade to design and build a new telecommunications switch, write the software to make it work, and deploy the new product widely to customers. Similarly, Microsoft and Lotus would spend two to three years just to produce new versions of their desktop applications. Today, Intel upgrades its microprocessors several times per year. Cisco unveils a new communications switch or router almost every month. PC manufacturers, like Dell and Compaq, use new processor technology to launch new computers every few months. And Netscape and Microsoft have been competing to deliver new versions of their browsers and servers as often as the market will absorb them.

COMPETING ON INTERNET TIME

The conventional wisdom about competition in the age of the Internet is that the business world has become incredibly fast and unpredictable, and we need to throw out the old rules of the game. We decided to test this hypothesis by looking in the place where the world was most likely to have changed–the small constellation of companies that are building the new information infrastructure and hope to accelerate the pace of life for everyone else. After more than a year of intensive investigation, we are inclined to agree with some (but not all) of the hype. Some things really have changed because of the Internet, and some traditional forms of business practice have become much less useful than in the past.

For companies competing in the new information economy, the Internet is forcing managers and employees to experiment, invent, plan, and change their ideas constantly while they are trying to build complex new products and technologies. The Internet also requires companies to face the reality that competitive advantage can appear and disappear overnight. This is because the Internet makes it possible to organize your business in new ways, to offer new products and services, and to distribute those products and services to tens of millions of people almost instantaneously via telephone lines, cable TV networks, and wireless communications. It was the electronic distribution capability of the Internet that allowed Netscape to burst onto the scene in 1994 and, in only a few months, emerge as one of the most serious threats Microsoft had ever faced. This sudden rise to prominence of new companies can and will happen again.

We also found, however, that some of the strategic precepts of the pre-Internet world continue to ring true. Several core elements of competitive advantage–vision, leadership, innovation, quality, barriers to entry, customer lock-in, switching costs, and partner relationships–remain critical to the overall equation for creating a successful company, even in the most turbulent environments. The bewildering pace of the Internet may even put a premium on these old-fashioned virtues. In addition, while the Internet compels managers to speed up several activities, such as product development and product launches, at the same time, other activities, such as strategic planning processes, can operate on more “normal” time scales. Microsoft, for example, found that its customary three-year planning cycles worked just fine, as long as you can “pulse,” in the words of Microsoft’s president Steve Ballmer, and make quick adjustments.

The Internet may be stimulating a revolution in competitive dynamics and some business practices, but it has not revolutionized everything. Some of the new technologies associated with the Internet, such as the new Java programming language, are too immature to be the foundation for many companies, or even a full suite of products. The tyranny of the installed base is also very real. Despite all the hype about the forthcomingsupremacy of new devices such as network computers and set-top boxes, PCs running Windows remain the primary access devices for the Internet. Assuming the imminent death of the installed base is a recipe for distraction. ...

Table of contents

• Title Page
• Copyright Page
• Dedication
• Contents
• Acknowledgments
• Chapter 1 Introduction
• Chapter 2 Creating The Company
• Chapter 3 Competitive Strategy
• Chapter 4 Design Strategy
• Chapter 5 Development Strategy
• Chapter 6 Competing On Internet Time
• Appendix 1 Netscape Chronology
• Appendix 2 Netscape Chronology
• Interviews
• Notes
• Index
• About the Authors