Living On Internet Time:

Product Development at Netscape, Yahoo!TM, NetDynamics and Microsoft®
by Gail McCarthy

In 1996, Internet software was a growing market in which entry was easy, competition was fierce, retaliation was quick, and players were diverse and typically dynamic young companies. The relative unimportance of scale, the rapid pace of innovation, and the free flow of knowledge, were great levelers of the playing field. A company's operational effectiveness, core competencies, and market share provided little insurance against failure. In this competitive environment, winners and losers would be determined by strategy - and by business and customer relationships.

Netscape, Yahoo!TM, NetDynamics and Microsoft® were all viable players in the 1996 Internet software market, and all were close to the edge of operational effectiveness. Different strategies, including market segmentation, kept Yahoo!TM and NetDynamics out of the path of Microsoft®, but in 1996, Netscape was competing head to head with Microsoft®. Microsoft®'s impressive gain in 1996, after a late entry to the Internet software business, put the writing on the wall for Netscape. Microsoft® had superior access to customers, pre-existing customer loyalty, ample resources, and a natural fit with its other business activities. Netscape's strategy, in spite of their impressive 1996 market share, was not sustainable.

Internet and network computing. In 1996, network computers were in a well-established life cycle, with steady but not accelerating sales. Networked computer systems had been in widespread business use well before the Internet became popular. The Internet itself was a well-established system dating back to the 1960's, but in 1996 growth in Internet communications was accelerating rapidly. 1996 Internet surfers were a mix of innovators and early adopters.

1996 Internet Software Market. Development of leading-edge Internet software required little more than a handful of on-line whiz kids with nerve. Market entrance was easy. Unlike hardware markets, capital requirements, economies of scale and the cost of exit (in dollars) for the Internet software market were not significant. Like other software markets, movement of employees disseminated best practices among competitors. Unlike hardware or mature software markets, interested customers were reachable on-line, product distribution could be done on-line, and rapid innovation and lack of an industry standard gave newcomers a fair chance against market veterans. While decisive retaliation would undoubtedly occur, dynamic young companies took the bet. There was little to loose.

Some factors might limit expectations of profit. OEM's and On-line Service Providers would ultimately have strong bargaining power. Talented labor was critical to success, scarce, highly paid, and fickle, moving from company to company.

But the huge potential for growth, and the expectation of a few big winners (as in other software markets), drove the competition into high gear. Strategic stakes were high for all players. For most competitors, Internet software was either their only business, or a business essential to their other product lines. The government played no role, except to preserve competition in the industry by preventing mergers involving the big players (e.g. Microsoft® and Intuit in 1995). The low cost of switching software fueled competition. In 1996, it was still anybody's game.

Internet Software Development Models. Netscape, Yahoo!TM, NetDynamics and Microsoft® were all using leading-edge development models. Netscape and Yahoo!TM had adopted Microsoft®'s iterative team approach. While Microsoft® and NetDynamics used more market research to set early objectives, they all incorporated user feedback to improve the products repeatedly during development.

Availability of users on-line gave Netscape reasonable chance against Microsoft®. Yahoo!TM (because of the high turn-off rate for a single boring site visit) and Microsoft® (because of the importance of protecting its other software business) relied more on captive expert users (employees). But Yahoo!TM was able to use its modular servers for simultaneous tests of multiple versions with selected on-line users.

NetDynamics, like Microsoft®, collected customer input at the objective phase. This was very important for NetDynamics because their initial development was parallel, rather than integrated, so that user testing and iterative development had to wait for integration. NetDynamics had the fewest development iterations, but perhaps a more intensive user input on a per person basis (training environment).

Iteration with user feedback was essential to a leading-edge development model.

Competitive Positions in Internet Software Market

Newness to Company/Newness to Market. Netscape and Yahoo!TM were new and fantastically successful companies. NetDynamics was smaller and also new, but had solid experience as well. Of the four, the older software giant, Microsoft®, was the only newcomer to the Internet software market in 1996. None of the products offered by these four companies in 1996 were fundamentally new this market. The market was more than a year old (i.e. multiple "Internet years"): third and fourth generations of some products were already in rapid development.

Opportunity Cost and Development Risk. Of the four companies, Microsoft® faced the highest opportunity cost. For the leading software company to sit out the boom in Internet software would have been a huge opportunity lost. Netscape, Yahoo!TM and NetDynamics faced lower opportunity costs, since they had viable products in the market. However, the rapid rate of innovation meant that opportunity costs were never insignificant.

As a big new entrant to an existing but smaller market, Microsoft® faced little development risk - the market was well defined. The other three faced some development risks, having established benchmarks with earlier versions, in their main product lines. The benchmarks for Netscape and Yahoo!TM products were particularly visible; mis-directed new products would have confused their places in the market, potentially loosing market positions gained by earlier products.

Internet Software Development Strategies. Iterative development with strong user input supported competition based on features for all four companies. All four companies competed on the basis of their products' features and performance - not price. This was good strategy because the cost of software in general was a small fraction of the user's cost of computing. Furthermore, the 1996 the Internet software market (unlike the more mature software markets) was characterized by innovators and early adopters of Internet communications, for whom features were key.

Microsoft® and Netscape were fairly predictable competitors in 1996, and neither brought out particularly exciting products that year. Netscape focused on incorporating features that Microsoft®'s product would have. Both Yahoo!TM and NetDynamics took greater risk in selecting new programming languages for their 1996 products, which made them more competitive in a field of less predictable competitors (and incidentally, made them less predictable to their competitors).

All four companies hurried to get their products out in this fast paced marketplace - and for Microsoft®, this was a rush job. But nothing was released until the companies were sure (through extensive user input) that the features were right.

Internet Software Business Strategies. In 1996, all 4 players had reasonable positions in the Internet software market. But their market positions were not all equally sustainable.

New to Business, High Opportunity Cost, Low Development Risk: Microsoft® The Microsoft® brand may have suffered a bit by their late entry to the Internet software market, but its brand name, customer access (via OEM's), and business fit made a good bet against early uncertainty in Internet applications. While Microsoft® would not be able to enter by acquiring the early market winner (Netscape), it could offer its own version of Netscape's product. Microsoft® was perfectly positioned to execute the "Follow-the-Leader" strategy, using its market intelligence, resources, speed to market, and reputation in the industry to ensure its success. For existing Netscape customers, the cost of switching was low. Furthermore, Microsoft® entered in time to catch the early majority of Internet communications users, many of whom would be uneasy with the innovator (Netscape), want an alternate choice, and be influenced by their pre-existing loyalty to Microsoft®'s laptop/desktop products. Microsoft®'s quick comeback against Netscape in the laptop/desktop Internet applications was a good, sustainable strategy.

Improve Existing Products, Low Opportunity Cost, Moderate Development Risk: Netscape.

Netscape was the clear winner in the early Internet software market, and an obvious target for major competition. Netscape's early position did not create a significant cost of switching to other products. Microsoft® was certain to enter the market. Predictably, Netscape found itself competing head to head with Microsoft® in 1996. Both companies were operating at the edge of operational effectiveness, and both had chosen the same set of trade-offs (features over price for the broad laptop/desktop market). Both companies offered products with improvements in functionality over Netscape's earlier products. Netscape's early success was unlikely to hold against Microsoft®'s resources, customer access, brand loyalty, and integration potential with its other software activities. In spite of its strong market position in 1996, Netscape's strategy was not sustainable in the long term.

Netscape should have begun differentiating (rather than modeling) its product vs. Microsoft®'s as early as 1996. Market segmentation was an obvious choice. Alliances with on-line Internet access providers was one option, moving Netscape closer to Yahoo!TM's market strategy. Diversification into other Internet software applications was another possibility. Cash flow from its Internet search software might have funded development of other product lines.

Rework Product Line, Low Opportunity Cost with Development Risk

Yahoo!TM was competing on features, had early success, and had a different route to its customers - one that the software giants couldn't use - paid advertising. Yahoo!TM's market strategy provided performance features free to users, and made a profit from advertisers. Yahoo!TM was leveraging its existing customer base, and its modular scaling, to push the edge of operational effectiveness in the development and testing of its products. The risk in moving to a different programming language for the 1996 release of My Yahoo!TM was justified, because leading-edge features were their basis for differentiation in the market. Their boldness in making the switch reinforced their corporate image. Their products also had a look and feel that was different from the office lines, and appealed to a fast growing market segment (young people without office equipment). This strategy for differentiation in the Internet software market was sustainable.

NetDynamics was competing on features, and had selected a growing market segment with special needs (easy web page creation, compatible with a variety of software applications). The risk in moving to a different programming language was justified, because compatibility features were their basis for differentiation in the market. Web-page making was graphically intensive (not a Microsoft® strength), and not a big enough market to attract the attention of the software giant at the time. By focusing on interfaces with a variety of software, NetDynamics further differentiated itself from any potential Microsoft® strategy. Microsoft® was unlikely to do anything to interface with its competitors' software. NetDynamics' strategy for differentiation in the Internet software market was sustainable. NetDynamics could achieve stronger differentiation in the Internet software market through partnership with database (e.g. Oracle) and/or other non-Microsoft® software companies, and by emphasizing the one-per-company software market, rather than the one-per-desktop market.