Living on Internet Time (9-697-052)
by Ulrika Linnér

1. The Internet software market in 1996
The Internet software industry of 1996 was in a state of fast growth with many new players entering the stage. New products and services were introduced (e.g., Microsoft Internet Explorer, My Yahoo!) as were new and enhanced versions of products that had been around for a year or so (e.g., Netscape Navigator 3.0, NetDynamics 2.0).

Threat of new entrants.

The threat of new entrants was high. At this point, product differentiation was not a big issue - brand identification and customer loyalties were not really established in this young but fast growing industry. Access to distribution channels was not a significant entry barrier since distribution mainly took place over the Internet itself. Another low barrier would be Cost disadvantages independent of scale (Internet related software is to a large extent standards based, not proprietary). No initial capital was needed for purchase of manufacturing equipment due to the nature of software. Thus, this entry barrier could be considered limited although capital was required for R&D. The development cost for software is usually significant and incur before the finished software product reaches the first customer. This cost could be balanced by a large volume sold (although it still represents a risky use of capital), preferably in as short a time as possible. The only entry barrier of some significance was therefor Economies of scale.

Expected retaliation was low since the industry was so young and did not yet have the established strong existing competitors needed to pursue such a forceful response to a potential entrant. The industry was growing very fast and could therefor easily absorb new entrants.

Intensity of rivalry among existing competitors.

The intensity of rivalry was not that strong. The number of competitors was increasing but they varied in size and power. Of importance is that the industry was in a state of fast growth which helped companies improve results just by keeping up and expanding with the industry instead of fiercely competing for market share.

Pressure from substitute products.

Depending on which product we look at, there may or may not be any real substitute. For example for NetDynamics, there are substitute softwares that are not Internet/intranet based. But since the perceived advantages of using an Internet interface even internally in the company probably started to become commonplace, the pressure from the substitutes was most likely not strong.

Bargaining power of buyers.

Since this is essentially all about a mass market, bargaining power of buyers is limited. However, buyers are - to a varying degree - influential in the process of developing products, something that gives them a certain amount of power.

Bargaining power of suppliers.

It is not completely obvious who would be considered a supplier in this context. I assume that, for example, companies providing programming languages (e.g., Sun Microsystems with Java) could be identified as suppliers to the Internet software industry. In some cases, one Internet software provider (e.g., Netscape) can be a supplier to another (e.g., NetDynamics). I don't expect that any actual "bargaining power" would be relevant to talk about.

2. The product life cycle.

Computer networks 1996.

Computer networks - like LANs/WANs etc - had reached a state of "early to late growth" by 1996. These networks had already been around for some time and had gone through a lot of the turmoil that characterizes the first stages of the Product Life Cycle. There was - and is - still, however, a lot of new product development going on (high speed routers/switches etc) and in 1996, in addition to "pioneers" and "follow-the-leaders", also typical "segmenters" had entered the field to address a particular segment (e.g., remote access routers).

Internet 1996.

By 1996, the Internet was still in an early growth stage. From the time of the actual creation of the Internet (in the 1960s) quite some time elapsed before it started to become widely used by the public, especially involving the WWW. By 1996, pioneers like Netscape and "Follow-the Leaders" like Microsoft had entered the field and business was growing rapidly.

3. Product development.

There are many similarities between the product development processes at Netscape, Yahoo!, NetDynamics and Microsoft but also quite a few differences. They all seem to follow an iterative development model. For an industry like Internet software, this seems to be the natural choice since technology and market environments are uncertain and change rapidly. The development process thus needs to be flexible enough to quickly adjust to new requirements and this is achieved through repeated iterations where the members of the development team incorporate new information to fine-tune the design. It is obvious that there need to be room for a lot of last minute changes in these types of products - for example for My Yahoo! it was estimated that over 50% of the software was changed during the last four weeks prior to their "soft launch".

While Netscape relies heavily on early user feedback - also from external users - the other three companies don't start external beta testing until much later in the process. It is clear that Netscape, by doing this, is exposing itself to competition. It also takes a high market risk since external users who try a new product/service once and have a bad experience from it might not ever try it again. Yahoo! and Microsoft instead use extensive "in house" beta testing letting their own employees act as lead users (assuming that these individuals, who in Microsoft's case could amount to thousands of people, were technically skilled and up-to-date with competitive products). Of course there are pros and cons with both these strategies. I would argue that Netscape, while taking a greater market risk and exposing themselves to competition, also gains a lot of very useful information from the user community at an early stage in the process. It is, after all, important not only to ask "your friends" what they think of your product...

Another important thing to note is that all the Internet software companies mentioned in the case heavily use the Internet itself in their product development processes (for beta releases and feedback, to coordinate project tasks, to track progress and run simulations etc). With the dramatically compressed timescales that were required, the instantaneous distribution and feedback potential that the Internet offered became crucial.

4. Price/features, newness and opportunity risk - positioning and strategies.


Assuming that we're looking at 1996 and the following products from the four companies in question: Netscape Navigator 3.0, My Yahoo!, NetDynamics 2.0 and Microsoft Internet Explorer 1.0, the positioning would be as follows:

a) The price/feature matrix.

This seems to be a bit complex since the price of the products in question is not really discussed in the case. A key piece of information here is that many Internet-related firms make all their money from advertising revenues. I am making the following assumptions:

· Netscape Navigator 3.0 had a price attached to it. It was, at that time, not delivered free of charge.

· The My Yahoo! service was delivered free of charge.

· NetDynamics 2.0 had a price attached to it.

· Microsoft Internet Explorer 1.0 was bundled with Microsoft's Windows and is considered free of charge.

I would place the four products as follows:

· Netscape Navigator 3.0 in quadrant IV. The product is differentiated and since there is a pricetag we can consider the price high (being the kind of market that it is).

· My Yahoo! ends up in quadrant III since it is free of charge to the user but it is a highly differentiated product.

· NetDynamics 2.0 should probably be placed in quadrant IV, like Navigator 3.0, and for the same reasons.

· I would put Microsoft Internet Explorer 1.0 in the same quadrant as My Yahoo!, number III. It is "free of charge" (thus "low price") and it is a differentiated product.

b) The newness map.

· Netscape Navigator 3.0 seems to belong in the "low newness to firm/low newness to market" quadrant. It is a question of improving an existing product by getting a new version out and therefor it is not all new to the market nor is it all new to the firm. It is, however, not a question of "cost reduction", as could be the case for some products in this quadrant. This term would not be relevant when speaking of software.

· My Yahoo! could have ended up in the "high newness to firm/low newness to market" quadrant. It was a new type of service for Yahoo! but when they were about to start the development process, there were already a few competitors out there with similar products as they first had planned. So since they did their "rethink" and added several new features to the product concept, I would say My Yahoo! should be placed in the "high newness to firm/high newness to market" quadrant instead.

· NetDynamics 2.0 should belong in the "high newness to firm/low newness to market quadrant. The product was not only improved but also rebuilt in a new language (Java) and for a new platform (Windows NT) which meant high newness to the firm but it was still not a brand new concept to the market since it had been out in its UNIX version before.

· As for Microsoft Internet Explorer 1.0, it would also fit in the "high newness to firm/low newness to market" quadrant since this was a whole new product line for Microsoft but a product concept already known to the market (because of Netscape Navigator).

c) The opportunity risk map.

· Netscape Navigator 3.0 is placed in the "high opportunity cost/low development risk" quadrant. It was very time sensitive to get the new release out in time (because of the competitive situation with Microsoft) but the risk of producing the wrong product for the market was very small since they had been "in the game" for some time and also used "customer feedback" as a main tool during the development process.

· My Yahoo! would be placed in the "high/high" quadrant since being a new type of product/service, there was a greater risk of producing a service that the market didn't want or need. Competition made it time sensitive.

· NetDynamics 2.0 would end up in the "low/low" quadrant. Although it could be considered just a new version of an established product, it actually was so rebuilt and so much "a new product" that I would place it in this quadrant. Furthermore, I am not aware of any real close competition to the product (which would make the cost of being late bigger).

· Microsoft Internet Explorer 1.0 is placed in the "high opportunity cost/low development risk" quadrant, like Netscape Navigator 3.0. Big cost of being late to market and low development risk, since they were "copying" what Netscape had already done.

Netscape, being a pioneer, seems to be willing to take risks (even though the risk of "producing the wrong product" decreases once they have the first product out and start releasing new versions) and expose themselves to competition and to the user community. Differentiation is important and they long tried to keep a "premium profile" by charging for their product. Recently (Feb 98) they had to step down on this, however, and start giving it away for free. I would think they should be more careful with exposing their product to competition and rather keep beta testing in "pre approved" and possibly "password controlled" user groups (who voluntarily agree to be part of the testing). Microsoft takes on a "following and copying" position so far, playing it safe, while Yahoo! - another pioneer - seems to be an aggressive player willing to take some risks to get what they want. Microsoft's development strategy seems to work very well for them since they managed to get three versions of the Explorer out in only nine months. It seems well structured and controlled and they do have an advantage having such a huge internal user community to use for testing. All the case companies aim for high differentiation with a lot of features and features that customers really want. This requires a development strategy with many iterations.