Netscape's Ipo

I. Why has Netscape been so successful to date? What appears to be its strategy? What must be accomplished if it is to be highly successful going concern in the long run? How risky is its current competitive position?

Netscape has been so successful because of following reasons:

1. First to enter the broad Internet market - Netscape had the first-mover advantage being the pioneer of web browsers in the evolving Internet market. They achieved the market leader position in a short period of time with their Netscape Communicator and Netscape Commercial server. For a while, it was the indisputable leader of its kind. This means that it was able to command high brand recognition and strong customer loyalty at the onset.

2. High level of innovation - The product which Netscape introduced was innovative. They catered to a market which was growing and where the information was valued quite highly. Their product enabled the user to publish information at a single point and that information being accessible everywhere publicly.

3. Less competition in the current market - While Netscape started their business, it had little competition in the market. There were no dominant players in the market. This enabled them to capture a bigger market pie and grow into the market leader position although the future competition was seemingly going to be tough with multiple players coming in including Microsoft.

4. Expansion stage - The business cycle for the Internet market was on the upside as the market was growing very fast. This formed the basis for potential growth for Netscape.

5. Thought of application - As mentioned above, the idea of sharing information was gaining momentum and the products of Netscape supported that which enabled corporations/people to publish and access the information in a more convenient and free way.

Netscape's Strategy

1. The Netscape management used the "give away today and make money tomorrow" strategy. They first created a customer base by allowing customers to experience the product free of charge and then build the market based on that platform.

2. After having paid a one-time fee to Spyglass for the original code, Netscape created a brand new identity for itself in the market.

3. To set new industry standards they created Mozilla and created rivalry among its own products (Mosaic vs. Mozilla). For Mozilla it was able to create an impression of an upgraded version of the earlier product, Mosaic. Finally as people migrated to Mozilla, they changed its name to Netscape Navigator.

4. Focusing on the commercial browser market, they offered bundled packages with Netscape server and browser functions as integrated application software as well as marketing them as individual products.

As the Internet community and its demand continues to expand, Netscape's competitors is also expected to grow in multitudes. Faced with a lot of competition, Netscape must be more aggressive in crafting a strategic plan that would ensure its success in the long-run. To be highly successful, its strategic plan must cover the following issues:

1. Positive financial performance - First and foremost criterion to become highly successful is to have positive financial performance with higher and positive operating cash flows followed by sustained and growing operating profits after a certain period of time.

2. Competitive Strategy - Identify the possible competitors in future and formulate a strategy to overcome competition. It can assume that Microsoft will be aggressively pursuing the same market for web browsers. Netscape should work to establish some form of lock-in, either due to the user interface, or proprietary functionality to at least get a price advantage. Microsoft is clearly positioned to give a product away for the long-term to gain market share.

3. Broaden its product range (expand the focus from web browser) - Netscape should consider broadening its product base to give the company sustainability. A larger product range will lend them more stability and develop more competences in the market. This can be done either through developing complementary products or through new products developed through continuous innovation.

4. Control costs (sales and marketing) and R&D over the long-run - Another significant aspect is managing costs. According to the case, Netscape's operating expenses are quite high as compared to their revenues. This is due to the nature of the business characterised by fast growth and innovative products which required high R&D cost. However, the company should carry out cost benefit analysis and decide an optimum ratio for R&D expenses to revenues.

Netscape's current competitive position is deemed to be very risky because of the following reasons:

1. Spyglass targeting the corporate market - Spyglass was targeting the corporate markets which formulated a larger percentage of market. This would create a strong strategic position in the market for Spyglass more as a market leader.

2. Strong companies like Microsoft are under Spyglass licensees: rivalry is high - Microsoft was a major threat as it has already dominated the Operating System space and if they come out with a successful browser they can capitalize on their strong user base and destroy Netscape's market leadership position (which they did!!!).

3. Emerging technology - Since this is an emerging technology, there is a risk of creating an ample and sustainable business in the long run which enhances the risk associated with it.

4. No proprietary technology - Since the browser technology is not a proprietary technology, it makes for low barriers to entry and therefore threat of new entrants to capture the market pie becomes high.

II. Can the recommended offering price of $28 per share for Netscape's stock be justified? Given these assumptions, and starting from its current sales base of $16.625 million, how fast must Netscape grow on an annual basis over the next ten years to justify a $28 share value?

Based on our assumptions listed in Annexure 1 and the forecast in Exhibit 2 and 3, the group determined a value per share of $ 29.78. Hence, a share price of $28 is justifiable. In addition to the assumptions stated in the case, some of the critical assumptions the group made are discussed below.

Revenue growth rate

In 1995, Netscape was in a growing phase and the IT industry was expanding rapidly. Further, Netscape's