How the Internet Happened

by Brian McCullough

  The people were in place. The funding was in place. The browser was deep into development. The final question was an important one: how to make money? Andreessen and Clark eventually settled on a seemingly radical strategy: the product would be free. Well, in a winking, knowing sort of way. Upon release, the web browser would be available for anyone to download so-called beta versions (“beta” means an early version of the software; a work in progress). However, if you wanted to own the standard version of the software—the final one, with all the bells and whistles and customer support—it would cost $39. (Even this was fungible. Anyone would be able to download the full version of the software on a trial basis for ninety days. After that, you were supposed to pay up.)

  “At the time, it was a crazy idea, to build this software but just give it away,” says Rob McCool. “They were going to give away the browser and charge a lot of money for the server.”47

  “Essentially, the razor and razor blades model,” says Net­scape engineer Lou Montulli.48

  This was a savvy move. At the time, everything on the Internet was free. If he wanted to be among the first to ask users to pay for web-based software, Andreessen knew he had to tread lightly. The idea was to hook users on the free beta version, and then to ask them to pay up for the finalized product, a “pro” version. If corporations wanted to get into the act, they would have to pay up—to the tune of thousands of dollars—for the servers to make the web work within their organizations. Being free would help the browser gain market share, which was the sine qua non of his platform strategy. If the new browser could quickly match Mosaic’s then 90% market share, then they would become the de facto standard that all other browsers would be measured against.

  “It’s basically the Microsoft lesson, right?” Andreessen asked. “If you get ubiquity, you have a lot of options, a lot of ways to benefit from that. You can get paid by the product that you are ubiquitous on, but you can also get paid on products that benefit as a result.”49

  For his part, Clark’s overarching imperative remained speed: speed of development, and speed to market. Clark was impatient, but he also believed that this was a once-in-a-lifetime market opportunity—if they could only get big enough fast enough, problems like “making money” would take care of themselves. But they had to be first to market—or at least, second to market. Mosaic was still a glorified research project that could be usurped by a more polished product. At least, that was what Mosaic was for the time being.

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  THEY WERE RIGHT TO HURRY. In May 1994, the original NSCA Mosaic browser code was licensed to a company named Spyglass, Inc., which had been formed to commercialize NCSA technology. It turned out that by poaching their student workforce, Clark and Andreessen had awoken the NSCA to the financial value of the web browser as a product. Spyglass would use the NCSA’s technology to begin a lucrative business creating browsers and licensing them to various outside companies.

  At around the same time, the University of Illinois threatened to sue on the NCSA’s behalf, claiming that the new browser was being built using Mosaic’s original code. It also hadn’t escaped the university’s notice that Clark and Andreessen’s company had originally called itself Mosaic Communications. In a preliminary attempt to appease the university and avoid litigation, the name of the company was changed to Net­scape, and the programmers submitted to what amounted to a forensic auditing of their work, despite the fact, as Jon Mittelhauser says, “We didn’t want to take any of [the old Mosaic] code, that’s the thing! We wanted to start from scratch. We wanted to do it right.”50

  As this was going on, on October 12, 1994, the marathon sessions of hard work in Mountain View paid off. A beta version of the new web browser, version 0.9 of a program eventually called Net­scape Navigator, was made available on the web for anyone to download at midnight.

  “When we announced it on [the WWW-Talk message boards, the same place the Mosaic browser had been launched] we had a different sound effect for different downloads,” Aleks Totic recalled. “We’re all sitting in this room, listening for the sounds and as soon as the email goes out there’s some guy in Australia trying to download it and you hear the smashing glass. Then a couple of minutes of silence. And then a cannon. And it started getting faster and faster. We were all just sitting there drinking beer and coding a little bit and listening. And within like five or six hours there was just a cacophony of explosions and croaks and lightning and cannons. Because people were downloading it from all over the world and we’re like, ‘OK. We’ve got something.’ Everybody loved it.”51

  Net­scape Navigator was a generational improvement over the other browsers then available. Navigator was fast, even working under the constraints of the slow modem speeds that were standard at the time. By some measurements, Navigator could load a webpage ten times faster than Mosaic. Early reviews from users and from the media were rapturous. Businessweek said that Navigator could “make the Internet a mass medium for home shopping, banking and a host of other services.”52

  Over the next few months, beta versions, and then the official 1.0 version, were downloaded about 6 million times.53 The Navigator browser quickly gained a reputation for being fast, stable, and feature-rich. It included so many web innovations that weren’t supported by existing browsers that a unique new phenomenon began. Website after website on the still immature web started posting little buttons that read “Best viewed in Net­scape Navigator” with a link that sent you to the download page. Just as had happened with Mosaic, webmasters and web creators wanted to show off the cool new things that Navigator allowed them to do, so they steered their users to the new browser organically.

  It was estimated that 20 million people were on the Internet at the time of the beta release of Navigator. This represented amazing growth in the eighteen months since Mosaic’s own beta release. In what felt like no time, Navigator quickly eclipsed Mosaic: at the start of 1994, the original Mosaic and its variants controlled 95% of the web browser market. By the end of October, a mere two weeks after release of the beta version, Navigator had captured 18% of the market, and by early 1995, Navigator was used by 55% of web surfers. By 1996, 45 million copies of Navigator had been downloaded, representing a full 80% of the browser market.54 By that point, Mosaic’s share of the browser market had shrunk to a mere 5%.55

  “Now people take for granted that they’ll put out a version of something and a million copies will be downloaded in a week,” Net­scape employee John Giannandrea said. “But nothing like that had ever happened before.”56 As John Naughton said in his A Brief History of the Future: From Radio Days to Internet Years in a Lifetime, “Net­scape had effectively launched an era when you could finish a product one day and have hundreds of thousands of users the next. The old era of two-year product cycles was over.”57

  Indeed, no sooner was Navigator 1.0 out the door than the team started work on version 2.0. The product launches couldn’t come soon enough. The company had burned through much of the $13 million that Clark and Kleiner Perkins had invested thus far. But the cash-flow issue would be resolved by the official arrival of Jim Barksdale as CEO.

  Barksdale brought old-school business acumen to the young company. In the few short months that their main product left beta and existed in the marketplace for the first time, Net­scape was on track to do $3 million in revenue for the first quarter of 1995. But Barksdale quickly discovered that he could do better. Early in his tenure, he sat down with Bill Kellinger, who ran the sales department. At that point, the sales team consisted of three overworked phone representatives who were handling more than a thousand calls a day. When Kellinger showed Barksdale these call-volume numbers, the new CEO was aghast. In effect, Net­scape was turning away paying customers because there weren’t enough people to answer the phones. “If I give you more people,” Barksdale asked Kellinger, “how much more revenue can you do?” Kellinger figured that if he put another three people on the phones, making a total of six, he could triple Net­scape’s
revenue. “You mean you can do nine million dollars in the second quarter?” Barksdale asked incredulously.58

  Kellinger got his extra phone reps. Second-quarter sales reached nearly $12 million.

  Where were these sales calls coming from? Well, corporate America, just as Marc Andreessen had hoped. The “sort of free” strategy backed up by official licenses was paying off.

  “We could look at our server logs and we could tell who was coming in and using the browser,” says Jon Mittelhauser. The sales and marketing team examined those logs and would say, “ ‘Oh, Oracle has 20,000 people using.’ Call up the IT guy at Oracle and say, ‘You’ve got 20,000 unlicensed copies, you owe us X dollars.’ We were making millions of dollars off of browsers.”59 Browsers that were ostensibly free.

  By the end of 1995, Net­scape would collect approximately $45 million in browser revenue alone.60 This growth forced the young company’s human resources department into overdrive, as the head count topped 250 by the summer of 1995. It would double that number by the end of the year. Based on the impressive growth statistics, CEO Barksdale was able to rustle up a second, $17 million investment round that included publishing companies Knight Ridder, Hearst and Times Mirror, as well as the cable company TCI. Net­scape was valued at $150 million. Barksdale also put the legal issues with the University of Illinois to bed by settling out of court. Net­scape agreed to pay the university $2.2 million in damages, with an additional payment of $1.4 million depending on future business deals. The university split the money with Spyglass, the Mosaic licensee. Net­scape offered to pay with shares of the company in lieu of cash, but this was rebuffed. That refusal would cost the University of Illinois tens of millions of dollars when Net­scape had its initial public offering.

  And an IPO was definitely coming. In May 1995, Spyglass filed to go public. That was all the impetus Jim Clark needed: at the June meeting of Net­scape’s board of directors, he began agitating for Net­scape to do its own IPO, and the sooner the better. CEO Barksdale and the chief financial officer, a former Morgan Stanley banker named Peter Currie, weren’t so sure. The traditional rule of thumb was that a company didn’t go public until it had three years of solid revenue growth; Net­scape only had two quarters of any sort of revenue at all. It was also tradition for a company to show at least three quarters of profitability before an IPO; Net­scape was on track to see profitability, but not until the end of the year. And then there was the small fact that the company wasn’t even a year and a half old at that point. When Clark’s own Silicon Graphics had gone public in 1986, it had been in business for five years!

  Jim Clark wasn’t concerned with any of these traditional measuring sticks. At his urging, Net­scape filed papers for an initial public offering on June 23, 1995, four days before Spyglass’s debut on the markets. Clark reasoned that Net­scape had majority market share in a young software market that seemingly had nothing but growth in its future. A user base of more than 5 million had to have some value to Wall Street. And software companies were the darlings of Wall Street at the time. Software is a high-margin business; a hit software product can be a gold mine, and investors were eager for a new breed of startups.

  Net­scape was not the first company to go public without significant profits (or even revenue) to speak of. Speculative enterprises like mining, energy and pharmaceutical companies often IPO early in order to raise money on the promise of a big score sometime in the future. But Net­scape was the highest-profile of a new breed of company that was looking to profit off the promise of the Internet. The splash would popularize the notion that the web and the Internet were new markets of unusual possibility and unique prospects. The web could potentially be a motherlode of a marketplace, and because of this, Internet companies would be held to different standards of valuation. In the dot-com frenzy that would follow, numerous IPO candidates could and would point to Net­scape as a company that had gone public with zero revenues, only to ride the parabolic growth of the Internet to hundreds of millions in revenue in a few short years. Just as important, Net­scape made it okay to go public even if you were only a few months old. Better to raise all the money you could and grab as much market share as possible before competitors could beat you to it.

  Another key enabler of the Net­scape IPO was the fact that Wall Street was buying into Marc Andreessen’s platform strategy. The investing community believed Navigator was building a platform on the web, and therefore, Net­scape could become the next Microsoft. “A lot of people had missed out on the Microsoft IPO because they didn’t believe in PCs” said Frank Quattrone, a Morgan Stanley banker who would help take Net­scape public. Buying Net­scape stock as soon as it IPOed was, in a lot of people’s estimation, a once-in-a-lifetime chance to jump on board the Microsoft of the next technology era.61

  Every IPO is preceded by what is called a “road show,” where the principals in the firm go around the country pitching their company as an investment to stock analysts, investors, mutual funds, pension funds and the like. Net­scape’s road show was like the world tour of a pop star. In New York, people were turned away when a 500-person ballroom was filled to capacity. Many in the crowd showed up not to ask questions about the company, but to find out more about the Internet in general.62

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  THE AUGUST 1995 NET­SCAPE IPO was the biggest thing Silicon Valley had seen in a while. For the first time in years, there was fire in the Valley again. Net­scape seemed to have bottled it, and Wall Street was ready to buy it.

  The morning of the IPO, Jim Barksdale had given strict instructions that Net­scape employees should not discuss the stock price and should instead keep working like it was business as usual. When Jim Clark got into the office that morning, he noticed that his own personal assistant had ignored the injunction and put a live electronic ticker tape above her desk. Clark decided not to reprimand her (she was a shareholder too, after all).

  “It was exciting,” remembers Jon Mittelhauser. “We yelled and screamed and all that stuff. Then an hour later we were back to work. Because none of us really understood what was going on. And all of us had something we were in the middle of doing.”63

  For his part, Marc Andreessen wasn’t even awake. He had been up until three the night before, working. When he woke up at 11 A.M. Pacific Time and logged in to Quote.com, the stock was finally trading, so he missed all of the drama of the delayed open. “Then,” Andreessen remembered, “I went back to sleep.”64

  Andreessen went back to sleep a multimillionaire. A few short months later, when Net­scape’s stock price peaked at $171 a share, more than six times the price at the IPO, so were all of those “kids” from the NCSA basement. Their 100,000 shares apiece were worth almost $17 million, more even than the $10 million that Jim Clark had promised. By that point, Clark’s own 20% equity stake in the company meant that he had achieved the billionaire status he had coveted for so long.

  Net­scape was Clark’s second billion-dollar company, after SGI, but it wasn’t just the bigwigs who were getting rich—it was the engineers and the secretaries as well. In his rush to go big and hire big, Clark had been generous with everyone he wanted to recruit. Here was the start of the cherished dot-com–era idea that all you had to do was pick the right company and get in early enough—so that even you, a lowly engineer, could make millions of dollars off of stock options. Net­scape started the gold rush for everyone and everything, for engineers, for IPOs, for stocks, for cockeyed business plans. More than anything, the speed of Net­scape’s ascent shocked people. It had taken twelve years before you could begin to talk about all the millionaires Microsoft had minted. Net­scape had done it in fifteen months. Wall Street and Silicon Valley had learned a valuable lesson; the web and the Internet in general was the Wild West, a land grab. The key was to get established first and dominate your market before competition could even notice. Andreessen’s platform strategy seemed to be a proven concept. Early profits were not important at all. Revenue was important, but not entirel
y a requirement. The more valuable thing was to show a sense of “Net­scape speed,” the ability to be nimble and a willingness to chase markets and market share; to sense your moment of opportunity and be willing to go after it immediately. As the journalist and author Michael Lewis described it later, “You had to show that you were the company not of the present, but of the future. The most appealing companies became those in a state of pure possibility.”65

  Net­scape had made entrepreneurship cool in America for the first time in a long time. For most of the previous few decades, kids aspired to be rock stars, athletes, or maybe astronauts (and stockbrokers, briefly during the 1980s). But few people had thought that starting a business could turn you into a rock star, let alone provide a decent path to fabulous wealth. All of a sudden, here was a high-profile Cinderella story wherein a bunch of college kids had taken a chance, gotten rich, and become—to the financial press at least—famous. Andreessen’s Time cover story ran on February 19, 1996. Fourteen years earlier, on February 15, 1982, the Time cover boy had been a twenty-six-year-old tech superstar named Steve Jobs. The headline in 1982 read: “Striking It Rich.” It signaled to the world that the first Silicon Valley revolution/gold rush was in full swing. In 1996, Andreessen was pictured barefoot and snarling (or yawning, depending on your interpretation) sitting under the headline: “The Golden Geeks.” For those who were listening, and for those of a certain technological persuasion (and perhaps for those of a certain age), the message was loud and clear: a new revolution was on, and a new gold rush. Net­scape laid the groundwork for the cult of the entrepreneur that is still with us today, and an entire generation took notice.