Profit-making through the portal

America Online's purchase of Netscape gives it access to subscribers who are using portal sites.

Four billion dollars might seem a large price to pay for a company that gives away its best-known product. But, in a business that is starting to take brands very seriously, America Online's deal to buy Netscape, makers of the Navigator and Communicator browser software packages, makes sense.

AOL is already the world's largest consumer Internet company: in the UK alone, it has over 500,000 subscribers. Last year, AOL bought the rival service provider CompuServe. Buying Netscape gives AOL access to some important technologies, especially in electronic commerce. It also gives AOL ownership of Netscape's Netcenter, one of the world's most popular websites. The cost of the deal is around $4.2bn.

In the last year, Netscape has changed its business. It is no longer simply a software company; instead, it is also a media and advertising company. Since it launched Netcenter in June, 9 million Internet users have registered with the site.

"Portal" sites such as Netcenter are increasingly important on the Net. There are now so many websites that surfing (or looking for sites on an almost random basis) is a waste of time. Internet users find it easier to go first to a portal site such as Netcenter, or one of the search engines. Portals are a key source of revenue on the Net: the large audiences they attract make them premium places to advertise.

"Netscape is not an Internet service provider, and it does not have a subscriber base," says James Eibisch, Internet analyst at IDC. "But there is the emerging area of the portals. This effectively gives Netscape - even though it started as a software company - subscribers through membership of the Netcenter site. Huge numbers go through that site every day." AOL will now have access to those users and will be able to drive traffic on to its other Internet operations. E-commerce, or selling goods and services over the Net, is a key motive. In a parallel move, AOL announced plans to develop a new e-commerce package together with Sun Microsystems, to encourage bricks and mortar businesses to sell on line.

"AOL sees the opportunity to build more of its business around e-commerce," suggests Simon Hayward at the Gartner Group analysts. "Having the portfolio of Netscape products supports that. Netscape has already proved itself in building e-commerce sites."

The launch of subscription-free Internet services, such as Dixon's FreeServe, supports the view that in the future Internet companies will rely more and more on revenues from electronic shopping and services such as advertising rather than subscription fees. "AOL is the landlord of Internet commercial property," says Hayward. "AOL provides the property where specialist merchants can sell their wares."

Owning Netscape further strengthens AOL as an Internet brand. It also secures the future of Netscape's software products. Netscape is still a relatively small company and it has been bruised by competition from Microsoft. Recently, Microsoft's Internet Explorer overtook Netscape Navigator as the most popular Web browser.

For Internet service companies, there could be disadvantages in relying on Netscape software owned by a competitor as powerful as AOL. AOL plans to run Netscape as an independent business, as it does with CompuServe. In fact, AOL will continue to build its own subscribers' Internet access software around Explorer - not least because it gives Windows users access to AOL from the desktop.

"It is good for the Net," suggests Roy Bliss, the managing director of Demon Internet. "It bolsters the Netscape browser and that can only be good for consumers because they have a choice." Observers believe that the benefits of a stronger competitor to Microsoft outweigh the disadvantages of another Internet service provider - AOL - owning the Netscape browser technology.

"There is immense competition out there," says John Swingewood, the director of Internet and multimedia at BT. "My agreements with Netscape are very clear: I buy software from them. We are in a world where we have both co-operation and competition." He points out that BT's partners in Line One - United News & Media and News International - compete in other markets but are happy to work together on the Net.

Swingewood, though, has been on a shopping expedition of his own. Last week BT bought 50 per cent of Excite UK, the search engine and portal, from its US parent. The fee, $10m, is small change in light of the AOL- Netscape deal, but it shows the importance that companies such as BT are now placing on portal sites.

Excite UK will continue as a joint venture between BT and Excite Inc, and the site will keep its branding. BT, though, plans to use Excite as a channel for its own electronic commerce developments. Swingewood believes the combination of Excite, a well-known brand on the Net, and BT, a name UK consumers trust, will be very powerful. "As more and more people come on to the Net, our research shows that BT is a company they trust for transactions," he says. "The joint venture with Excite moves us up into the new revenue streams of advertising and e-commerce."

The number of mergers, deals and takeovers on the Net is bound to grow as the Internet reaches more and more households. Well-known names will have the edge. "This is really about some serious brands making their moves," says Swingewood. "The big brands are really taking this seriously, and they are moving at a serious pace."