Case Study

How Microsoft Outnegotiated Netscape in the Browser War

Summary

Microsoft won negotiations with AOL competing against the browser market leader Netscape by getting the best out of their marketing resources.

Back in 1996, Steve Case’s AOL was urgently seeking a top notch internet browser to market their products. Both Bill Gates’ Microsoft and Netscape Navigator were vying with AOL to take them on as a client. In terms of their Best Alternative (BA or BATNA), Netscape held a decisive advantage due to its strong technical superiority, presence and dominance in the overall browser market. Microsoft was just in the process of entering the market and held a fledgling percentage of the overall browser market, but had a long way to go relative to Netscape’s much superior overall market hold. Additionally, Microsoft’s browser was also considered technically inferior to Netscape’s. Despite this unequal valuation of their positions, Bill Gates had deemed that gaining a greater presence and market share of the browser market was a competitive priority.

Netscape adopted the position that since they were so powerfully based, they would only negotiate with AOL by holding out for a high per copy fee. In essence, the deal would have been based on a “browser for dollars” agreement. Steve Case, the CEO of AOL viewed the position of Netscape as: “They [Netscape] were very aggressive about selling the browser, but they wanted a very high per-copy fee. The attitude was, ‘We’re so hot, we’ll license to everyone, so you better take it’.” This was a miscalculation that doomed Netscape to negotiation and eventual business failure.

Being new to the market and possessing what was considered an inferior product, Microsoft had very limited leverage at the negotiation table. As Netscape engaged in waiting for AOL to respond to their proposal, Microsoft readjusted their focus by shifting their own proposal to concentrate on their business marketing strength, rather than the technology issue. In essence, Microsoft used a creative strategy to change the nature of a weak position or BA to enhance their position while weakening Netscape’s in the process.

Microsoft concentrated its pitch on the marketing features it could offer to AOL, which it knew Netscape could not match. They did so by offering to bundle AOL into the Windows operating system, and more importantly, they offered to do this for free! They also promised AOL that they would provide additional technical adaptations if AOL were to sign a multi year contract. As David Colburn, AOL’s chief negotiator and Business Development head, would later state: “ The willingness of Microsoft to bundle… with the Windows operating system was a critically important competitive factor that was impossible for Netscape to match.

Despite the fact Microsoft and AOL were competitors, the match was perfect for both parties simply because collaborative seller Microsoft had the foresight and negotiation skills to change the nature of their offering to their advantage, and made AOL an offer it could not refuse.

The end result was that AOL would now be able to position the AOL icon directly next to the Microsoft Network icon in what AOL described as “the most valuable desktop real estate in the world”. Simply put, they could reach out to a market that equated to an additional fifty million people per year, and could do so at zero cost. AOL would no longer have to bombard the market by sending out its discs at a cost of forty to eighty dollars per acquired customer, and still actively compete with Microsoft in the process.

Although Microsoft surrendered some of its market share to AOL in the short term, the company achieved its loftier goal of making a huge stride forward in gaining a significant share of the browser market.

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