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The IPO That Started a Bubble: Netscape, August 1995

Abstract

Netscape Communications Corporation went public on August 9, 1995. The company was 16 months old, had never reported a profit, and had only one product, a web browser. Its stock was priced at $14, revised upward to $28 before trading opened, shot to $75 intraday, and closed at $58.25. The company was valued at $2.9 billion on its first trading day. The Netscape IPO is considered the starting gun of the dot-com bubble, the first demonstration that internet companies could achieve enormous valuations before generating any earnings, setting expectations that led directly to the crash of 2000.

Netscape and the Early Web

Marc Andreessen was an undergraduate working at the University of Illinois’ NCSA when he co-wrote Mosaic in 1993, the first web browser with inline images and a graphical interface that ran on multiple operating systems. Mosaic made the World Wide Web usable for non-technical users. Andreessen took his degree and left for California, where Silicon Graphics founder Jim Clark sought him out; on April 4, 1994 the two founded Mosaic Communications Corporation, renamed Netscape Communications after the University of Illinois objected to the name.

Netscape’s primary product was Netscape Navigator, a faster, more capable browser than Mosaic, distributed free to individuals and licensed to companies. The strategy was similar to the “give away the razor, sell the blades” model: by dominating browser usage, Netscape intended to sell server software to companies that wanted to conduct business on the web. Navigator had taken three quarters of the browser market within four months of its October 13, 1994 release, and passed 90% in the mid-1990s.

The full story of Andreessen’s role in the web’s commercialization is covered in Marc Andreessen and Netscape.

The IPO Numbers

By normal investment banking standards of 1995, Netscape was not ready to go public. The criteria for an IPO typically included:

  • Multiple profitable quarters.
  • A sustainable business model.
  • Management experience operating a public company.
  • At least three years of operating history.

Netscape met none of these. It had been founded in April 1994, 16 months before the IPO. Its registration statement showed revenues of $16.6 million for the six months to June 30, 1995 against a net loss of $4.3 million over the same period. It had one product. Navigator was being given away free.

The underwriters (Morgan Stanley and Hambrecht & Quist) originally planned to price the IPO at $14 per share. They revised this to $28 the night before trading, based on investor demand. When NASDAQ opened on August 9, Netscape shares could not be immediately sold, so many buy orders had been placed that the opening price had to be negotiated between market makers for over two hours before trading began. The stock opened at approximately $71, touched $75, and closed at $58.25. Market capitalization on the first day: $2.9 billion for a company with $16.6 million in first-half revenue and no profits.

The Dot-com Consequence

The Netscape IPO demonstrated to Silicon Valley, Wall Street, and every entrepreneur with an internet idea that:

  1. Internet companies could achieve enormous valuations without profitability.
  2. Investors would pay for future potential, not current earnings.
  3. Being first to a market mattered more than being sustainable.

The five years following the Netscape IPO produced the dot-com boom: hundreds of companies were funded and taken public on similar logic. Pets.com, Webvan, Kozmo, eToys, businesses with enormous capital consumption and no clear path to profit attracted hundreds of millions of dollars. The NASDAQ Composite index rose from approximately 1,000 in early 1995 to 5,048 on March 10, 2000, then collapsed to 1,114 by October 2002, a 78% decline. The full story is covered in The Dot-com Bubble.

Netscape’s Fate

Netscape Navigator was eventually defeated by Microsoft’s Internet Explorer, which was bundled with Windows 95 and distributed free, undercutting the commercial server licensing strategy. Microsoft’s browser bundling was the central issue in the antitrust case United States v. Microsoft Corporation (2001), which found Microsoft had engaged in anticompetitive behavior. By the time the antitrust case concluded, Netscape belonged to AOL and Navigator’s market share had fallen below 5%. AOL announced the acquisition on November 24, 1998 at $4.2 billion in stock; by the time it closed on March 17, 1999, AOL’s shares had run up enough to make the deal worth about $10 billion.

Netscape itself had already released the Navigator source code and set up the Mozilla Organization in February 1998, months before the sale. The Mozilla project eventually produced Firefox (2004), which is covered in Mitchell Baker and Mozilla. The browser that started a bubble became the foundation for the browser that checked Microsoft’s dominance, six years later and two owners on.

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