Overdrive, page 22
The first version of Mosaic for UNIX machines was released by the university in early 1993. In September and October, Mosaic became available for the PC and Macintosh, respectively. By this time, about 100,000 copies a year of Telnet were being downloaded for free to universities on high-volume servers. By early 1994, those same servers were downloading 50,000 copies a month of Mosaic, prompting Spyglass to reinvent itself and focus on Mosaic and the Internet.
While Krauskopf handled the technical duties, CEO Doug Colbeth visited with companies with a potential interest in licensing Mosaic. “We concluded that this thing was going to explode so fast that we could not create the company that we needed to service it. So we decided to leverage other companies that were out there, like Digital, FTP Software, NetManage,
Sun, Novell_ We would license the product to them and they
would distribute it through their channels. That way, we did not have to hire people for end-user support.”
In April 1994, Spyglass became the ninth company to receive the rights to distribute Mosaic when it signed a licensing contract with the university. The other eight companies had signed what amounted to small-scale licensing deals, of $10,000 to $100,000; they had committed to selling a small number of copies of Mosaic to their customers. Spyglass, on the other hand, committed to selling millions of copies. “That first commitment we made to the university was the largest by far, by probably a factor of 10, of any commitment that they’d gotten before,” said Krauskopf. “It showed how serious we were as a partner.”
Other companies that had already licensed Mosaic included Spry and Santa Cruz Operations. “All those other companies had licensed Mosaic from the university with end-user business models in mind,” said Tyrrell, who was the sixth employee at Spyglass. “We believed that Mosaic would become so pervasive, and would end up inside operating systems and applications, that we decided the best long-term business model was, in effect, to take NCSA’s place in the licensing chain and to become an OEM [original equipment manufacturer] supplier of technology.”
After acquiring the April license from the university, Spyglass soon negotiated deals with Digital Equipment Corporation and FTP Software for the browser. More agreements followed. Spyglass was more than meeting the commitment it had made to the university. Consequently, in August, the university agreed to give Spyglass the master license for Mosaic.
Spyglass next prepared a list of the biggest potential OEMs that might want to license Mosaic. Number one on the list was Microsoft. “We put an asterisk by their name,” said Tyrrell, “because any deal you do with Microsoft, you have to be very careful that Microsoft doesn’t become your biggest competitor.”
In late August or early September 1994, Tyrrell approached Microsoft about a licensing deal for Mosaic. He was the one whom Microsoft told that it wasn’t interested. “It came from several levels at Microsoft,” Tyrrell said. “I was told that they were not interested; or that they would build their own browser.”
Then in early October Netscape’s browser hit cyberspace. It was free, and it could be downloaded off the Internet. The rush was on. Within days, Microsoft was indicating to Spyglass that it might want to license Mosaic after all. Tyrrell flew out to Redmond to propose to James Allard how the two companies could structure a deal.
In subsequent negotiations, Reardon took over as Microsoft’s point man. Generally, Sinofsky, Allard, and Slivka are credited for pushing Microsoft toward the Internet, but Reardon was instrumental, too. “He was as influential as anyone,” said Tyrrell. “He was the person beating the drum for browsers in the Internet at large. He and Allard are cut from the same cloth.”
Tyrrell believed that Microsoft changed its mind about licensing Mosaic not so much because of the threat of Netscape, but because IBM had decided to put a browser in OS/2. Big Blue’s souped-up operating system, with the Star-Trekky name of Warp, was released a few days before Netscape’s browser. Among the many new features in Warp not available in Microsoft’s Windows was a browser that made it easy for anyone using the operating system to connect to the World Wide Web. IBM also began a $50 million ad blitz to convince people to transport from Windows to Warp. Although when Warp was launched, Windows had more than 50 million customers and OS/2 only about 4 million, Gates was clearly worried about Warp, browser or no browser.
Mitchell Kertzman, who sold Powersoft Corporation, the Boston-based software company he founded, to Sybase in 1994, recalled a conversation he had with Gates during that time regarding OS/2. “Bill Gates was still thinking about OS/2,” Kertzman said. “You would think, ‘Does Bill Gates think about OS/2? Hell no. That war has been won.’ But he was still thinking about it. When Microsoft displaces an OS/2 customer in a corporation, Bill knows about it. That’s amazing. This is the least complacent company you have ever seen. I urged people at Powersoft to emulate them. We took every little competitor seriously. We learned that from Microsoft. Microsoft always wants to win.”
Once Microsoft had decided it wanted to license a browser, as a negotiating tactic, it quickly let Spyglass know that it had some competition. Tyrrell was told that Microsoft had a couple of internal groups working on a browser, and that it was also talking to other companies about their browser technology. What Microsoft didn’t say was that it had been trying to do an end run around Spyglass and was talking to the NCSA about licensing Mosaic directly from the university. “Spyglass had the master license and every commercial organization had to go through them,” said one NCSA official. “Microsoft did not want any part of that. They wanted a direct relationship with the university. It was the hotbed of the Internet. Microsof't also probably figured they could get a better deal if they came to us rather than Spyglass.”
But Krauskopf downplayed Microsoft’s attempt to license Mosaic from the university rather than from Spyglass. “It was not uncommon for our customers to contact the university and be referred to us as the commercial channel for Mosaic. Microsoft was not alone. You would expect them to explore their options, and one of the things that went on in the fall of 1994 was us educating Microsoft about what our arrangement with the university really was.”
Meanwhile, Spyglass was learning about Microsoft. CEO Colbeth, a software executive who had been recruited in 1991 by Krauskopf to raise venture capital for the fledgling company, talked with people and companies that had done business with Microsoft. That background information proved invaluable in the formulation of the business strategy that Spyglass would use in the upcoming negotiations with Microsoft. Specifically, the strategy was to set a market value for Mosaic and not play games, in an effort to stay abreast of Microsoft, which is known for cutting to the chase and having an instant response to anything the other side comes up with.
“Smoke and mirrors are going to be blown away,” said Krauskopf. “There are so many people who I think have gotten where they are by using negotiating tricks that they are not prepared to deal with a company like Microsoft that simply attacks whatever trick you put in front of them.”
After AOL had bought Booklink and the talks between Microsoft and Spyglass about licensing Mosaic heated up, Reardon made it clear that Microsoft was interested in a browser only for Windows 95 and that there would be no royalty payment. Further, he said, Microsoft would pay a one-time fee only. Tyrrell said no. Microsoft’s offer directly contradicted the marketing strategy Spyglass had developed for licensing Mosaic, which was to charge a fee of about $1 for each copy of Mosaic that was sold by a customer. If Spyglass agreed to Reardon’s terms, Microsoft could turn around and license Mosaic to Spyglass customers, and could potentially charge those customers less than Spyglass did.
“We saw the classical Microsoft in those negotiations,” said Tyrrell. “They essentially wanted all the rights in the world for very little money; and we promptly stated that we would not do that type of deal and could never do that type of deal, and if Microsoft were in our shoes, it would not do that type of deal, either.”
The negotiations continued, with Spyglass trying to sell Microsoft not only on the value of Mosaic, but also on the “time-to-market” value—the amount of time it would take Microsoft to release a browser if it used the Mosaic code as a base, versus the time it would require to build its own browser from scratch. It was a factor Microsoft had already calculated. Microsoft executives had concluded that it would take six months to a year to build a browser, whereas if it had the Mosaic code, it could have a browser out of development and ready for testing within a couple of months. But Reardon did not reveal this to Spyglass. His position took two poses: one, that Microsoft would build its own browser; and two, that the Mosaic name was not worth that much.
Said Krauskopf: “We kept coming back with, ‘Here’s the time to market. The code is good. There are other companies using it. Mosaic is one of the most widely known noncommer- cialized names; and by the way, look how much attention Netscape is grabbing in the headlines.’ Netscape was a major source of irritation for Microsoft at the time.”
As the negotiations dragged on through October and into November, Tyrrell found himself doing business at what seemed to him some very strange hours, often after 11 p.m. eastern standard time. E-mail was exchanged at all hours of the day and night. “I had numerous conversations with them very late at night, from hotel rooms across the country and from my home," said Tyrrell. “The phone would ring late at night and my wife would say, ‘Don’t tell me that’s Microsoft again.’ It was just the Microsoft way of doing business. I don’t believe they ever really sleep.”
Eventually, in November, the broad parameters of a licensing arrangement took shape, though nothing was finalized and Tyrrell was still not certain Microsoft was going to agree to a deal. Finally, Reardon called to set up a meeting in Redmond for the morning of Monday, November 17. Tyrrell and Kraus- kopf flew out on Sunday. The next morning, about 8:30, Reardon escorted them into one of the buildings on the Microsoft campus. They were walking down a hallway toward a conference room when Krauskopf spotted Ben Slivka. “Hello, Ben,” said Krauskopf. “Long time no see.” The two had gone to school together at Northwestern and had known each other well.
Krauskopf asked Slivka what he did at Microsoft, and Slivka said he was in charge of the Internet engineering crew. “That was very pleasant surprise for me, to go walking into our big meeting with Microsoft and see Ben,” said Krauskopf. “It was a very nice feeling.” But what occurred next was not so pleasant. First, Krauskopf and Tyrrell signed a nondisclosure agreement, followed by an intense, six-hour technical grilling by Allard, Slivka, and Reardon. By this time, they were familiar with Mosaic, having downloaded copies from NCSA, but they wanted to know all about the version of Mosaic that Spyglass was selling. Had it been improved from the version available from NCSA over the Internet? Tyrrell and Krauskopf made the case for the code, the Mosaic name, the university relationship, and the time-to-market value.
“Our code had a lot of mileage on it, which was good,” said Tyrrell. “We had already licensed it to 10 or 12 other major OEMs, which had also beaten up the code. So, it was a good starting point for them to go build a browser on top of.” Numerous times during the six-hour interrogation, the Microsoft team would leave the room to confer, only to return with another series of rapid-fire questions.
Finally, they brought John Ludwig into the room. It was time to get down to the business of how much Microsoft was willing to pay to license Mosaic, which was Ludwig’s job as general manager for the Windows 95 group. Ludwig started by putting a figure on the table. It was significantly lower than what Tyrrell and Reardon had discussed a week earlier on the phone. “That’s totally unacceptable,” Tyrrell told him. “We would not have made the trip all the way here if we had known that’s what you had in mind. And I’m speaking for Spyglass and the university.”
Ludwig, Allard, Reardon, and Slivka left the room. When they returned, Ludwig asked Tyrrell what the figure had to be. “Well,” Tyrrell told Ludwig, “it better start with a two and have a whole bunch of zeros after it.”
Tyrrell had determined a value for Mosaic long before he and Krauskopf had sat down that morning to negotiate a licensing deal. Tyrrell had figured it would cost Microsoft about a million dollars to develop its own browser, not counting what it would cost to commit a team of programmers to work around the clock for six months to a year to get a browser out the door. There was also the added value of the Mosaic name.
“For the money they paid us, Microsoft got a bargain,” said Krauskopf. “It would have taken them six months to a year to develop their own browser, and if they had accelerated that time to market, it would have ended up costing them a lot more than they paid us. We were convinced it was the right play for them. And it was right for us. It was critical to the kind of success we wanted to build on. It legitimized our strategy of doing leverage deals, because we knew that this was going to get distributed, and distributed by an engine that could make it successful.”
The $2 million that Microsoft agreed to pay Spyglass was the same amount that Microsoft had offered Booklink for its browser a few weeks before. The essence of the deal was that Microsoft would get a single snapshot of the Mosaic code and very limited distribution rights. It could use the code to build a browser for Windows 95 and Windows NT, but not for Windows 3.1, the Macintosh, or UNIX-based machines. After some fine-tuning, it was up to the lawyers to ready a final copy of the agreement to be singed by Gates and Spyglass CEO Doug Colbeth.
That same Monday, while Reardon, Allard, and Slivka were in Redmond putting together a tentative agreement to license the Mosaic browser, long lines and a packed house welcomed Bill Gates as he opened the Comdex trade show in Las Vegas with a keynote speech on the future of the information superhighway, where, he predicted, virtual money from wallet computers would replace cash, and wall-size screens would bring interactive television into the home.
Although his oratorical skills will never rival those of a fiery southern preacher, Gates can always hold the attention of an audience of the faithful, and so, accompanied by a Microsoft interactive video, he had the techie crowd of 5,000 entertained with his vision of the future. The content of his speech, though, was old news. The information highway, movies on demand, and those 500 television channels had been the hot talk of Comdex the year before. And many of the interactive TV trials that were supposed to have gotten under way in 1994, including some in which Microsoft was involved, had been delayed or canceled. Thus, Gates, that day, had to acknowledge that it would take 10 years for the information highway to really be paved. But, Gates assured the crowd, Microsoft would be a part of that future by creating standards for the distribution of information along that highway.
Coincidentally, Microsoft’s more immediate future was being decided even as Gates spoke, by the three true-blue Internet believers who were holed up in a conference room of Building 3 on Microsoft’s campus. They believed that people wanted to cruise the Web, not point some remote control device at a TV set-top box. And for that, they needed a browser. Due in large measure to the vision and the tireless efforts of Allard, Slivka, and Reardon, Microsoft now had one.
Following his keynote address at Comdex, Gates held a news conference to announce the industry’s worst-kept secret: Microsoft would launch its own on-line service, to be called the Microsoft Network, MSN for short. Although Microsoft had discussed its plans with industry executives and had been negotiating to line up content for the service, the company had never before publicly acknowledged its plans. Now it was officially out; MSN, to be bundled with Windows 95, was scheduled for launch in April (the date would soon be pushed back to August). MSN, Gates promised, would be available in 35 countries that had telephone access to the network. With the simple click of the mouse button, any computer user running Windows 95 would be able to log on to the Microsoft Network.
That ease of registration had the competition crying foul, building on the criticism that had been mounting since Microsoft announced in October its plans to buy Intuit. If Microsoft obtained Intuits popular Quicken program and made it available through the Microsoft Network, critics claimed, it would give Microsoft a dominating platform for an on-line banking service.
It wasn’t only the usual suspects who were complaining this time. A few days before Comdex, during a discussion on the future of electronic commerce at BusinessNet, held at New York City’s Waldorf-Astoria Hotel, executives of Prodigy, CompuServe, and America Online asserted that they could be at a significant disadvantage if Microsoft tied MSN to Windows 95, and that Microsoft would be able to use its dominance in operating systems to leverage itself into a similar position among the on-line services. “The Windows operating system is what the dial tone is to the phone industry,” explained AOL’s Steve Case, meaning that in the same way that consumers who pick up a receiver automatically get a phone company’s dial tone, anyone who signed on to a computer would be on Microsoft’s line.
Case contended that Microsoft should offer MSN as a standalone service, not connected to Windows, so it would have to compete fairly with the other three services. And he strongly suggested that perhaps it was time for the government to step in and regulate Microsoft, just as it had regulated the phone companies to allow competition. “There needs to be a level playing field on which companies can compete,” said Case.
At his Comdex news conference, Gates said that competitors’ fears about MSN were misplaced. “We don’t think this is anticompetitive at all,” Gates told reporters. “If this is about splitting up the market, it’s a poor market for all of us.” While Gates defended MSN, Russell Siegelman gave reporters a demonstration of the service, which was set up to run on a bank of computers at Microsoft’s campus in Redmond. Siegelman promised that MSN would be priced to meet or beat the competition. Initially, it would have a selected number of content providers, but it would eventually be open to everyone, even industry rivals.
