The Ghost of Netscape

This article, by Rich Kaarlgard, appeared in the WSJ yesterday. Normally I do not like to cut and paste newspaper articles, but this one brought back lots of old memories. Does anyone remember the internet gold rush days ? What was that Greenspan quipped, ah yes, irrational exuberance. Now I find myself nodding my head reading about the amazing IPO ride of Baidu.com. Seems like Groundhog Day. Read on......

What a short, strange trip it's been.

Ten years ago today, the Grateful Dead's Jerry Garcia died of a massive heart attack. His last words were rumored to be: "Netscape opened at WHAT?"

We all felt the shock. Morgan Stanley's top tech banker Frank Quattrone, a poor south Philadelphia kid with a gambler's heart, had priced Netscape's IPO at $28 per share. This price was thought nuts. Typical for tech IPOs, then and now, is around $15 per share. But all summer the heat had been building for Netscape. A pre-thunderstorm sauna it was: Netscape had not reported one profitable quarter.

Netscape, of course, didn't open at $28. It burst into the public realm at $71. A few minutes later the stock peaked at $75, then closed the day at $58 -- for a $2.7 billion market cap. The great Internet gold rush was on.

Jerry Garcia: 'Netscape opened at WHAT?'

Ten years later, what can we say about Netscape's IPO? Was it to Nasdaq as Mrs. O'Leary's cow was to the history of Chicago -- a bit actor touching off a great blaze with grave economic consequences? (Like the cow, Netscape the company is no longer with us.) Or did Netscape's Web browser alter the world in thrilling and still unforeseen ways?

The answer is yes -- on both counts. Let's talk about the Nasdaq bubble first. My favorite list of "Screaming Internet Top Signs We Missed" includes:

• Yahoo, a chief beneficiary of Netscape's browser but only episodically profitable during the late 1990s, hits a market value of $104 billion in March 2000. This is more than the entire U.S. auto industry, parts suppliers included.
• Consultant Geoffrey Moore, in early March 2000, creates a betting pool. The wager is when the Nasdaq index, then 5000 and growing, will overtake the Dow Jones Industrial Average, then 10000 and wobbling.
• Venture capitalist Geoffrey Yang, gloating about his industry to Fortune magazine in late 1999, says: "If the company doesn't work out, we'll sell it for $150 million. If the company kind of works out, we'll sell it for $500 million. And if it really works out, it'll be worth between $2 billion and $10 billion. Tell me how that's risk."
• Analyst Bill Gurley sends out a spoof email. After noting the history of deteriorating valuation benchmarks, from cash flow, to EBIT, to EBITDA, to "price-per-click," announces the ultimate Internet valuation benchmark: EBE, or "earnings before expenses." Most readers don't realize Mr. Gurley is joking.

On Sept. 17, 2001, the Nasdaq closed at 1579. On Oct. 9, 2002, the tech index hit a low of 1114 -- the 79% drop from a high of 5132 was the biggest index plunge since the Dow fell 89% from 1929 to 1932

Yet the Internet, invented in 1969 but sparked to life by Netscape's 1995 browser, really has reshaped business and the world. The rise of China and India is impossible to imagine without the cheap communications medium of a browser-based Internet. China will surpass the U.S. in numbers of Internet users next year or soon after. When Beijing figures out Internet use creates national prosperity, censorship will begin to melt away. During the mid-'90s, Singapore restricted citizen Internet use. Then the country discovered its best scientists and engineers were leaving. Now Singapore is wide open.

The Internet has had a positive effect in the U.S., too. The speed with which the U.S. economy recovered after the quadruple blast of Fed tightening, a stock market collapse, a recession and terrorist attacks, could not have happened without an Internet immune system. Key to recovery from financial cock-ups is rapid repricing between sellers and buyers. That is how inventories get soaked up. That is how new markets are made. During the grim year of 2002, Sun Microsystems discovered its chief competitor was its own used Sun servers selling on eBay for a dime on the dollar by cash-starved dot-coms and telecoms. But "clearing" is how an economy heals. After the 2001 recession, the American economy had cleared within a year. It has been growing at a 3.5% clip since.

America should be growing faster. After all, we're the country that birthed the Internet and the Web browser. But in one critical area, America has stumbled. Fed Chairman Alan Greenspan, anticipating an investor binge caused by Netscape's famous IPO, a year later made his "irrational exuberance" comment. Of course he was right about investor silliness. But Mr. Greenspan was wrong to attack it with aggressive rates hikes. In doing so, he crib-killed the brand new Internet-based telecom industry.

Telecoms, unlike dot-coms, are capital intensive businesses. Beyond the scale of small venture capital backers, telecoms need to tap bond markets. Problem is, debt-fueled enterprises are vulnerable to interest-rate shocks. Even when gold prices had sunk into the $200s by 1999, shouting deflation, Mr. Greenspan (insomniac from dot-com excesses) kept hiking rates. Thus he killed new-era telecom. Today America finds itself out of the world's Top 10 in broadband per capita. Behind South Korea, Finland, even Italy.

But no worries -- it's still the very early days of the Netscape revolution. The most astonishing fact about the 10th anniversary of Netscape's IPO is that number -- 10. Think about the airplane in 1913, the personal computer in 1984.

The history of the PC suggests where the Internet is going. In 1980, Apple Computer went public, making centimillionaires of its founders, Steve Jobs and Steve Wozniak. In 1982, Time magazine named the PC its "Man of the Year." During early 1983, venture capitalists went crazy, funding dozens of lookalike PC and disk drive companies. The bust came in late 1983 and lasted for three years. Many danced on the PC's grave. One was Ken Olsen, founder of Digital Equipment Corporation and considered the father of the minicomputer industry. He said PCs had little use in serious business.

Mr. Olsen was wrong. By 1986, PCs were fast enough that graphic displays now worked. New software appeared, such as desktop publishing and computer-aided-design. Microsoft went public in 1986. The same year Intel turned itself back to profitability. The PC, once a novelty, was now a real business machine. By 1990, Microsoft and Intel were unstoppable. Digital, Wang, Data General, and even mighty IBM suddenly were in big trouble.

Ten years after Netscape's IPO, the Internet is where the PC was in 1990. What a short, strange trip it's been! Google, only seven years old, is wildly profitable -- and menacing. Bill Gates, the PC era's winner, pulls his hair in frustration. Large local newspapers, their classified ad sales going to Google, Monster.com, and Craig's List, are in steep decline.

Netscape's Big Meteor of 1995 dooms any nation or business that can't adapt. For the nimble and quick, thrilling days lie ahead.

Mr. Karlgaard is publisher of Forbes magazine and author of "Life 2.0" (Crown Business, 2004).