Econimics-Merger Between Aol And Netscape Essay, Research Paper

This paper focuses on the proposed amalgamation between America Online Inc. and Netscape Communications Corporation. It presents an overview of the two companies prior to the amalgamation, identifies the issue/issues at manus, presents an in-depth analysis, and suggests options utilizing class constructs.


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America Online Inc. , based in Dulles, Virginia, is the universe & # 8217 ; s leader in branded synergistic services and content. The company provides two world-wide Internet online services, America Online and CompuServe, with about 16 million members. Other branded Internet services operated by America Online Inc. include AOL.COM, Digital City Inc. , AOL NetFind, ICQ, and others.

Netscape was founded in April 1994, and presently employs more than 2000 people in 17 states. The organisation has been described as & # 8220 ; the fastest turning package company in history. & # 8221 ; Tonss of persons and companies big and little usage Netscape package to host and manage Internet sites on the World Wide Web. More specifically, companies are now utilizing Netscape for their intranets. The Netscape package line includes four households of merchandises:

+ Netscape Communicator client package suite

+ Netscape SuiteSpot and FastTrack waiters

+ Netscape Development Tools

+ Netscape Commerce Applications

At the present, Netscape Communications is a provider of AOL Inc. Netscape is upstream from AOL ; Netscape supplies its Internet browser ( Netscape Navigator or

Netscape Communicator ) to AOL. AOL is being charged a fee for the usage of Netscape & # 8217 ; s merchandise. This fee is based both on a fixed and a variable constituent.

Netscape is presently undervalued as a company, but has valuable engineering and resources that AOL can integrate into its offering to its consumers. America Online & # 8217 ; s proposed $ 4 billion acquisition of Netscape would offer a graceful and moneymaking issue for an Internet innovator that & # 8217 ; s been fall throughing for a twelvemonth. This will give AOL a opportunity to progress its place in the browser/content market. Furthermore, It would besides strengthen AOL & # 8217 ; s armory against an progressively aggressive enemy: Microsoft.

Analysis and Recommendations

The chief issue of concern is whether or non it is good for AOL to maintain on utilizing the market as opposed to vertically incorporating with Netscape. First of wholly, it may be argued that market houses can accomplish economic systems of graduated table. As Netscape specializes in the production of its merchandises, such as Netscape Navigator, it can accomplish greater graduated table, and therefore lower unit costs, than can the downstream houses that use the input. This is so because Netscape can aggregate the demands of many possible purchasers, whereas a vertically incorporate house typically produces for its ain demands. This premise is based on the premiss that a house that builds its ability to self-manufacture for its internal demands would miss the necessary accomplishments and be distracted in selling the extra merchandise to outside houses. In this instance, AOL is geting Netscape instead than constructing its supply capableness. Netscape has had experience and accomplishments at selling to many purchasers, and it will be bring forthing its merchandises for both internal and external usage. Therefore, in this instance the merged company will besides profit from economic systems of graduated table. AOL will be able to utilize both Netscape and AOL merchandises ( for illustration, Netscape Navigator and ICQ ) to advance its current and approaching merchandises, and therefore heighten its client base. Netscape & # 8217 ; s Netcenter portal will besides broaden AOL & # 8217 ; s planetary audience at place and at work.

The proposed amalgamation will progress AOL & # 8217 ; s multiple-brand scheme with one of Internet & # 8217 ; s best known trade names ; Netscape. This combination will increase the assortment of merchandises that AOL provides to the planetary market. These assorted merchandises will let AOL to profit from economic systems of range as the entire cost of bring forthing these merchandises will decidedly be lower when one company produces them than the two bring forthing them separately. The company may be able to take down costs by to the full using its resources ( labour, stuffs, etc. ) and fixed costs. Merchandises necessitating similar Research and development attempts and engineering may besides be less dearly-won as such attempts are non duplicated. Therefore, perpendicular integrating will decidedly take to economic systems of range due to the related nature of AOL and Netscape merchandises. As a separate provider, Netscape may besides profit from economic systems of range and still be able to supply low cost services to AOL.

Similar to market houses, the merged company will besides be capable to the subject of the market. Since AOL will non be the lone client that Netscape trades with, Netscape has to bring forth expeditiously and introduce to stay competitory in the market place, and non lose its concern. Certain internal divisions that have a confined internal market are extremely inefficient and fail to introduce. & # 8220 ; The absence of market competition coupled with troubles in mensurating divisional public presentation, make it difficult for top direction to cognize merely how good an internal division is making comparative to its best accomplishable public presentation & # 8221 ; ( ES, 1996 ) . Such conditions frequently lead to high bureau and influence costs.

A vertically incorporate house besides avoids many of the coordination jobs associated with a market house. The new house can accomplish coordination within the company through centralised administrative control. As a market house, Netscape may hold had to supply AOL with timely entree to browsers and any related information that was required. The nature of the

input resulted in no design jobs and therefore, a low accent on the coordination of production flows.

By vertically incorporating AOL benefits from non losing any valuable private information in the unfastened market. AOL has particular information about its merchandises design or other consumer information that it values greatly, and would non desire persons in the market to cognize approximately. Covering with Netscape as an independent provider, AOL may put on the line losing confidential information through assorted beginnings ( company employees, informal pipelines, etc ) .

If AOL uses the market to obtain its supply, it may hold to incur dealing costs ; costs that & # 8220 ; originate when one or more parties to a dealing have a opportunity to move opportunistically & # 8221 ; ( ES, 1996 ) . To forestall the other party from prosecuting in timeserving behaviors, companies try to supply complete contracts. It is, nevertheless, rather hard to stipulate complete contracts due to delimited reason, troubles in stipulating or mensurating public presentation, and asymmetric information. If it is assumed that Netscape is the lone available supplier of browsers to AOL, and that it ( AOL ) can non develop its ain browsers, so the armed robbery job may originate. This dependence of AOL may let Netscape to raise its fee by claiming that its costs have risen. The marketer may endanger to end the relationship if the purchaser does non hold to renegociate. The possibility of armed robbery increases the costs of transacting arm & # 8217 ; s-length market exchanges. AOL may necessitate more rigorous demands in their contract with frequent renegotiations. It may seek to better its expost bargaining place by looking for 2nd beginnings of input ( browsers ) , which are dearly-won. Not merely will at that place originate feelings of misgiving between the parties, but besides AOL may cut down its investing in relationship-specific investings. Vertical integrating will avoid this armed robbery job and lower overall dealing costs. After the amalgamation, the two houses will go one and are more likely to move hand in glove as they have a common mission and aims. Furthermore, regulations, ordinances, and authorization relationships in the incorporate house may forestall struggles and any possibilities of armed robbery. If Netscape has monopolistic power in the market, it may be desirable that it vertically integrates with AOL. Unifying can undo the harmful effects of dual marginalisation, where each house independently equates its fringy gross to fringy cost. Integration allows houses to accomplish the degree of production that maximizes net income in the perpendicular concatenation.

AOL may besides be sing perpendicular integrating as an effort to prevent rivals from come ining its market or turning larger ( Microsoft ) , or to even avoid foreclosure. Before Microsoft got a opportunity to coup d’etat Netscape and go the & # 8220 ; Web & # 8217 ; s unchallenged traffic king & # 8221 ; , AOL took advantage of this chance to vie on a stronger degree with Microsoft. With Netscape, AOL will go the biggest conduit of electronic mail and electronic commercialism on the Internet, the largest web of online content, and the chief meeting topographic point of consumers and concern users. If the acquisition goes through Microsoft will all of a sudden go the underdog.

The market seems to be positive sing the proposed amalgamation between AOL and Netscape. The integrating of the two companies will make synergisms that will spread out the new company & # 8217 ; s audience, construct its gross watercourses, and drive electronic-commerce to a whole new degree that will profit both concern spouses and internet consumers. Certain factors may forestall the perpendicular amalgamation from going a world. There is ever a hazard that the Netscape concern will non be integrated successfully into AOL & # 8217 ; s concern. The costs associating to the amalgamation may be highly high or AOL may be unable to acquire the blessing of Netscape stockholders. Furthermore, AOL may be unable to obtain, or run into conditions imposed for, governmental blessings for the amalgamation, and may be unfastened to put on the line from new and altering ordinance in the U.S. and international markets.

There several options that are available to AOL sing the type of relationship to prosecute with Netscape inorder to keep and heighten its place in the market place. First of all, AOL may see keeping the position quo ; Netscape will stay a market house and supply inputs to AOL. This option will show all the benefits and costs of utilizing the market, presented earlier in the paper. Besides, AOL can unify with Netscape and make a new company that benefits positively from the synergisms created. Although, integrating may besides be unsuccessful as mentioned earlier. AOL can besides see tapering integrating, where, if the information is available, it can both do and purchase the inputs. This may let AOL to develop internal input supply capablenesss to protect itself against armed robbery from Netscape. Netscape and AOL can besides see a joint venture, a type of strategic confederation in which two or more houses create, and jointly ain, a new independent house. Last, but non least, the two companies can make a long-run relationship through implicit contracts. This may non be advisable, as these contracts are non enforceable in the tribunals. Some long-run relationships do prosper on the footing of trust and of fright of losing future concern.

The many options available, present both positive and negative effects for AOL and Netscape. It is recommended that AOL vertically integrate with Netscape to take advantage of their similar backgrounds and to unite their resources to keep and develop a new epoch of merchandises which allow to stay competitory, in this unstable, complex planetary environment.


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