Aol Angling To Buy Netscape -- Microsoft Immediately Makes Possible Deal An Issue In Antitrust Trial

America Online is negotiating to acquire Internet-software pioneer Netscape Communications for about $4 billion in stock, a merger that would alter the online industry and pose a serious competitive threat to Microsoft.

If the deal goes through, it would make AOL one of the computer world's biggest players. The company would get control over Netscape's popular software to "browse" the Internet and its World Wide Web site.

The transaction also would mean the end of Netscape, the Silicon Valley upstart that rose to prominence because of its browser but lately has suffered in the face of an aggressive fight for the browser market waged by Microsoft.

Lawyers for Microsoft pounced on the news of the proposed deal today, saying events in the software industry again have overwhelmed the government's antitrust case and shown it to be irrelevant. They said a merger could dramatically undercut the market strength of Microsoft's Web-browsing software, called Internet Explorer.

The market for Web-browsing software is the very market the government contends Microsoft is trying to gain control of using its alleged monopoly power.

"From a legal standpoint, the proposed deal pulls the rug out from under the government," said William Neukom, Microsoft's lead attorney, speaking this morning outside the federal courthouse in Washington, D.C., where the Microsoft antitrust trial is occurring. "The mere possibility of this kind of a combination undermines the government's case, from start to finish.

"Microsoft's competitors have always had the resources to change the competitive landscape, and to do that virtually overnight."

Microsoft is being sued by the Justice Department and 20 states. The lawsuit has focused on whether Microsoft used illegal tactics against Netscape to monopolize the browser market.

Today in court, an economist testifying on behalf of the government said that, in his mind, the news of the buyout of Netscape is evidence of how completely Microsoft has overwhelmed the company. If the deal goes through, it shows how Microsoft drove Netscape out of the industry using illegal business tactics, he said.

"This particular merger is the result of Microsoft's actions, its use of exclusive contracts and other anticompetitive moves toward Netscape," said Frederick Warren-Boulton, the former chief economist for the Justice Department during the Reagan administration.

"Netscape's been forced to the wall," he said. "That's an unfortunate result of what's Microsoft's been doing here."

Microsoft's attorneys argued that the $4 billion price tag means Netscape couldn't have been hurt that badly. Four years ago, Microsoft offered to purchase Netscape for $2 billion, according to evidence introduced in the trial.

However, Stephen Houck, New York state's antitrust chief and lead attorney for the 20 suing states, said the deal wouldn't have any impact on the prosecution of the lawsuit.

"We're looking at activity that Microsoft engaged in over a period of time, and that's past behavior," Houck said. "Anything that might happen to Netscape in the future doesn't change that."

David Boies, lead attorney for the government, said, "It's not going to remove any of the obstacles that Microsoft has placed in the path of competition," he said.

A Netscape purchase would put AOL in a position to grab a massive slice of the growing commerce that is taking place on online networks. AOL's flagship online service has 14 million subscribers, while Netscape's Netcenter Web site gets about 20 million visitors a month, making both ripe targets for businesses seeking to place online advertisements or open electronic storefronts. AOL hopes to sell Netscape's business software to many of these commerce partners, sources close to the deal said.

AOL also said today it is negotiating a separate agreement with computer maker Sun Microsystems to market and develop Netscape's business software, which is used to "serve up" information on the Internet, in exchange for guaranteed revenue commitments to AOL, the sources said. AOL, which has stumbled in previous efforts to hawk its technology to businesses, could get much-needed legitimacy in that arena through the potential Sun deal.

Several industry analysts said an AOL-Netscape deal could provide a potent competitive threat to Microsoft in the Internet and electronic-commerce world. Microsoft has been investing heavily in online ventures, including a Web site that competes with sites that Netscape and AOL operate.

A merger of the two companies would create a force that even Microsoft's newly redesigned Web launching pad, msn.com, would have trouble battling.

This summer, Microsoft announced plans to consolidate its online offerings under msn.com. The idea was to turn the Web site into one of the most traveled spots on the Internet, since traffic drives advertising dollars. It's still unclear whether that has worked, and a deal between AOL and Netscape could throw a wrench into those plans. AOL's Web site is the most popular on the Net and Netscape's Netcenter is not too far behind.

"It further marginalizes msn," said Ted Schadler, an analyst with Forrester Research in Cambridge, Mass.

Additionally, AOL has installed Microsoft's Internet Explorer as the default Web browser for its users. In exchange, Microsoft gave AOL key real estate on its Windows desktop, making AOL available to anyone using Microsoft's dominant Windows operating system.

"I suspect that licensing arrangement is coming to a close," Schadler said.

In court today, internal Microsoft documents showed the company's own experts predicted Microsoft would gain control of as much as 67 percent of the market for Web browsers by the year 2001. Today it has slightly less than 50 percent.

The government economist, Warren-Boulton, claimed that is evidence that Microsoft "appears to believe that . . . it has or shortly will win the browser war."

But Microsoft attorney Michael Lacovara asked Warren-Boulton if he had read "this morning's newspapers," referring to news of the proposed AOL-Netscape merger. He said it's obvious AOL now will feature Netscape's browser, not Microsoft's.

"Won't that affect whether Microsoft gets monopoly power in the browser market?" he asked. "Does it say anything to you about the market that Microsoft, the so-called monopolist, is going to have to get in there and try to bid for this again?"

However the browser question ultimately turns out, Sun's involvement in the deal also could provide wider distribution for its Java programming technology, perhaps the biggest threat to Microsoft's dominant Windows operating system. Java was written to give developers the ability to write programs in one computer operating-system language, yet have them run on any platform. If Sun picks up Netscape's popular business software, it could significantly extend the reach of Java.

Two current lawsuits against Microsoft maintain that the Redmond company has fought as hard as possible to prevent advances of anti-Microsoft camps such as this one. According to the antitrust suit brought by the Justice Department, Microsoft gave up valuable space on its Windows desktop to AOL in exchange for AOL's using its Internet Explorer as the default browser. The move was a significant blow to Netscape, which thought it had won AOL's business. Microsoft picked up new users for its browser, but it also wound up putting a bullet in The Microsoft Network (MSN), its fee-based online service designed to compete with AOL. Sources say MSN is on the sales block.

A separate suit filed by Sun alleges that Microsoft sought to stanch the threat of Java by rewriting it and encouraging developers to write programs for what it calls a "polluted" Java. The idea, according to the suit, was to create a Java that would work only with Microsoft software, thus killing the cross-platform capabilities that made Java so ominous. A federal judge in California last week barred Microsoft from selling its version of Java until the case could be heard at trial. Microsoft has denied the charges.

Under the proposed terms being discussed, AOL would retain the Netscape brand name, and the company's operations would remain based in Mountain View, Calif. No layoffs would be carried out, but it was unclear how many of the company's top leaders, specifically Chief Executive James Barksdale, would stay on.

Under the proposed terms, AOL would exchange 0.45 share for each Netscape share. On Friday, shares of AOL closed at $84.875 and Netscape at $39.188, after a week in which both companies' stock surged on reports the two were negotiating.

Story compiled from reports from Seattle Times staff reporters Danny Westneat, Jay Greene and James Grimaldi and from The Washington Post.