I
In January 1995, the Dow Jones Industrial Average was lingering around 3,800, about the same level it had been at a year earlier. During 1994, Alan Greenspan and his colleagues at the Federal Reserve Board had raised short-term interest rates from 3.5 percent to 6.5 percent to slow down the economy and head off a possible revival of inflation. This policy shift prompted Wall Street analysts to reduce their forecasts of corporate earnings, which contributed to the stock market’s sluggish performance. The big political story of early 1995 was the rise of Newt Gingrich following the Republicans’ victory in the 1994 midterm congressional elections. As the new Speaker of the House of Representatives, Gingrich was eager to present himself as a national leader for the information age. The former history professor frequently held court about the technological changes sweeping the nation and the political implications thereof. During Gingrich’s orations, the Internet often featured prominently—another indication that going online and surfing the World Wide Web was no longer the preserve of scientific researchers, computer buffs, and sex addicts. It was now a mainstream pastime, enjoyed by millions of ordinary Americans.
Part of the growth in online traffic came from commercial online services, such as CompuServe, America Online, and Prodigy, which were grudgingly starting to provide their customers with access to the Internet. CompuServe, which had been in business since 1969, was the oldest online service. Now owned by H&R Block, the accounting firm, it had more than 500,000 subscribers, who paid $9 a month, plus an hourly usage fee, for access to a range of proprietary content that included news, chat, and information. Most of CompuServe’s customers were business users, and they provided a steady if unspectacular stream of profits. America Online, which was third in the market with about 200,000 subscribers, had been losing money ever since 1982, when it started out as a distributor of online video games under the name Control Video Corporation. In March 1992, America Online did an IPO, which, despite the firm’s troubled history, succeeded in raising $23 million. A year later, Microsoft, which was preparing to start its own online service, tried to buy America Online, but Steve Case, the firm’s young chief executive, turned down the deal.
Prodigy, which IBM and Sears had launched with great fanfare in 1990, was in even worse shape than America Online, having run through hundreds of millions of dollars. Although it didn’t operate on the Internet, Prodigy was in many ways the prototype Internet business. In return for $14.95 a month, subscribers received unlimited access to expensively produced news and information sites that featured Howard Cosell on sports, Liz Smith on Broadway, and Evans and Novak on politics. There were also video games and online shopping. “We had a belief that goods will be sold electronically, so why not establish dominance in the marketplace,” Ross Glazer, a senior Prodigy executive, explained. “You could make the case that eventually there would be no need for malls.”1 In the event, Prodigy’s customers turned out to be more interested in communicating with each other than in buying CDs and airline tickets. Unfortunately, Prodigy limited free e-mails to thirty a month, and it didn’t introduce chat rooms until 1994. Advertising revenues were a lot lower than expected, and Prodigy learned a lesson that many Internet start-ups would learn years later: in the online world, large numbers of users, easy-to-use software, and high-quality content don’t necessarily add up to a profitable business.
The World Wide Web’s rapid growth presented a threat to the online services, which depended on subscribers paying for proprietary content. In March 1994, America Online allowed its members limited access to the Internet. A few months later, Prodigy said it would provide full access at the start of 1995, and America Online was forced to follow suit. In preparation, America Online acquired a firm called Booklink Technologies, which made its own Web browser, and another called NaviSoft, which produced software for publishing on the Web. Case even tried to buy a stake in Netscape Communications, but he was rebuffed. CompuServe also moved toward the Internet. In February 1995, it paid an eye-popping $100 million for Spry Inc., a Seattle-based company whose Web browser had a market share of less than 10 percent.
Despite the exponential growth of traffic on the Internet and the World Wide Web, online commerce was still in its infancy. In April 1994, two Arizona lawyers, Laurence Cantor and Martha Siegel, posted an advertisement for their firm on more than five thousand Internet bulletin boards. Sending people unwanted commercial messages like this, a practice known as “spamming,” was verboten on the Internet. Cantor and Siegel found themselves deluged with so many angry messages that their local Internet service provider closed their account. But the traditionalists were fighting a losing battle. According to Cantor and Siegel, their spam generated $100,000 in extra business. Discreet advertising was already an established feature on the Internet. Bookstores advertised on literary bulletin boards, sex companies advertised on sex sites, and florists advertised at florist.com. O’Reilly & Associates, a California publishing company, had set up an Internet service called Global Network Navigator, which included “GNN Marketplace,” a primitive online shopping mall.
Corporate America was slowly realizing that through the Internet it could reach millions of customers, most of them affluent and educated. Marty Nisenholtz, an executive at Ogilvy & Mather, a New York advertising agency, drew up a set of guidelines for online advertising. (Nisenholtz’s first rule was that intrusive e-mails were unwelcome.) In November 1994, AT&T and Zima, a beverage company, placed the first “banner” advertisements on the Web, at Hotwired.com, the online arm of Wired. The advertisements were interactive, which was claimed to be their great virtue. Whenever somebody clicked on a banner, he or she was transferred to another Web site that provided more information about the advertiser. (Of course, people could simply ignore the banners, but this aspect of interactivity wasn’t stressed at the time.)
All of this activity didn’t go unnoticed on Wall Street, where hordes of investment bankers were busy searching for deals. Investment bankers are basically realtors. The properties they sell are companies, and securities in companies. Like real estate agents, they charge a hefty commission for their services. Managing an IPO is a particularly lucrative business. When an investment bank issues $100 million in stock from a new company, it usually keeps about $7 million of the proceeds for itself, and that is only the start of the payoff. Most young companies are forever in need of money, and they end up doing a lot of follow-on stock and bond issues, which generate more commissions. Another thing that investment bankers share with real estate agents is that they are always on the lookout for the next trendy area, where big money can be made in fixing up old properties and building new ones. The Internet was just such a neighborhood. During the early 1990s, it was widely seen as a bohemian enclave, but during 1994 and 1995 this attitude changed, and the rich started to move in. “It’s like the land rush in Oklahoma,” Larry Ellison, the chairman of Oracle, said in February 1995. “The best spot in the valley goes to the one who gets there first.”2
With demand for Internet-related companies increasing, the investment bankers set about increasing the supply. The first candidates were the Internet service providers, which were enjoying strong growth. In December 1994, Netcom On-Line Communications Services, an ISP based in San Jose, issued 1.85 million shares in a stock offering organized by Volpe, Welty & Company, a small investment bank based in San Francisco. The media didn’t pay much attention to the Netcom IPO, but Wall Street did. The stock was issued at $13, valuing Netcom at more than $85 million. Since Netcom didn’t make any profits or pay any dividends, its stock was priced on the basis of a new formula: value per subscriber. Netcom certainly had subscribers—about 41,500 of them—and they had to be worth something. At $13 a share, each one of them was valued at about $2,100—more than twice the value that the stock market was attributing to cable television subscribers. This was despite the fact that Internet service providers charged about $20 a month, while cable companies charged upwards of $30 a month. There was no obvious reason why Internet users should be valued so highly, but even at this early stage Internet stock valuation wasn’t based on reason. It was based on hope and hype. The new valuation formulas were primarily an attempt to rationalize the fervor of investors. “This is a rocket that has been launched,” Eric Schmidt a senior executive at Sun Microsystems, declared shortly after the Netcom IPO. “There’s no one who can stop it.”3
Within a few months of going public, Netcom’s stock price had doubled, thereby justifying the new valuation formula, at least in the eyes of its progenitors. In the spring of 1995, two more ISPs went public at outlandish prices. PSINet, a Virginia company that had lost more than $10 million during the previous year, sold 3.8 million shares at $12 each, valuing the company at $431 million. UUNet, which was also based in Virginia, sold 4.725 million shares at $14 each, and its stock price almost doubled on the first day. Goldman Sachs, the most prestigious firm on Wall Street, underwrote the UUNet offering, and the sight of the mighty Goldman giving its imprimatur to Internet stocks raised the industry to a new level of respectability.
Many Wall Street veterans looked askance at these events. Even in Silicon Valley, where companies tend to go public quicker than elsewhere, there had been a custom that IPO candidates should have two or three years of profit-making behind them. Some of the new Internet companies had hardly been in business for three years, let alone made profits for that long, but their stocks were being snapped up like Impressionist paintings. “Anything that even sounds like it’s an Internet play can go public without much on the books,” Cristina Morgan, a senior executive at Hambrecht & Quist, a San Francisco–based investment bank, commented. “Investors want to be on board.”4
II
Jim Clark, the founder of Netscape, was watching these events closely. Back in 1986 his first firm, Silicon Graphics, had carried out a successful IPO after being in business for five years, which was then considered fast. Netscape was barely a year old, but its revenues were growing rapidly, and its browser was spreading like one of the filthy jokes that Clark liked to tell. By the end of May 1995, more than 5 million Netscape Navigators had been distributed, and Netscape’s market share had gone from zero to more than 60 percent.
Clark stood to make a lot of money if Netscape went public, but that wasn’t his only consideration. He was hearing rumors that Spyglass, the company that had licensed the Mosaic browser from the University of Illinois, was preparing to do an IPO, and he didn’t want to be left behind. A successful stock offering would produce a lot of publicity, which would be immensely valuable to a young company like Netscape. In the old days, firms went public because they needed the money to expand, but in the 1990s IPOs had turned into marketing events. “I continued to preach the gospel, assuring the unsaved that the Internet was their salvation,” Clark later wrote. “But we needed something else to get the world’s attention. More marketing bullshit! For a tiny little company with modest but exploding revenues, what was the biggest marketing event of all?”5
There was yet another reason to move quickly, which Clark didn’t like to acknowledge publicly. At some point soon, Microsoft was bound to react to Netscape’s growing popularity, which was a potential threat to its grip on the PC desktop. Microsoft monopolized the market for PC operating systems with Windows 95, and the market for PC applications with Microsoft Office. Bill Gates had been slow to realize the importance of the Internet, but he was finally coming to his senses. Earlier in 1995, Microsoft had licensed Spyglass’s technology in order to ship a Web browser with the Windows 95 operating system and the Microsoft Network, both of which were due to be launched in August. Netscape Navigator was a superior browser to Spyglass’s Mosaic, but Clark knew that Gates was unlikely to stop there. Before very long, Microsoft was sure to attack the Web browser market in a more serious manner. If Netscape was going to issue stock, it made sense to do so while the competition was sparse.
In early June 1995, Clark called a board meeting and invited Frank Quattrone, an investment banker at Morgan Stanley, to make a presentation. At thirty-nine, Quattrone was not a typical Wall Street preppie. He had grown up in an Italian-American family in Philadelphia, and he still spoke with a strong accent. After getting his MBA at Stanford Business School in 1981, Quattrone chose to stay in California. He joined Morgan Stanley’s San Francisco office as an associate working on technology IPOs. At that time, the Silicon Valley investment-banking industry was largely detached from Wall Street. Three San Francisco–based firms—Hambrecht & Quist, Montgomery Securities, and Robertson, Stephens—handled most of the deals. Quattrone saw an opportunity for his new employer to move in on a rapidly growing business. With its strong links to institutional investors and its famous name, which emerged from the breakup of J. P. Morgan’s financial empire during the Great Depression, Morgan Stanley could offer Silicon Valley companies instant credibility on Wall Street. The strategy worked. During the late 1980s and early 1990s, Quattrone helped some of Silicon Valley’s most successful companies to go public, including Cisco Systems and Silicon Graphics, which is when he met Clark. After Clark founded Netscape, Quattrone got back in touch with him. In early 1995, Quattrone helped organize the deal that saw several big media companies take stakes in Netscape, an experience that convinced him other investors would be willing to back Netscape despite its youth.
At the Netscape board meeting, Quattrone argued that an IPO would be a big success, especially if it was done before Windows 95 appeared. Given all the necessary paperwork, the earliest possible date was August, a month when many people on Wall Street decamp to the Hamptons and Martha’s Vineyard. “With this company, and in this market, I think people will give up their vacations to see the road show,” Quattrone said.6 The venture capitalist John Doerr was willing to go along with an immediate IPO, but Jim Barksdale, a courtly southerner whom Clark and Doerr had brought in as Netscape’s chief executive earlier in the year, thought it was too early to go public. The firm’s revenues in the second quarter of 1995 were only $12 million, and it was still losing money. Barksdale, who had previously held senior positions at Federal Express and McCaw Cellular Communications, was also worried that an IPO might distract Netscape’s staff and attract more attention from Microsoft. He asked for some time to think things over, and the board meeting broke up.
Clark was relentless. As Netscape’s founder, chairman, and biggest shareholder he couldn’t be ignored for long. A couple of weeks later, Spyglass held its IPO, issuing two million shares at $17. The stock closed above $21. Clark became even more insistent. “If Spyglass could score a successful IPO, we had to get our asses in gear,” he later wrote.7 A couple of days after the Spyglass offering, Clark called another board meeting, this time via telephone. When everybody was on the line, he asked Barksdale what he had decided. “Okay,” Barksdale said. “Let’s do it.”
The process of taking a company public takes place in three stages. The first task is to prepare a wealth of financial information about the firm and file it with the Securities and Exchange Commission. Fortunately, Morgan Stanley had gathered many of the relevant figures earlier in the year. In mid-July, Netscape published its prospectus and said it intended to sell 3.5 million shares at $12 to $14 each. This was only a provisional estimate—the actual price of a stock issue is never decided until a day or two before the IPO—but it indicated that Morgan Stanley believed Netscape was worth about $500 million, more than three times the valuation placed on it earlier in the year. In other circumstances, such a valuation would have been considered excessive, but in this instance it turned out to be too low.
This became clear during the second stage of the IPO process: the investor road show. In late July and early August, Barksdale and Andreessen crisscrossed the United States and Europe to meet the fund managers and other institutional investors who would be bidding for Netscape’s stock. In theory, an investor road show is an occasion for skeptical investors to take the measure of the company’s management and ask some tough questions. In practice, most of the people who attend have already decided to buy, and the main reason they show up is to impress the underwriters who control the stock allocations. At stop after stop, Barksdale and Andreessen were treated like visiting dignitaries. In New York, so many people tried to get in that some were turned away. During the presentations, Andreessen regaled the audience with his views about the future of the Internet, while Barksdale played the part of the southern minister. “It’s just like church,” he would say in his Mississippi drawl. “Come on down the front and be saved.”8
After the road shows finished, Quattrone and his colleagues at Morgan Stanley gathered for the third and final stage of the IPO process—the pricing of the stock. They were facing a dilemma. The number of shares to be issued had already been increased to 5 million, but judging by the expressions of interest during the road shows 50 million could easily have been sold. The IPO price would have to be raised, but by how much? Pricing a stock issue is as much an art as a science. Ideally, the price would be low enough for the stock to enjoy a decent “bounce” when it started trading but high enough to ensure that Clark and Barksdale didn’t feel like they had left too much money on the table. After some debate, Morgan Stanley recommended an issue price of $31 a share. Barksdale thought that figure was too high, and he insisted on a price of $28, which would value Netscape at more than a billion dollars.
III
On the morning of August 9, 1995, Clark woke up at his usual time in his home in Atherton, a small town a few miles north of Palo Alto. “The weather at seven A.M. was typical for a summer morning in the semimythical part of California known as Silicon Valley,” he wrote in Netscape Time, a memoir published in 1999. “While the rest of the country sweltered, in my neighborhood thirty miles south of San Francisco the clouds lay so low they verged on fog. The temperature hovered in the mid-fifties. Had this been almost anywhere else, the dull light coming through the bedroom windows would have suggested a day of rain, but I knew that within two hours the sun would burn away the clouds and the temperature would climb into the nineties. Rain still was months away.”9
While Clark contemplated meteorology, the men and women on the Equity Capital Markets trading floor at Morgan Stanley’s global headquarters, high above the north end of Times Square, were in a frenzy of activity. Even at $28 a share, the demand for Netscape stock was easily outstripping the supply. The stock had been due to start trading at 9:30 A.M. E.S.T., but at 10:30 it hadn’t opened. So many investors were bidding for the stock that Morgan Stanley’s traders were finding it impossible to establish a floor for the first trade. Whatever price they indicated, investors seemed willing to bid more. Everybody on Wall Street, it seemed, wanted in on the Netscape offering. Many of the bidders were mutual fund managers, but there was also heavy demand from individual investors. The Netscape IPO had captured the public imagination in an unprecedented manner. At Charles Schwab, the discount brokerage, the recorded phone message had been changed to say, “Press one if you’re calling about Netscape.”10
Back in Silicon Valley, Clark was getting nervous. After having breakfast and calling Morgan Stanley a couple of times, he drove to Mountain View, where his secretary had rigged up an electronic ticker tape to display Netscape’s stock price in real time. It was now after 8 A.M. on the West Coast, and after 11 A.M. on the East Coast, but the electronic display said $28. Trading still hadn’t opened. Clark thought of swinging by Andreessen’s office but decided against it. Andreessen wasn’t in yet anyway. Having worked late the previous night, he was in bed. At about 8:30 A.M., Clark’s secretary finally put through a call from somebody at Morgan Stanley to tell him the stock had opened at $71. “Unbelievable,” the voice said. “Congratulations.”11 After putting the phone down, Clark did some arithmetic in his head. His 9.7 million shares were now worth $663 million. A little later, Andreessen finally woke up and logged onto Quote.com, a financial Web site, to find out what was happening. When he saw the stock price and realized he was worth about $70 million his eyes widened. Then he got back into bed and went back to sleep—at least that is what he later claimed he did.
Over the course of the day, Netscape’s stock climbed as high as $74. Almost 14 million shares were traded, which meant that each one of the 5 million shares changed hands nearly three times, on average. At the close, the stock stood at 58 1/4, valuing Netscape at $2.2 billion, almost as much as General Dynamics, the giant defense contractor. On its first day of trading, Netscape’s stock had risen by 108 percent. As The New York Times noted the following morning: “It was the best opening day for a stock in Wall Street history for an issue of its size.”12 Pretty much everybody involved in the IPO had gotten seriously rich. Clark’s shares were worth $565 million, not as much as they had been earlier in the day, but enough to make him one of the wealthiest men in the country. Kleiner Perkins’s stake, which had cost it $3.5 million sixteen months earlier, was now worth $256.3 million. Doerr’s decision to give into Clark’s demands had turned into the most successful venture capital investment in history. Barksdale’s shares, which he had received on taking the CEO job, were worth $244.7 million—a handsome return for eight months of work. Andreessen was worth $58.3 million. As for the rest of the University of Illinois team—Bina, Mittelhauser, Totic, et al.—they were each worth at least $20 million. Clark had come through on the promise he had made in Illinois a year and a half earlier. He couldn’t help seeing what had happened as a personal triumph. For the past year or more he had been preaching the Internet gospel to anybody who would listen. “People started drinking my Kool-Aid,” he told Michael Lewis. “Netscape obviously didn’t create the Internet. But if Netscape had not forced the issue on the Internet, it would have just stayed in the background. It would have remained this counterintuitive kind of thing. The criticism of it was that it was anarchy. What the [Netscape] IPO did was give anarchy credibility.”13
Clark’s statement contained a lot of truth, but it wasn’t anarchy in the usual sense of the word that had been legitimized. Some of the early Internet enthusiasts harbored anti-authoritarian, anticapitalist instincts, but they were now in a small minority. Anarchy in the post-Netscape sense meant that a group of college kids could meet up with a rich eccentric, raise some more money from a venture capitalist, and build a billion-dollar company in eighteen months. Anarchy was capitalism as personal liberation. To a country based on the twin pillars of free enterprise and individualism, this was an intoxicating vision, and it goes a long way toward explaining the extraordinary enthusiasm shown for the Internet in the ensuing years. From the moment of Netscape’s IPO onward, going into the business world didn’t necessarily mean putting on a suit, killing your teenage dreams, and working for a stultifying corporation. It could just as easily mean pulling on an old T-shirt, hooking up with some friends, and striking out on your own.
The Internet had turned into the new American frontier—an argument made explicitly by John Perry Barlow, the rancher, writer, and co-founder of the Electronic Freedom Foundation. “Today another frontier yawns before us, far more fog-obscured and inscrutable in its opportunities than the Yukon,” Barlow declared. “It consists not of unmapped physical space in which to assert one’s ambitious body, but unmappable, infinitely expansible cerebral space. Cyberspace. And we are all going there whether we want to or not.”14 As this passage indicates, Barlow is something of a hippie. As a young man he wrote song lyrics for the Grateful Dead. In one of history’s bizarre coincidences, Netscape went public the same day that Jerry Garcia, the lead singer of the Dead, died of a heart attack. As the cultural icon of one era left the scene, a new one replaced him: Andreessen, the Wisconsin farm boy who had turned himself into an “Internet billionaire.”
But as was the case with the hippie movement, there was always something slightly suspect about the notion of the Internet as a capitalist nirvana. For one thing, Andreessen wasn’t a billionaire. Clark, Doerr, and Barksdale, three men who were already wealthy, made a lot more money from the Netscape IPO than he did. Since Andreessen came up with the idea for Mosaic in the first place, this was hardly fair, but it reflected an eternal verity: most of the rewards of capitalism—Internet capitalism or any other form of capitalism—go to the well-to-do. For another thing, it was far from clear that the money that had been made in the Netscape IPO was the real folding stuff. Only 5 million shares had been issued. Most of Netscape’s 38 million shares, including all of those owned by Clark and Andreessen, were not yet trading. The stock price had been boosted by an artificial shortage of stock that would gradually be eliminated as more shares were issued over the coming months and years. Finally, it was by no means certain that Netscape was capable of withstanding the challenges that it would inevitably face. Despite the startling success of its IPO, this was still a business that gave away its main product and that faced imminent competition from Microsoft.
For now, none of these things seemed to matter. America was moving into a different realm—one where the restrictive laws of economics and gravity had been temporarily suspended. “This frontier, the Virtual World, offers opportunities and perils like none before,” Barlow declared. “Entering it, we are engaging what will likely prove the most transforming technological event since the capture of fire. I have a terrible feeling that your children, by the time they are my age, would be barely recognizable to me as human, so permanently jacked in to the Great Mind will they be.”15
IV
The media reaction to the Netscape IPO was mixed. The Financial Times, Europe’s leading business newspaper, compared Netscape to Boston Chicken, a fast-food chain that went public amid a blaze of publicity in November 1993 but quickly ran into trouble. Time pointed out that Microsoft was only two weeks away from launching Windows 95, which would come packaged with a new Web browser that “like other Microsoft programs, may smother all competitors.”16 George Gilder, who had finally discovered the World Wide Wed and adopted it with the zeal of a convert, was much more positive. Writing in Forbes, he anointed Marc Andreessen as the new Bill Gates and claimed that the Internet would “displace both the telephone and the television over the next five years or so.”17 Gilder’s article caused amusement in Internet circles, because hitherto he had expressed little interest in the World Wide Web. “George, George, George—what took you so long?” Howard Anderson, a well-known technology consultant, commented wryly.18
Microsoft released Internet Explorer 1.0 at the end of August, but it turned out to be a barely improved version of the Mosaic browser. The Microsoft Network, which was launched at the same time, was equally uninspired. A month later, Netscape released the beta version of Netscape Navigator 2.0, which was far more impressive. It included space for “plug-in” applications, such as music players, and it also featured the “Java” programming language, which enabled users to download software from the Internet. The incorporation of Java made Netscape even more of a threat to Microsoft. If computer users could download word processing programs and spreadsheets from the Internet, they might no longer need Microsoft Windows and Microsoft Office. In November, Rick Sherlund, an analyst at Goldman Sachs, removed Microsoft’s stock from his recommended list, and it fell sharply. Netscape’s stock continued to astonish. In early December 1995, it reached $170, at which point Netscape was worth almost $6.5 billion.