August 10, 1995
Originally, the article appeared on The Electronic Newsstand. Since then, Netscape has split, so you might want to divide the prices below by two to compare them with Netscape's current price.)
On the car radio, I heard one broker point out that the price pattern means that a lot of people now are holding the stock who bought it for $70 or more. He referred to these unfortunate buyers as "bagholders," as in "left holding the bag." This is in contrast to the people who bought in the mid-$50's, who at least were not staring at a $15 paper loss at the end of the day.
I think the term "bagholder" applies to all of the people owning traded Netscape stock at the end of the first day. If you bought at $54 you should be happier than someone who bought at $75, but either way, you paid a phenomenal price for the stock.
The first day's closing price put the total value of the Netscape franchise at close to $2 billion.
Next, we need to figure out how much of that $500 billion goes to Internet service providers of all sorts. Of course, the producers of the goods and services have to get 90 percent of the revenue, or else they're not making money selling on the Net, so that leaves $50 billion for Internet services.
Next, we need to figure out the percentage of the $50 billion skimmed off by the Net that will go to Web server software. Remember that companies who market on the Web will need hardware, communication services, graphic artists, database programmers, content designers and managers, and other software tools and services to market on the Net. Figure that the Web server cost can be no more than 5 percent of total cost, or $2.5 billion.
Finally, project Netscape's share of the Web server software market. Keep in mind that as of today there is usable freeware, that there are companies selling commercially supported Web server software for $500 (vs. Netscape's price of $50,000), and that professional software firms with established client bases can get into this business.
Also, keep in mind that companies with complementary hardware and software will work very hard to avoid allowing another Microsoft-style monopoly to emerge. Sun, DEC, and other hardware and software companies will want to encourage competition in the server software industry in order to increase the relative value of their own products. Their incentive is to turn Web server software into a commodity.
Putting all this together, I think Netscape will be lucky to achieve a 50 percent market share. So, using what I believe are relatively optimistic assumptions, I see Netscape revenues over its useful life of $1.25 billion. Meanwhile, it will incur costs of several hundred million, so that the total profit is going to be pretty low.
Here is what I believe owning these stocks represents to people:
From an Internet perspective, investors are trying to lay claim (through Netscape, Netcom, AOL, Spyglass, and all the rest) to a phenomenon that nobody really owns. The Internet is a set of protocols and standards that enable different computers to communicate with one another. It used to be a cliche that "No one owns the Internet."
Traditional stock market analysts do not trust the Internet. Much of the Net culture distrusts Wall Street. Under the circumstances, the romance between Wall Street and the Internet is quite remarkable. I don't believe it can last.
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