By the spring of 1995, Microsoft was on top of the software world. Windows 95 was months from launch, Office was printing money, and the company's grip on the desktop looked unbreakable. And yet, on May 26, 1995, Bill Gates sat down and wrote a memo to his executive staff that read less like a victory lap than a fire alarm. Its title: The Internet Tidal Wave.
“I have gone through several stages of increasing my views of its importance,” Gates wrote of the Internet. “Now I assign the Internet the highest level of importance.” He compared its arrival to the IBM PC of 1981 — the last technology shift big enough to remake the entire industry. And he named the company that had him worried: a fifteen-month-old startup called Netscape.
A startup born on the Web
Netscape had come out of nowhere. Founded in April 1994 by Marc Andreessen — the 22-year-old who had co-written the pioneering Mosaic browser — and Silicon Valley veteran Jim Clark, the company gave its Navigator browser away free to anyone who wanted it. Within a year Navigator was the front door to the Web, holding well over 90% of the market. To use the Internet in 1995 was, for most people, to use Netscape.
Then came August 9, 1995. Netscape went public having never turned an annual profit, priced its shares at $28, and watched them nearly triple on the first day of trading. The IPO minted instant fortunes, put the word “Internet” on every magazine cover, and effectively fired the starting gun on the dot-com boom. Gates's memo suddenly looked less like paranoia and more like prophecy. A company with no operating system, no Office, and barely any revenue had just become the most exciting business on Earth — and its product was a piece of software that could run on any computer, Windows or not.
That last part was the real threat. If the browser became the place where people lived, the operating system underneath it would stop mattering. Netscape co-founder Marc Andreessen said as much, boasting that Navigator would reduce Windows to “a poorly debugged set of device drivers.” Gates understood the danger perfectly. Microsoft's entire empire rested on Windows being the thing everyone had to have. Netscape was building a world where it wasn't.
Embrace, extend, and outdistribute
Microsoft's answer arrived quietly on August 24, 1995, tucked into the “Plus!” add-on pack for Windows 95. Internet Explorer 1.0 was not, in truth, much of a browser. It was built on Mosaic code that Microsoft had licensed from a company called Spyglass — a deal that would later come back to bite, since Spyglass expected a cut of sales and Microsoft chose to give the browser away for nothing.
“Free” was the whole strategy. Netscape charged businesses for Navigator; Microsoft could afford to charge no one, subsidising Internet Explorer with the bottomless profits of Windows and Office. Then it did something Netscape couldn't answer: it welded the browser to the operating system. Every copy of Windows would come with Internet Explorer already installed, and PC makers who wanted to ship Windows found they had little choice about it.
The timeline below traces how quickly a memo became a market Microsoft was determined to own.
The product caught up fast. IE 1 and 2 were forgettable, but Internet Explorer 3.0, released in August 1996, was the first version that could genuinely stand next to Navigator — it added support for cascading style sheets and, of course, cost nothing. By the time Internet Explorer 4.0 shipped in the autumn of 1997, the browser was no longer a bundled afterthought but a core part of Windows itself, threaded so deeply into the system that removing it became a genuine engineering question.
Winning the war, inviting the reckoning
The numbers turned. Navigator's commanding lead eroded quarter by quarter as new PCs shipped with Internet Explorer preloaded and users simply used what was already there. Distribution, not features, decided it. Netscape, unable to out-give a company giving software away for free, saw its share collapse from more than 90% toward the single digits over the following years. In early 1998 it made a last, radical bet — releasing Navigator's source code to the public and founding the Mozilla project, a decision whose fruit, Firefox, was still years away. By 1999 Netscape had sold itself to AOL for around $10 billion, a rich price for a company that had already lost the war.
But winning came at a cost Microsoft would spend years paying. The very tactics that crushed Netscape — bundling the browser into Windows, leaning on PC makers, wielding the operating system monopoly as a weapon — caught the attention of the U.S. Department of Justice. In May 1998, the DOJ and twenty state attorneys general filed suit, accusing Microsoft of illegally protecting its monopoly by tying Internet Explorer to Windows. The internal emails that would fill the courtroom — Gates's memo among them — were about to become Exhibit A.
Microsoft had ridden the Internet tidal wave instead of drowning under it. In doing so it proved, once again, that its deadliest product was never a single piece of software but its sheer control of the desktop. That control had just made it the most feared company in technology. It was about to make it the most-watched defendant in America.
Next time: the trial of the decade — how a videotape, a deposition, and a judge's ruling nearly split Microsoft in two.
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