Breakingviews - Netscape IPO casts a shadow from 1995 over AI boom

Reuters

2 days ago

NEW YORK, July 24 (Reuters Breakingviews) - With a $300 billion valuation, ChatGPT developer OpenAI towers over peak Netscape. The trailblazing web browser, however, looms large from Silicon Valley to Wall Street as the 30th anniversary of its world-shaking initial public offering approaches. Both the similarities and differences with the internet craze have created some worrisome conditions for today's artificial intelligence mania.
Netscape IPO delirium was instrumental in reshaping technology and finance. The company went public on August 9, 1995, just 16 months after veteran entrepreneur Jim Clark and computer programming whiz Marc Andreessen started it. With assistance from Morgan Stanley's Frank Quattrone and Mary Meeker, and Bill Hambrecht of Hambrecht & Quist, the co-founders cleared the way for unprofitable, fast-growing ventures to attract investments from big money managers.
The frenzy to buy its shares also spawned a dotcom boom that would run for nearly five years. Moreover, Netscape helped rewrite funding handbooks, debunked some of the first-mover gospel, and provides lasting cautionary tales about capital intensity and the threat from entrenched rivals. As AI fever grips the market, these developments are instructive.
Consider the technological backdrop as Netscape released its user-friendly Navigator browser three decades ago. Soon after the market debut, Meeker drafted the first of her regular trend-spotting reports, which have become required reading, opens new tab for the industry. 'What is the Internet?' she pondered early in the inaugural 323-page presentation. While TVs and corded telephones could be found in 95% of U.S. households, less than 1% of the world's population had access to the worldwide web, including email. There were about 16 million users.
Netscape sold 5 million shares for $28 apiece, nowhere near enough to satisfy insatiable demand for a company considered to be the future of the internet, despite having lost $4 million on $15 million of revenue during the first half of 1995. The stock nearly tripled, before ending the day at about $58 to impute a $2.3 billion market value. Six months later, the boom got an extra boost from the U.S. government. Deregulation of the telecom industry helped fuel a nearly $500 billion spending spree over roughly five years to build network capacity.
There are some notable differences between then and now. Just look at OpenAI, whose ChatGPT exploded onto the scene much like Netscape did by making an arcane technology accessible to the masses. The firm led by Sam Altman is now almost a decade old and three years have passed since it shook up the industry, but it remains beyond the reach of most investors. OpenAI recently raised $40 billion privately, the single biggest funding round in Silicon Valley history, at a $300 billion valuation.
With so much venture and later-stage money available to entrepreneurs, it's no wonder the number of tech IPOs has plummeted from 370 in 1999 to just 14 last year. Myriad scandals from the dotcom era involving inflated valuations, excess commissions and improperly allocated shares also led to new regulations that chilled some of Wall Street's willingness to underwrite unproven business models. Efforts in 2012 to make it easier for smaller startups to go public failed to jumpstart the market and arguably put investors at greater risk by reducing the amount of required corporate disclosure. New tech stock issuance is so fallow that JPMorgan has started providing, opens new tab clients with research about private ones.
'Some good business models are out there,' Hambrecht, one of the bankers who advised Netscape, told Breakingviews in an interview earlier this month. 'There's still a lot of demand for new investments, and sites like Robinhood are bringing a new dimension with younger, more aggressive investors. There's just a lack of issues, and I just think the financial markets have changed so significantly since Netscape.'
Another big reminder of the time remains entrenched in the technological firmament: Microsoft (MSFT.O), opens new tab. The software behemoth squashed Navigator, which had amassed about 90% of the browser market, by bundling its competing Internet Explorer with the Windows 95 operating system. The aggression attracted the attention of U.S. trustbusters, leading to a landmark lawsuit and settlement. Seemingly heeding the ominous precedent, Microsoft boss Satya Nadella carefully partnered with OpenAI in 2019 while providing a $1 billion investment. Since then, however, the relationship has become increasingly strained, leaving open the possibility that history will rhyme.
Altman has another good reason to brush up on the browser wars. Netscape could not have mobilized any faster, having developed a product, dominated the market and created investment buzz within 16 months. And yet it was unable to keep up with a deep-pocketed rival. The company swiftly ceded its share of users and succumbed to giving Navigator away free. In late 1998, Netscape agreed to an ill-fated sale to dial-up internet service provider America Online for about $4 billion in stock, worth $10 billion by the time the deal closed months later. One risk for Altman is that ChatGPT winds up similarly clearing a path only for more established rivals to ultimately walk it.
'It's always striking – given all the tech enthusiasm – how few companies become massive winners. There's a lesson there,' Meeker wrote to Breakingviews in an emailed reply to questions. 'There's also a lesson related to just how massive and foundational the big winners can become.'
Her observation partly explains the mad rush to build data centers, buy chips and secure the power used to train and expand large language models. The danger is that all this investment alters Big Tech's use of capital for the worse. Alphabet (GOOGL.O), opens new tab, Amazon.com (AMZN.O), opens new tab, Meta Platforms and Microsoft are on track to deploy more than $300 billion this year alone, a 13-fold increase from a decade ago. Although they're funding the outlays with their own cash flow, unlike the debt-heavy telecom providers of the 1990s, there is a risk that capacity winds up similarly outpacing demand.
As if all that isn't enough to give investors pause, there are other indications of recklessness, any one of which could cause fear to ripple through the market. Cryptocurrency exuberance abounds thanks to relaxed restrictions; shell companies stuffed with cash have made a comeback buying speculative ventures; meme stocks keep raging; and U.S. regulators have proposed rolling back rules designed to curb day trading and protect investors from big losses that were put into place in 2001 after the dotcom bust. The dearth of IPOs is also leading to a proliferation of sites offering unproven access to hot, private tech firms. It's all part of a shaky edifice that portends another bittersweet anniversary.
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