Microsoft Blindsided!

Microsoft was blindsided by the rise of the Web. Netscape Navigator was being downloaded at a rate of one million copies a month and on November 16, 1995 Goldman Sachs downgraded Microsoft stock because of Internet concerns. Until December 7, 1995 it looked like Microsoft would become irrelevant in the Internet Age.
In the early 1990s, Marc Andreessen was an undergraduate at the University of Illinois, making $6.85 an hour writing computer code for the National Center for Supercomputing Applications. In 1993, Andreessen and Eric Bina wrote a graphical Web browser called Mosaic. Mosaic was the first GUI (graphical user interface) for the Web. Users could download it for free. By the fall of 1994, it had become the tool for three million Web surfers and was growing at a rate of 600,000 new users per month.
Venture capitalist and entrepreneur Jim Clark, founder of Silicon Graphics, contacted Andreessen early in 1994. Using $5 million of Clark's capital, they founded Netscape with the idea of becoming the Microsoft of the Internet.
Every year Bill Gates appoints technical assistants who become his eyes and ears in Microsoft and within the technical community at large. The technical assistant works to identify new trends or technologies that might impact Microsoft or change the course of technological development.
In February 1994 Gates' technical assistant, Steven Sinofsky, returned from Cornell University where he saw students using Mosaic. He sent an e-mail to Gates and his other technical staff, "Cornell is Wired." In April 1994 Microsoft's top executives poured over a 300-page briefing on the Internet by Sinofsky, and debated the importance of the Web and how much Microsoft should invest in it. David Marquardt, a director on Microsoft's board and a venture capitalist, was at an April 1994 board meeting and was amazed at how little Microsoft was investing in the Net and raised the subject. Gates' response was that the "Net was free. There was no money to be made there."
In early 1995, Microsoft management was intensely focused on Windows 95. Microsoft was scrambling to complete Windows NT, government regulators were probing anti-competitive practices, and Gates and other senior executives had already committed to developing Microsoft Network (MSN), a proprietary online service to compete with America Online (AOL).
Planning for MSN began in 1992, and Gates approved bundling the service with Windows 95 in 1993. In 1993, AOL was perceived to be a far larger threat than the Internet.
By November 1994, Mosaic accounted for 60 percent of all Web traffic. In December, Netscape launched its first commercial Web browser, Navigator. In four months, with no advertising and no sales in retail outlets, a stunning six million copies of Navigator were in use. By the spring of 1995, 75 percent of Web surfers were using Navigator. Mosaic's share had plummeted to five percent. By May 1995, Gates was sounding the Internet alarm. He issued a memo titled, "The Internet Tidal Wave" declaring that the Net was the "most important single development" since the IBM PC. "I have gone through several stages of increasing my views of its importance. Now I assign the Internet the highest level."
Benjamin Slivka, who was in charge of Internet Explorer, wrote his own alarm in May titled, "The Web is the Next Platform" warning that the Web had the potential to supersede Windows. In June 1995, Microsoft held another retreat focused on the Internet. Gates gave a talk on his memo and Slivka's scheduled 15-minute talk lasted over an hour. At one point, Slivka proposed that Microsoft give away software on the Net, as Netscape was doing. Gates dissed the idea saying, "What do you think we are, communists?"
On August 8, 1995, Netscape's spectacular Initial Public Offering (IPO) sent a shock wave through the consciousness of the business world. On the first day, the stock offering, which was priced at $25, rose in trading to $75 - valuing the company at over $2 billion. Amid the subsequent blaze of publicity, no one could ignore the power of the Web. On November 16, Goldman Sachs downgraded Microsoft stock because of Internet concerns.
Finally Gates had had enough. On December 7, 1995 he staged an all-day program for analysts, journalists, and customers to show that Microsoft had every intention of playing and winning in the new medium. This was the beginning of a complete about face. Microsoft's Internet Platform & Tools Division was created in February 1996 and by July had grown to 2,500 employees. And Microsoft changed its strategy mid-stream on MSN. Microsoft forged a deal with AOL to have its Internet Explorer as its primary Web browser, in return for putting AOL in Windows 95, ending the exclusive edge for MSN.