Netscape Case Study
Corporate Finance: Case Netscape
1. Why has Netscape been so successful to date? What is its strategy? How risky is its current competitive situation? Netscape follows a “give away today make money tomorrow”-strategy. Netscape currently has 75% of web browser market, making it by far the most popular browsing software. Netscape is making money by selling server software to companies that require marketing access to potential consumers, by selling its software packages and through providing services. Netscape gained its large market share by initially giving away its product for free, which turned out to be a very successful strategy. However Netscape finds itself in a risky competitive situation, as new competitors have entered the web browser, server and service markets. Currently Netscape is still by far the web browser industry leader. It gained this position by giving its browser away for free. The web browser market is a fast changing market and in order to remain market leader Netscape has to innovate and invest heavily.
2. Value Netscape. Two ways to value a company: estimate the future cash flows and compute the present value, or estimate the value by examining comparable companies. A review of the valuation can be found in the attached excel sheet, where: - Revenues are the companies six months ended revenues * 2 = 33.250.782 for 1995, which is increasing with the assumed growth rate of 20 %. - Total costs in 1995 are the six months ended (total costs of revenues + total operating expenses) * 2 = (1.735.812 + 19564.223) * 2 = 42.600.070 and thereafter the costs are calculated as a percentage of total revenues. - PPE is previous year’s PPE – previous year’s depreciation + this year’s capital expenditures. - Depreciation is (last year’s gross PPE + capital expenditures) / 10. - The company’s value in 1995 is the 1995 free cash flow / 1 + risk-free rate?
1. Why has Netscape been so successful to date? What is its strategy? How risky is its current competitive situation? Netscape follows a “give away today make money tomorrow”-strategy. Netscape currently has 75% of web browser market, making it by far the most popular browsing software. Netscape is making money by selling server software to companies that require marketing access to potential consumers, by selling its software packages and through providing services. Netscape gained its large market share by initially giving away its product for free, which turned out to be a very successful strategy. However Netscape finds itself in a risky competitive situation, as new competitors have entered the web browser, server and service markets. Currently Netscape is still by far the web browser industry leader. It gained this position by giving its browser away for free. The web browser market is a fast changing market and in order to remain market leader Netscape has to innovate and invest heavily.
2. Value Netscape. Two ways to value a company: estimate the future cash flows and compute the present value, or estimate the value by examining comparable companies. A review of the valuation can be found in the attached excel sheet, where: - Revenues are the companies six months ended revenues * 2 = 33.250.782 for 1995, which is increasing with the assumed growth rate of 20 %. - Total costs in 1995 are the six months ended (total costs of revenues + total operating expenses) * 2 = (1.735.812 + 19564.223) * 2 = 42.600.070 and thereafter the costs are calculated as a percentage of total revenues. - PPE is previous year’s PPE – previous year’s depreciation + this year’s capital expenditures. - Depreciation is (last year’s gross PPE + capital expenditures) / 10. - The company’s value in 1995 is the 1995 free cash flow / 1 + risk-free rate?