Question

Back in 1996, Steve Case’s AOL was urgently seeking a top notch internet browser to market their products. Both Bill Gates’ Microsoft and Netscape Navigator were vying with AOL to take them on as a client. In terms of their Best Alternative (BA/BATNA), Netscape held a huge advantage because of its strong technical superiority, presence and dominance in the overall browser market. Microsoft was just in the process of entering the market and held a fledgling percentage of the overall browser market, but had a long way to go relative to Netscape’s much superior overall market hold. Additionally, Microsoft’s browser was also considered technically inferior to Netscape’s. Despite this unequal valuation of their positions, Bill Gates had deemed that gaining a greater presence and market share of the browser market was a priority. Netscape adopted the position that since they were so powerfully based, they would only negotiate with AOL by holding out for a high per copy fee. In essence, the deal would have been based on a “browser for dollars” agreement. Steve Case, the CEO of AOL viewed the position of Netscape as: “They [Netscape] were very aggressive about selling the browser, but they wanted a very high per-copy fee. The attitude was, ‘We’re so hot, we’ll license to everyone, so you better take it'.” Being new to the market and possessing what was considered an inferior product, meant Microsoft had very limited prospects at the negotiation table. As Netscape engaged in waiting for AOL to respond to their proposal, Microsoft readjusted their focus by shifting their own proposal to concentrate on their business marketing strength, rather than the technology issue. In essence, Microsoft used a creative strategy to change the nature of a weak position or BATNA to enhance their position while weakening Netscape’s in the process. Microsoft concentrated its pitch on the marketing features it could offer to AOL which it knew Netscape could not match. They did so by offering to bundle AOL into the Windows operating system, and more importantly, they offered to do this for free! They also promised AOL that they would provide additional technical adaptations if AOL were to sign a multi year contract. As David Colburn, AOL’s chief negotiator and Business Development head, would later state; “ The willingness of Microsoft to bundle… with the Windows operating system was a critically important competitive factor that was impossible for Netscape to match.” Despite the fact Microsoft and AOL were active competitors the match was perfect for both parties simply because Microsoft had the foresight to change the nature of the negotiation to their advantage and made AOL an offer it could not refuse. The end result was that AOL would now be able to position the AOL icon directly next to the Microsoft Network icon in what AOL described as “the most valuable desktop real estate in the world”. Simply put, they could reach out to a market that equated to an additional fifty million people per year and could do so at zero cost. AOL would no longer have to bombard the market by sending out its discs at a cost of forty to eighty dollars per acquired customer and still actively compete with Microsoft in the process. Although Microsoft surrendered some of its market share to AOL in the short term, the company achieved its loftier goal of making a huge stride forward in gaining a significant share of the browser market.

1. Describe the strength of the BATNA for each side? Who had the advantage based upon BATNA? What mistake did they make?

2. Your text talks about value and creating value. When the negotiation began, what value or service was being negotiated? Which side created new value and what was it? How did this move them from a position of weakness to a position of strength?

3. We have also talked about bundling in class. How did one of the competitors use bundling to win this negation? Describe the offer and why it was creative.

4. Explain how this negotiation was a win for both parties, AOL and Microsoft.

Answer 1

Note: This response is in UK English, please paste the response to MS Word and you should be able to spot discrepancies easily. You may elaborate the answer based on personal views or your classwork if necessary.

(Answer) (1) The two sides or alternatives here are Microsoft and Netscape. Considering that the deal is to join forces and perform supplementary functions, the best alternative would be one where both companies in the agreement would be able to grow. While Netscape was the behemoth with a large consumer base and more shares, Microsoft was young and small enough to offer the attention and care to each client. Both of these alternatives are viable for a long-term business relationship.

Based on the BATNA, Microsoft has the advantage because they were amenable towards their client’s needs and were willing to adapt or rather to “meet them halfway.” Furthermore, the advantage to Microsoft and disadvantage to Netscape was that Microsoft was willing to give them better client service and extra incentives for a longer contract.

(2) The negotiation was moved from a position of weakness to strength when the negotiators at Microsoft were offering more value to the partnership than their counterparts at Netscape. Microsoft offered better client services, developing a bungle for integration of AOL to Microsoft, AOL wouldn’t have to sell their discs, their audience reach would increase and for a short-term, AOL had a part of Microsoft’s market share. This is how the value was created.

(3) In marketing and computing terms, a bundle would be like purchasing a combo meal. The meal would have a little bit of several courses that would cost the same as an entire order of a single dish. Similarly, Microsoft gave AOL multiple offers and services at a price smaller than what it would have cost separately. In this case, Microsoft offered more software and business services to make the contract lucrative for AOL.

(4) Microsoft was still growing at the time and needed a major endorsement that would enable them to increase their reach and better their services. AOL simply needed a lucrative deal that offered them the most utility in order to meet their business goal. Both companies were willing to give that to each other through the deal that was cut out.