America Online Inc., based in Dulles, Virginia, is the world's leader in branded interactive services and content. The company provides two worldwide Internet online services, America Online and CompuServe, with approximately 16 million members. Other branded Internet services operated by America Online Inc. include AOL.COM, Digital City Inc., AOL NetFind, ICQ, and others.

Netscape was founded in April 1994, and currently employs more than 2000 people in 17 countries. The organization has been described as "the fastest growing software company in history." Scores of individuals and companies large and small use Netscape software to host and manage Internet sites on the World Wide Web. More specifically, companies are now using Netscape for their intranets. The Netscape software line includes four families of products:

· Netscape Communicator client software suite

· Netscape SuiteSpot and FastTrack servers

Netscape Communicator) to AOL. AOL is being charged a fee for the use of Netscape's product. This fee is based both on a fixed and a variable component.

AOL may also be considering vertical integration as an attempt to foreclose competitors from entering its market or growing larger (Microsoft), or to even avoid foreclosure. Before Microsoft got a chance to takeover Netscape and become the "Web's undisputed traffic king", AOL took advantage of this opportunity to compete on a stronger level with Microsoft. With Netscape, AOL will become the biggest conduit of email and electronic commerce on the Internet, the largest network of online content, and the principal meeting place of consumers and business users. If the acquisition goes through Microsoft will suddenly become the underdog.

A vertically integrated firm also avoids many of the coordination problems associated with a market firm. The new firm can achieve coordination within the company through centralized administrative control. As a market firm, Netscape may have had to provide AOL with timely access to browsers and any related information that was required. The nature of the input resulted in no design problems and thus, a low emphasis on the coordination of production flows.

Similar to market firms, the merged company will also be subject to the discipline of the market. Since AOL will not be the only customer that Netscape deals with, Netscape has to produce efficiently and innovate to remain competitive in the marketplace, and not lose its business. Certain internal divisions that have a captive internal market are highly inefficient and fail to innovate. "The absence of market competition coupled with difficulties in measuring divisional performance, make it hard for top management to know just how well an internal division is doing relative to its best achievable performance"(ES, 1996). Such conditions often lead to high agency and influence costs.

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Approximate Word count = 1825
Approximate Pages = 7 (250 words per page double spaced)