JVM, Netscape's position even before IE took the lead was that they didn't expect to make money of of the browwser. Netscape Navigator was primarily supposed to help generate sales of their server software.
Thinking about it, why would any company spend money to research, develop, and market a browser if one is going to come free with the OS?
To make the internet more available by default, give a known set of services to developers and end users like the TCP/IP stack included before the browser, and allow for new software that can be seemlessly integrated with both the desktop and the internet. In short, a value added feature.
There is also the fact conviently ignored by most that browsers were free long before Internet Explorer's introduction. Free browsers were the norm, and including the browser with the OS for free was no different than other apps that were included for free, and was done by others before and after MS.
What hurt Netscape was lack of improvement and on-time execution in the face of stiff competition. Stiffer licenssing and lacking integration abilities also hurt them. AOL didn't even integrate the browser into their software years after purchasing the company. The PC AOL client still doesn't use Netscape's engine.
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