Examining Novell and Red Hat

Novell: Haunted by the Past, Enticed by the Future

Novell executives don't come right out and say the company is competing head-to-head with Microsoft. In fact, Novell CTO Alan Nugent ducked our direct question by saying, "I don't think a day goes by when someone in the data business doesn't compete with Microsoft in some fashion or another." Still, with a huge application stack that can run on Linux, a steady buildup of Linux support and development talent, and the acquisitions of SuSE and Linux desktop software maker Ximian, it's clear the company is making a serious bid to attract disenchanted Microsoft enterprise customers with a solution that extends from back end to front. To succeed, Novell will have to win back some disenchanted customers of its own.

Novell has been quietly laying the groundwork for its open-source strategy over the past few years. While continuing to support lackluster but entrenched product lines such as GroupWise and NetWare, the company incorporated Linux technology into ZENworks and developed its flagship product, eDirectory, for Linux. These moves gave Novell an excuse to start training its engineers in Linux; as a result, when the time came for Linux acquisitions, the technologists had experience with development and support.

With Novell's new acquisitions, the company offers a soup-to-nuts, "Microsoft-free" product lineup. Furthermore, based on company history, we expect Novell, like IBM, to become a legion of Linux desktops connected to Linux servers, with proprietary Novell middleware tying it all together. If an enterprise assigns value to that proprietary layer, Novell becomes the no-brainer Linux server and desktop provider.

Nonetheless, it's going to be tough for Novell to get back into IT shops. The vendor hopes to take advantage of anti-monoculture sentiment by offering operating-system competition and global Linux experience at the same time. Nugent says Novell will seek customers who want to avoid vendor lock-in; target the large-enterprise market segment that needs more power and reliability than Windows offers; revitalize Novell's partner network; and ship product on time.

Novell has one thing on its side, or against it, depending on whom you believe: The company claims it owns the Unix source-code copyrights. If Novell is right, SCO's much-publicized vendetta against Linux--which started a year ago, when SCO filed a lawsuit alleging that some parts of Linux were lifted from Unix--shouldn't pose a problem.

In fact, Novell is so confident, it's offering "litigation indemnity" to customers who buy its Linux solutions. However, SCO recently dragged Novell into the ring "for its alleged bad-faith effort to interfere with SCO's rights with respect to Unix and UnixWare," according to an SCO press release. SCO has asserted that it, not Novell, owns the copyrights.

Although the quick-to-change nature of open source makes it unlikely that SCO will win the legal battle, there's no telling for sure what the outcome will be. Be that as it may, Novell is the Linux player in the best position with regard to the SCO litigation because of its copyright assertions, countersuits notwithstanding.

Novell has set its sights on customers that want to escape the single-vendor cycle of installations, upgrades and end of life. "The feedback we keep getting is that there are customers who don't want to be locked into any vendor, no matter who it is," Nugent says.

Because avoiding vendor lock-in is typically a larger organization's issue, Novell is targeting the large-scale segment of the market. "I don't see GM, Lufthansa and Daimler-Chrysler with data centers full of Win2003 data-center edition," Nugent says.

This market-segmentation strategy means Novell must forgo the pursuit of smaller companies. Nugent acknowledges that small and midsize businesses will still have a hard time going in another, non-Microsoft direction. Furthermore, Novell has lost that battle in the past, so focusing on larger customers is smart at this point.

Nugent didn't mention SuSE's and Novell's established success overseas; however, it may be wise for Novell to look to an international market segment for initial growth, given that the battle in the United States will be much tougher. The company is off to a good start with international customers like McDonald's Germany, Costco Mexico and Siemens Business Services.

Can Novell Have It All?

If Novell recognizes that many large-scale corporate customers want to avoid vendor lock-in, it will have to produce a road map for making more, if not all, of its other products open source. Nugent claims that one of Novell's proprietary products, eDirectory, is so powerful that customers don't mind its proprietary nature. He says "it's completely transparent," and that IT directors don't view it as a potential lock-in by Novell. But for many years, eDirectory (formerly Novell Directory Services) was undeniably a powerful barrier to leaving Novell--middleware was only somewhat useful, and migrating, say, a 30,000-user tree was expensive. IT managers who remember this might question Novell's commitment to flexibility.

Customers committed to open-source software will likely avoid proprietary solutions in favor of open-source equivalents. Sure, SuSE Linux will remain open source, but part of Novell's strength is its bundling of eDirectory and other Novell solutions. If these solutions use proprietary code, the open-source software value proposition is clearly missing.

Truth is, it's tough to be both an open-source and proprietary-source company, and Novell's adoption of SuSE as a business unit indicates that Novell doesn't think its business model is materially different from SuSE's. Such fence-straddling is worrisome. History points to one of IBM's success factors with the PC being the spin-off of the PC unit, geographically and politically remote from the New York offices. The proprietary and open-source models are no less different from each other than the minicomputer and microcomputer.

Truly disruptive innovation is typically "competency destroying." That is, the same processes and procedures that maintain the status quo usually don't work in the new, disruptive business model, and vice versa. Because Novell has chosen to keep SuSE as a business unit, the company will face lots of conflict management in the upcoming year, as the goals of open-source and proprietary-code staffs diverge so dramatically.

Although Novell has built credibility by shipping products on or near schedule, questions remain about how the company will resolve competing product lines, such as GroupWise and Open Exchange, and how it will revitalize its tepid partner network. Novell hasn't disclosed plans regarding the specific products, but with regard to the partner network, Nugent says, "it's our goal to make it vibrant."

Novell has done so in the past. But when it began directly targeting larger customers a few years ago, it lost credibility with its partners in the channel. Nugent acknowledges that mistake, but Novell must take care not to repeat it while going after the same large-scale customers. As Novell rebuilds its channel relationships, it must be mindful of its current market segment. If it uses its old mailing lists, Novell will end up trying to sell large-scale solutions to small and midsize companies.

Nugent points to the launch of Novell's new CLE (Certified Linux Engineer) program as one way the company will engage partners and IT at large. But with the RHCE (Red Hat Certified Engineer) program firmly established, Novell faces a huge marketing challenge in selling its own Linux certification to IT managers and administrators.

Outside the channel, Novell has legions of disenchanted customers as well. The archetypal IT manager who has just ripped out NetWare 4 or 3.11 and replaced it with Windows 2000 is not about to switch back. Nugent is hopeful, however, and says Novell has talked to both current and former customers to learn why they stayed or left. That's a good first step. Not abandoning NetWare is probably another, as the installed base is still quite large (4 million servers installed worldwide, with 90 million user licenses). It's always more expensive to support applications on multiple platforms; but Novell must support its existing NetWare base or risk alienating a significant number of customers.

With the SuSE acquisition, Novell is doing the equivalent of remodeling its house while it's still occupied. The company has the unenviable task of going on with business as usual--convincing the old users that everything will stay pretty much the same--while launching a new company direction and convincing new adopters that everything will be totally different.

In the competition for Linux loyalty, Red Hat has the first-mover advantage. It is not encumbered by the turmoil and costs associated with large-scale mergers and acquisitions; it doesn't face conflicts over open- and proprietary-source code--all its code is open. Red Hat has excelled in getting key customers in the United States, and it's built a valuable IT credential with its RHCE program.

Although Red Hat hasn't taken Novell's data center-to-desktop approach--at least not yet--it has strong enterprise-application support from companies such as BEA Systems, Oracle and PeopleSoft. And though its pockets don't run as deep as Novell's, Red Hat has garnered enough Wall Street capital to fuel its growth for the foreseeable future. In fact, it just raised $600 million in a bond offering--$200 million more than anticipated.

Founded in 1993, Red Hat was the first company to make a credible commercial move to Linux. Although it has something to prove, the company has nothing to disprove about its past self--unlike Novell, which must grapple with its image.

As Red Hat CTO Michael Tiemann is quick to point out, the company has substantial support among the enterprise application vendor heavy lifters. Like SuSE, Red Hat has quite a few success stories, but probably has done better in the United States than SuSE, a German enterprise. Both revenue and profit margins have grown consistently over the past several years (see "Red Hat Financials," left) and analysts have noticed. Red Hat has consistently received a majority of "buy" recommendations from Wall Street.

Beyond the key application vendors, Red Hat can boast an impressive list of customers. BEA's Web site touts Red Hat's "Enterprise Proven Linux," complete with a Red Hat logo. And Amazon.com, the poster child for enterprise-class applications on Linux, runs Oracle on Red Hat servers. Other large customers include Google and the U.S. Army.

When we asked Tiemann how he's getting in the door of IT departments, he answered, "They're calling me up." Customers are coming to Red Hat asking about Microsoft alternatives. Tiemann says he believes the open nature of Linux leads to competition among IT suppliers--an idea he says is attractive to customers.

To remain accountable to its customers in the long term--the goal of every commercial open-source vendor--the company has dropped support for the free Red Hat Linux. From now on, Red Hat will support only RHEL (Red Hat Enterprise Linux). The operating system comes with one year of free support and what amounts to a compilation copyright that prevents users from duplicating the ISO (the exact image of the Linux distribution CD-ROM).

Still, any open-source vendor has to keep close ties to the community. To do so, Red Hat simultaneously launched the Fedora Project as a community service. Fedora is essentially Red Hat's experimental Linux that comes without commercial support. This is a good thing, as it lets Red Hat more clearly delineate which activities are profit-making and which are community and/or marketing activities. Fedora isn't likely to cannibalize Red Hat's commercial sales; commercial customers need support and Fedora has none (for more on Red Hat's Fedora, see "Red Hat Linux Morphs Into Fedora Core," in our review of RHEL 3.0).

The open-source model is what makes Linux so pervasive, Tiemann observes.

"Universities and schools are increasingly making Linux a part of their learning environment and infrastructure," he says. "More and more people are graduating with a positive experience with the platform."

Red Hat has engaged in aggressive academic pricing for RHEL ($2,500 for an unlimited student site license, with the $1,500 administrative server product priced at $50). Such pricing is definitely a good idea if Tiemann's academic-propagation model is going to work.

When we challenged Tiemann about the availability of staff to run RHEL at large IT organizations, he related a story about a meeting he had with IT executives at the military. "The people who supply Microsoft training run Linux at home," he said.

IT shops wishing to run Linux have great reason to choose Red Hat: The company's certification programs are among the most highly regarded in the business. The RHCE is considered more than just a paper certification--if we had to place it in geek-respect ranks, it's probably just below the vaunted Cisco CCIE. Even in 2002, the RHCE was getting kudos from the likes of Certification magazine. Clearly, Red Hat has done something right with its Global Learning Services.

Unlike Novell, Red Hat doesn't offer litigation indemnity from SCO. But it does provide "Open Source Assurance," which warrants that Red Hat will replace system components shown to have intellectual-property problems. While SCO has called this "wiping the fingerprints off the gun," most observers have scoffed at the analogy--if there's a breach and Linux vendors offer a timely remedy, no foul. Users worried about legal action from SCO can look to the OSDL (Open Source Development Labs) for a legal defense fund to protect Linux customers; both IBM and Intel have contributed.

Jonathan Feldman, a NETWORK COMPUTING contributing editor, is director of professional services for Entre Solutions, an infrastructure consulting company in Savannah, Ga. He has worked with and managed technology in the health-care, financial services, government and law-enforcement industries, and is the author of Teach Yourself Network Troubleshooting. Write to him at [email protected].

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