Novell's Uphill Comeback Trail

Once upon a time, Novell ruled the networks. In the early 1990s, 70 percent of corporate networks ran on the NetWare OS. Then Windows Server NT came along and won customers over with its ease of use and interoperability with other Microsoft software. But Novell isn't exactly sitting idle--it's coming back with a vengeance, armed with a new set of product offerings and looking to recapture some of its old glory.

Over the past few years, the company has been executing an aggressive strategy to try to catch up to and perhaps exceed Microsoft and open-source competitor Red Hat. Whether or not it can stage a full comeback--or at least win respectable market share--will depend on its ability to sell and market its Linux applications and SUSE Linux distributions, build on its identity management software, and stanch the flow of departing executives.

OPEN MOVES

There's no question that Novell's open-source initiatives have been appropriate and necessary moves. As NetWare slowly fades away and U.S. companies are at least evaluating Linux, rewiring its products for Linux should help Novell hold on to its existing customer base and win over Unix users.

To briefly recap Novell's open-source efforts, the company bought Ximian, a maker of desktop and server applications for Linux, in August 2003, gaining it Linux developers and solutions as well as sponsorship of two open-source projects: GNOME, which has produced an open-source GUI and productivity applications for the desktop; and Mono, an open-source platform for running Microsoft .NET applications. In January 2004, Novell acquired European Linux vendor SUSE Linux and became the only world-wide source (with a world-wide support staff) for Linux in the enterprise. In April of this year, the company rolled out SUSE Linux Professional 9.3 for home PC users, which comes with 3,000 open-source applications, including OpenOffice, the Firefox Web browser, e-mail, and IM. OpenOffice improves with each new version, and some think it's already ahead of Microsoft Office in its feature set. So far, compatibility is adequate. For example, the word processing module of OpenOffice, Writer, can read Word files and save documents in Word format.Also in the first quarter of this year, Novell rolled out Open Enterprise Server (OES) 1.0, which essentially repackages basic NetWare services for the Linux platform. This is an achievement in that it's a real, functional product, whereas its predecessor for the Unix platform, UnixWare, was considered vaporware. While at present OES doesn't do anything that NetWare couldn't do, Novell says version 2.0 of OES, due out in the first quarter of 2006, will introduce virtual server and virtual storage capabilities.

At about the same time, the company will roll out SUSE Linux Enterprise Server (SLES) 10. For this release, Novell is upgrading and updating hardware drivers and providing further integration with various hardware platforms. It will support Xen virtual machine technology so that multiple SLESs can run on one machine, as well as offer virtual storage. Meanwhile, Novell is breaking out the clustering and business continuity features it created for NetWare and will be offering them as a separate product for Linux platforms this fall.

Novell's GroupWise, which is third in the collaboration market behind Microsoft Exchange and Lotus Notes Domino, is also being affected by the move to open source. With its Hula project, Novell is working on an open-source version of NetMail, the lightweight, Web-based messaging and calendaring alternative (or companion) to GroupWise. In many cases, Novell will sell these products together. For example, Southwest Airlines has about 5,000 employees using the heavier-weight GroupWise, while another 10,000 employees, including pilots and ground support personnel who don't require as many messaging features, use NetMail.

Novell's primary Linux server competitor is market leader Red Hat. Since Novell's acquisition of SUSE, the product has gained a modest two percent of market share. Novell's greatest strength against Red Hat is its global network of 10 native-language support centers around the world, staffed by 700 people--more employees than Red Hat has all told. Novell also has many more applications to run on its Linux server than Red Hat does, and it offers a mix of open- and closed-source offerings (for instance, its identity management software is proprietary). So while Red Hat stands for open-source purity and relies on revenue from services and support, Novell employs a hybrid open/closed approach to software and should increasingly be able to make more money licensing software for Linux. Behind the scenes, the two companies' engineers work together on several open-source projects.

HITCHED TO THE OPEN WAGONAll these open-source efforts mean that to some extent Novell's future will depend on the future of Linux and open source in general, both of which look promising.

Oracle and IBM's promotion of Linux (Oracle is marketing it as "unbreakable Linux") is helping to improve comfort and confidence levels in the OS; HP and SAP are also offering strong support. More product innovation is taking place in open source than in any software company. An IDC report shows revenue growth for packaged applications and infrastructure software running on Linux growing at a compound annual rate of 44 percent through 2008. This is perhaps evidenced by the popularity of the open-source Apache Web server and Samba file server. However, Microsoft-sponsored IDC studies have also concluded that at four out of five companies, the TCO is around 11 percent lower for Windows Server than it is for Linux because of implementation, administration, and support costs. Often, companies migrating to Linux are those that need new hardware or software, or need to upgrade storage or security architectures.

A happy omen came for Linux in April, when Adobe and Macromedia announced support for it with their Reader and Flash products. Similar announcements from other software vendors are sure to follow.

IS DESKTOP LINUX VIABLE?

It's hard to compete with Microsoft on the desktop where Windows owns approximately 95 percent market share, and Novell acknowledges that it won't lure corporate America away from Microsoft Windows in this area. Windows has become standard for most companies, and adopting Linux Desktop would mean a painful, large-scale conversion that would be hard to cost-justify--help desk calls alone would quickly eat up the savings of Linux's lower licensing fees.And there's no guarantee that everything will work together or that users will like it. "Most companies have millions of documents, PowerPoint presentations, and Excel files, and it isn't until you actually make the migration to Linux and open those on a Linux desktop that you discover if they're compatible or not," notes Gary Hein, an analyst at Burton Group. One hour of wasted time fixing a presentation could blow the $90 per year of savings from discarding Windows.

Linux Desktop and OpenOffice also lack applications and features that Windows users have become accustomed to. "OpenOffice today is where Microsoft Office was a few years ago," says Gordon Haff, a senior analyst at research firm Illuminata. On the other hand, Linux Desktop and OpenOffice improve with each new version.

Novell does see specific areas of opportunity for Linux Desktop, however. One is Europe, where anti-American and anti-Microsoft feeling is rampant and SUSE is still perceived to be a German company. "There's political pressure to not be beholden to this big American monopoly on the desktop," notes Haff. Developing countries, particularly in the Far East, are another potential market for Linux Desktop. In these emerging markets, Windows isn't as ingrained and software cost is a huge issue.

In the United States, Novell sees a niche for Desktop Linux as an OS for special-use computers, such as shared computers in libraries, PCs on manufacturing shop floors, airport kiosks, and other setups where plug-and-play integration with a broad set of applications isn't necessary. Burton's Hein has a few customers that are using Linux on the desktop in controlled environments, such as a manufacturing floor or a remote office that uses only Web-based applications. "In most of these cases, it was done either out of spite for Microsoft or as an experiment," he says. It's likely that Novell could dominate these limited markets.NETWARE/OES vs. WINDOWS SERVER

On the network server side, it's almost but not quite as hard for Novell to win customers away from Microsoft. Windows Server has huge market share and an ease of implementation and interoperability with other Microsoft software that's hard to beat. Many young IT professionals have been brought up on Windows Server, and it's all they know. But Novell still has a devoted following, a good many of which are interested in OES. Novell offers strong applications for OES and has a better reputation than Microsoft for security and reliability.

Hein at Burton Group predicts that five years from now, Windows will still dominate the desktop, but Linux will take over more servers. "If you believe that, then you have to look for a vendor that can cross the chasm, and Novell has a strong history with the ZENworks product line for managing Windows desktops from a non-Windows server," he says.

Novell's best hope for the future lies in the applications it has and continues to develop for its Linux servers, particularly in the areas of identity management, clustering, and business continuity.

MANAGING IDENTITIESNovell CEO Jack Messman describes Novell's overall strategy as "Linux plus identity." In fact, one of the company's two core business units is the Identity-Driven Computing group (the other is the Platform group, which oversees Linux, NetWare, and GroupWise). This group has long experience building identity management software, having created Nsure Identity Manager, one of the best products available. According to Novell, Nsure Identity Manager is used by 3,700 companies and gets high marks for its ability to synchronize user account information between different directories (such as Active Directory or Sun Directory), applications (such as PeopleSoft or SAP), databases, and PBXs.

The product line is rounded out by eDirectory, the highly regarded metadirectory; iChain, a Web access management and single sign-on product; Novell Security Manager, a firewall VPN product shipped recently with partner Astaro; Novell SecureLogin, a tool created with partner Protocom Development Systems to provide enterprise host-based single sign-on for non-Web-based applications; Novell Nsure Audit, which provides a way to monitor events in an infrastructure so that IT managers have a single view of all accesses to information, account provisioning, deprovisioning, and password management; and Novell BorderManager, a NetWare firewall product used by 20,000 customers according to Novell.

Two years ago, Novell was the leader in identity management software. Since then, a who's who of software has gained a foothold in this market--IBM, Microsoft, Oracle, Computer Associates (through its acquisition of Netegrity), and Sun Microsystems. Some feel that Novell got distracted with its Linux acquisitions when it should have bought Netegrity or Oblix, whose products have become popular. Novell executives respond that the company is always considering appropriate acquisitions and that it wins competitive shootouts in the identity management area through its scalability, field-tested experience, and support for standards such as Liberty and the Service Provisioning Markup Language (SPML). The company will need to continue innovating in this area to regain its leadership status among these big guns.

Novell's next project in the identity management area will be to build more features into its end-user provisioning software, one of the most requested forms of identity management today. It will do this by integrating Nsure Identity Manager with exteNd, the former SilverStream product that provides workflow and portal capabilities for provisioning. This will result in the ability to create approval flows so that when an employee is hired or fired, all the appropriate access approvals or rejections can be taken care of immediately and automatically. This is also called "Zero Day Start" and "Zero Day Stop."

WHAT WILL CUSTOMERS DO?The litmus test for Novell's comeback will naturally be whether or not customers take to its new open-source offerings. For existing NetWare customers and Unix users, OES should be appealing. It preserves the NetWare services they're used to and provides a migration to Linux that's transparent to users. It also lets customers use new hardware technologies that NetWare didn't support, such as HP server blades, and it provides the flexibility to use open-source, proprietary, Linux-specific, or .NET applications. By comparison, Windows, HP-UX, and Solaris all support a more limited range of programs.

The IT department at Comair airlines, a NetWare customer since 1996, was concerned about Novell for a time. "We're primarily an HP hardware shop and Itanium servers were becoming more popular, but there was no support for Itanium in the NetWare kernel," notes Roger Fenner, infrastructure services manager at the company. Now, using OES, the airline can virtualize and run Windows, HP-UX, and SUSE Linux on one piece of HP hardware with virtual partitions. It's currently using HP's hardware partitioning to do this, though next year SUSE Enterprise Linux will also provide support for virtual servers and virtual storage using Xen software.

Comair is in the midst of migrating its backend servers to Linux, attracted by the OS's flexibility to use any kind of software, open-source or proprietary. For the few applications that require a Windows file and print server, Comair will run Samba on Linux to provide the service. Fenner, for one, is a devoted Novell fan. "I think they've always had a great technical vision and been on the leading edge of leveraging technology to advance business," he says. "I'm happy to see that Novell's gone with the open-source direction and that there's a clear future."

But Windows shops are unlikely to turn to Novell. The City of St. Petersburg, FL, used to be a Novell NetWare customer, but two years ago it converted to Windows Server. Senior Network Systems Engineer Todd Giedraitis compares implementing and maintaining the Windows and Novell server OSs to two types of car: "With the Windows car, you get in, put the key in the ignition, and it starts. With the Novell car, you have to cast magic spells on it, crawl in through the trunk to get to the front, pull the steering wheel out of the glove compartment, somehow attach it to the car, then pray for four hours before it starts," he says. "The only way we'd go back to Novell is if it looked exactly like Microsoft Windows Server 2003."

Exceptions to such pro-Windows attitudes include companies that can't afford Windows, or have had serious security issues that have sickened them of Windows. And as mentioned, the special-use and emerging markets Novell has identified may well gravitate toward OES.STRONG FINANCIALS, REVOLVING DOOR

Financially, Novell is in good shape for a comeback. Its first quarter 2005 earnings were $290 million, with most of that coming from NetWare maintenance and services, $15 million coming from the SUSE Linux business it acquired, and less than one-fifth coming from new software licenses. Revenue was an increase from the $267 million of the first quarter of 2004. The company's financial foundation is solid, with $2.6 billion in assets, $772 million of it in cash. The sustainability of this level of revenue is doubtful, given that NetWare services revenue is bound to decline as more customers gravitate away from it toward Windows or Linux.

Assuming it can maintain its financial stability, two management questions remain for Novell: First, why are so many of its top executives leaving? And second, is Novell overextending itself with too many projects?

The departure of top executives just when the company is starting to see results is mysterious. Some of those who have left include Vice Chairman Chris Stone and CTO Alan Nugent, who helped forge Novell's Linux strategy. (Both started new jobs in April--Stone became president and CEO of business communications software company StreamServe, and Nugent was made general manager and senior vice president of Computer Associates' Unicenter business unit.) Novell's explanation is that the executives received appealing offers from other companies and insists that no individual is so vital that his or her loss would prevent the company from executing its strategy. But the exodus can't be reassuring for investors or customers. Novell is looking to fill these slots, particularly the CTO position, and the sooner it can accomplish this the better.

The overextension issue has to do with whether Novell is spreading its engineering talent too thin. In addition to porting NetWare services over to the Linux platform, the company is also dividing its engineering efforts among numerous application projects higher up the stack. If revenue from NetWare servicing declines and Novell sticks with the software industry's typical R&D investment of about 17 percent of revenue, the R&D budget will inevitably suffer and developers will get laid off. However, Novell is a large company with about 6,000 employees, and the beauty of open source is that developers from other companies and the open-source community at large also contribute, so Novell doesn't have to devote too many engineers to any one project. For instance, Novell has 20 of its own developers working on the Mono project, but the overall number of contributing developers is 400, affording the company a good ROI in time and labor. So far, 60 applications have been written using Mono.One last recurring management issue for Novell is its marketing efforts, which need to be proactive rather than reactive. In times like these, when IT staff is under pressure to meet tight budgets and deadlines while still making the right choices, it's necessary to push a brand and really promote new products, not sit back and make customers work to figure them out.

Senior Technology Editor Penny Lunt Crosman can be reached at [email protected].

Executive Summary

For Novell to become a powerhouse again, it will need to vigorously continue the open-source efforts it started with its acquisitions of Ximian and SUSE Linux. It must also further develop its already-strong identity management software lineup.There are several major opportunities for Novell. One is to win disenchanted Exchange customers over to GroupWise. Another is to make its identity management product line the market leader. A third is to increase its Linux distributions and to improve and better integrate the components of OES. A fourth--and one that pervades all the others--is to aggressively market all the efforts it's making. Novell would do well to remember that it's not always the technically superior product that wins; other factors, such as public perception, often prevail. A strong message, well expressed and promoted, could help the company not only survive, but thrive.

Novell Open Source

1Q 2005: Novell hires Jeremy Allison, an open-source guru who helped create Samba

3Q 2005: Business continuity and clustering capabilities, formerly embedded in NetWare, are offered as standalone software 3Q or 4Q 2005:The company releases integrated identity management, provisioning, and workflow software 1Q 2006:

SLES 19, OES 2.0, Linux Desktop 2.0, and storage virtualization software are rolled out