FRAMINGHAM (07/31/2000) - Financially battered, Novell Inc. is struggling to stay alive. Although the firm is abetted by what analysts say is a brilliant new product strategy and buoyed by a few legacy products that account for more than two-thirds of its revenues, it is thwarted by ineffective marketing and a daunting competitive landscape.
The company is just emerging from a calamitous financial quarter that was fraught with sales underestimates and confused channel directives. The second quarter of 2000 ended in total revenues of $302 million with net income of $31 million, but most of the profit came from a $35 million royalty payment resulting from an antitrust settlement between Caldera Systems Inc. and Microsoft Corp.
An early warning that second-quarter revenues would be less than expected caused Novell's stock to plummet 40% overnight and analysts to downgrade the company's already plodding stock. Taking almost half of its large cash assets, Novell bought back $500 million of its stock when its market capitalization had fallen to a little more than $2.6 billion. Financial observers say this stock repurchase bolstered a "poison pill" measure the company could exercise in the event of a possible takeover bid.
Although Novell is concentrating on building a trade in the lucrative Internet services, personal identity and management arena, it faces difficulty expanding into unfamiliar markets with a management team that is largely untried and fractious.
Yet overall, Novell has shined in the past two-and-a-half years under the helm of CEO Eric Schmidt. The vendor rebounded from several flat quarters and the divestiture of three companies that were draining Novell's resources under the leadership of Robert Frankenburg, whom the board ousted in 1996.
With Schmidt instated, Novell turned itself around, posted 10 successive profitable quarters, launched a profusion of Internet-centric products and shipped them on time.
The company failed, however, to get customers to buy into the overall product strategy. What's more, Novell admits it didn't keep an eye on the sales channel, where the majority of its packaged software is sold to small and midsize businesses. In a quarterly report, the vendor cited a lack of "effective training, demand generation and field support" for the decline in channel sales.
As a result, Novell is facing a reticent NetWare channel and dubious enterprise customers who can't stake their futures on the company.
This uncertainty comes at a time when Novell is attempting to break new ground and build revenue with Internet-related dot-com companies and service providers that demand a concentrated consulting and support effort.
Dj vu
Some observers might say that Novell has been successful in spite of itself.
Under the direction of ex-marketing wunderkind Craig Burton, Novell was invincible in the 1980s. The company was brash and aggressive. NetWare dominated the file and print network operating system market, cleaning up over IBM's PC LAN and LAN Server and Microsoft's LAN Manager.
Users say Novell made the best and most reliable network operating system and the company sold the heck out of it. Today, nearly one-third of Novell's customers still have 10-year-old versions of NetWare 3.X and are either resistant to upgrading to Novell's newer operating systems or are considering migrating to Windows NT or Windows 2000.
Novell's momentum in the network operating space slacked off when the company turned its attention to capturing the desktop from Microsoft. Since its divestiture of WordPerfect, UnixWare and Dr. DOS in 1996 at Frankenburg's behest, the company has failed to recapture sufficient mindshare and recover its dominance in network operating systems (NOS).
While many users say NetWare is technically superior and more reliable than Microsoft's NT and Win 2000, the product has lost market share, and products that sold on their technical merit are now stalled in the channel.
"We have a lot invested in NetWare," says Dennis O'Neill, vice president and network engineering manager at Wells Fargo Bank in San Francisco. "We deploy almost 900 applications via ZENworks."
O'Neill says Wells Fargo thinks Novell is finally back on track. "The company has a solid product, it runs day in and day out. I have NetWare servers that have been running since our migration [from NetWare 4 to 5] in February," he says.
O'Neill will also look to use Novell's metadirectory product, DirXML, to integrate PeopleSoft Inc. and Microsoft Exchange with Novell Directory Services eDirectory. Wells Fargo has 35,000 users on 500 NetWare servers and 200 NT Servers.
Neil McDonald, an analyst with Gartner Group Inc. of Stamford, Conn., says Novell won't lose its NOS market share lead to Microsoft until 2002. He adds Novell's customers, not its technology, are the company's main asset and that customers have been largely ignored.
"Enterprises should continue to pressure Novell to deliver products that are easier to use, do not require NetWare and, longer term, do not require [Novell Directory Services]," McDonald says. "Although Novell will not sell any NetWare to new customers, they are making progress in selling NDS eDirectory for extranet and e-business applications to customers who have never had NetWare."
Novell's ventures with products and technologies such as AT&T Corp.'s NetWare Connect, Dr. DOS, Novonyx and processor-independent NetWare "have created a credibility problem for Novell where its customer base still has to be convinced that Novell is a viable long-term strategic partner," McDonald says.
Three of Novell's largest customers, Chase Manhattan, the United Parcel Service and the University of Southern California, are migrating away from NetWare.
Keeping such customers and stopping further defections to NT, Win 2000 or Unix is a top priority since the reorganization.
At the same time, Internet and e-commerce opportunities are competing for the firm's attention.
A new direction
Novell recently reorganized into four divisions to focus on customers and sets of products and services tailored to each group. The divisions it formed are:
- Net Management centers on enterprise network customers and encompasses NetWare, ZENworks for Servers, Desktops and Networks, BorderManager, GroupWise and a storage appliance called the OneNet drive. Scheduled for release this year, the OneNet device will provide Unix NFS, Windows NTFS, and Novell Storage System file and print storage capability.
- Net Directory, aimed at large companies and dot-coms, includes its directory products, DirXML and iChain e-commerce products.
- Net Content markets to service providers and offer hosted services focused on Novell's Internet Caching System (ICS), Web acceleration products such as Content Exchange, application delivery, personal identity products such as DigitalMe and its Novell Internet Messaging System.
- Net Customer Services, which includes consulting services, technical support and education.
Each group has profit and loss responsibility, and all report into a central management staff led by Schmidt and Chief Operating Officer Stewart Nelson. The company appointed an office of the chief technical officer with oversight responsibility for all four divisions and gave each group the OneNet vision as a mantra to follow. OneNet specifies that all internal, external, public and private networks on any operating system platform will be connected, secured and managed with a set of tools Novell provides.
"The opportunity around unlimited storage and bandwidth is enormously big now," Schmidt said during the corporate reorganization. "It leads to a very different architecture from one people have been building. We have to transform it into a place where we can keep our information, our services, our confidentiality and privacy, our friends and our identity."
Martin Marshall, an analyst with Zona Research Inc. in Redwood City, Calif., is enthusiastic about Schmidt's message and Novell's reorganization into four operating companies.
"In some sense new blood is better," Marshall says. "I've seen a number of companies come in with new ways of doing business, because old ways get staid and archaic."
Marshall says Novell has captured some of that freshness in its Net Content Division, which focuses on accelerating the Internet via Novell's ICS. "No one else has done this level of [dynamic content] switching before. There is a lot of opportunity."
The vendor has even attracted a few customers early on, a move analysts like Marshall view favorably. Among them are Internet incubator CMGion and e-commerce services provider GlobalCenter.
"[CMGion] certainly will act as a showcase for the OneNet strategy Novell is promulgating," says Joel Achramowicz, an equity analyst with Preferred Capital in San Francisco. "This is a hard-hitting move on Novell's part to partner with Sun and a major Web incubator company to use the directory as the core traffic cop and identity structure for the whole distributed network."
CMGion will use ICS, NDS eDirectory and other billing-based software in its national data centers to speed Internet performance and increase a customer's ability to deliver content based on user-profile information.
GlobalCenter Inc. will use a new Novell service dubbed Content Exchange that will feed transactional revenue back to Novell based on the number of customers who use it.
Content Exchange bundles a Foundry Layer 4 switch with ICS, billing and management software, and on-the-fly preparation of data for content deliverers such as Akamai Technologies Inc., Digital Island Inc. or Mirror Image Internet Inc.
By 2002, Novell will derive 50% of its revenue from fee-based subscriber services.
The other divisions of the company need to focus on spreading their management and directory platforms, McDonald says. He believes Novell's primary competitor in directory-enabled management products will remain Microsoft, but will be followed closely by Tivoli Systems Inc. and Computer Associates International Inc.
McDonald says the directory will become a commodity in the next five years, and that Novell will extract less revenue for directory users as time goes on. He adds that because Novell can't compete with Microsoft and Linux on price, it must focus on managing network services with the directory.
At least one former Novell marketing manager, who has rejoined the company this month, agrees. "Novell could easily give away the directory and make money on applications, management, support and maintenance of the directory," he says.
Customer woes and competitive foes Major factors preventing Novell from making its business directives happen are missed opportunities and a failure to listen to what its customers want.
Alex Salehi, vice president of Novell Consulting, which handles enterprise customers with more than 5,000 nodes, says decisions are made based on feedback. "We are trying to understand what is it they are trying to solve," Salehi says. "By listening differently, we know how to create business solutions to solve those problems."
Novell has formed more than 10 e-business practices, such as a Personalized Storefront (eCatalog) for SAP AG, since February, and has established partnerships with most of the major consulting vendors, including Deloitte & Touche LLP, EDS Corp. and PricewaterhouseCoopers LLP. However, the company has shown only lackluster partnerships with application and system vendors, such as Hewlett-Packard Co., Oracle Corp. and IBM Corp., McDonald says. "Neither Oracle nor IBM directly supports NetWare as a standard platform, and their new products will first appear for Windows, Unix and even Linux," he notes.
The company has brought back marketing whiz Craig Burton on a consulting basis to add the 'so what' to the product equation.
"Novell is still in love with the technology," says Mary K. Marsden, an ex-Novell marketing executive under Ray Noorda. "They've forgotten the 'so what' - the benefit the customer gets from technology, why the customer needs it, where the customer's pain is."
"The company has never done well in marketing the full product," Marsden says.
"Each piece is a disparate technology where the [IT executive] is left to tie the pieces together. And IT simply doesn't have time anymore."
Novell's success depends, Marsden insists, on its ability to market its diverse products as a solutions portfolio - packaged ways to solve business problems.
To be successful, the company needs to overcome the objections of often technically unsophisticated CXOs for whom Novell is an unknown entity and for which NetWare is a dirty word, says one Novell source who asked not to be identified.
These CXOs' success is pinned on recommending the latest products and operating systems like Win 2000, and those products don't have the name Novell associated with them. To say you've deployed it in your organization isn't a resume booster for your next job, this source says.
"IBM walks in with WebSphere and says 'Look, we have all the development tools, here's how they fit [for your company],'" says Chase division Global Private Banking Vice President Richard Boyle. "I say 'OK, I've got Apache and all this, how do I get to WebSphere.' IBM outlines the whole thing for you."
Microsoft has announced .Net, which observers say sounds similar to Novell's OneNet strategy. Microsoft is two years behind Novell on its BizTalk e-commerce software, and has yet to introduce products like Novell's caching/Web acceleration software.
Will NetWare survive? Last March, Schmidt said that NetWare in some form will be around for 100 years. However, the vendor is proceeding slowly in furnishing its loyal installed base with details. Novell was to originally announce the future of NetWare in June, and that announcement is now slated for next week.
Here is what Network World already knows about the future of NetWare:
- Development will not stop on NetWare 5. Going forward, the company is building NetWare so it can be developed faster and so modules can be fastened right to the kernel, thus reducing overhead and increasing performance. Users will be able to add modular services such as printing, file system, directory or caching as required.
- Novell says the first implementation of NetWare 6, whatever it will be called, will be introduced as an appliance in 2001. The firm says there will be a software-only NOS available to existing customers.
- The company has also promised a 32-bit symmetrical multiprocessing version of NetWare, code-named SixPack.Six-Pack won't ship before early next year, a Novell spokesperson says.
- Novell says it will release a 64-bit caching appliance concurrently with Intel's shipping of the Itanium microprocessor. This appliance will appear before a 64-bit operating system replete with file, print and directory services. Novell will also deliver a 32-bit software-only version for customers who don't want to run more powerful graphic and compute-intensive applications on Itanium.
"In five years, less than half the company's revenues will come from sales of NetWare, and the company will become a vendor of Internet and network services and directory-enabled management products," says McDonald, who believes Novell's services revenues will double in the next four to five years.
Only time will tell if Novell can capitalize a market it no longer owns and compete in a world that has other dominant players.
The company appears to have a unique start in the Web content-delivery area, and as the Internet evolves, may have a place in personalizing the wireless and broadband services market with the directory.
That all depends on execution, CEO Schmidt says.
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