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Novell Bets The Farm

Information Technology: Software

Novell Bets the Farm

Its new e-business strategy faces a big problem: Microsoft

Until three weeks ago, Novell Inc. CEO Eric E. Schmidt was being fitted for a halo. Revenues at the Provo (Utah) software maker had been on a steady upward march since 1998. Ditto profits. But the second quarter, which ended on Apr. 30, stunned both Schmidt and Wall Street. Novell warned on May 2 that revenues dropped to about $305 million, from $316 million a year earlier, and that the company had barely squeezed out a profit. Investors fled, deflating the stock price by 39.5% in a single day, to about 10, where it has stagnated. Now, Schmidt, who was heralded as a savior when he joined Novell three years ago, must prove that the comeback wasn't a mirage.

His best shot comes on May 22, when Schmidt unveils his latest strategy for morphing Novell from a supplier of software to run PC networks into a supplier of crucial e-business software. He has packaged all of Novell's Web software into a bundle to be sold to so-called application service providers, or ASPs--companies offering e-commerce and Net-collaboration software that is delivered over the Web and paid for on a rental basis. The bundle includes a central directory for keeping track of a company's information and network users, security software to ward off intruders, caching software to speed up delivery of data, and policy-management software for controlling who gets access to information. "We have the technology that enables the next work that's being done on the Net," he says.

If Schmidt can give Novell a new identity, the company could have a brighter future. It has been selling these products for years, but it hasn't been able to establish a reputation as a crucial supplier of Net software. "This will help," says Paul J. Dravis, a financial analyst at Banc of America Securities. By packaging its software this way, Novell can focus its sales efforts on 500 ASPs instead of tens of thousands of corporations and smaller businesses. The market for such rental services seems ripe. It's expected to zoom from $889 million in 1998 to $22.7 billion in 2003, according to Dataquest Inc. Novell faces competitors in each product category, but only a handful of companies can field the whole array.

Unfortunately for Schmidt, Microsoft Corp. is one of them. The company's new Windows 2000 software for corporate servers and Web sites includes a directory like Novell's and at least basic versions of most of the other programs. Since 1993, when the predecessor to Windows 2000 was introduced, Microsoft has eaten Novell's lunch: Novell's market share for network operating systems has dwindled from 44% to 19%, while Microsoft's has risen from 2% to 38%, says International Data Corp. The debut of Windows 2000 in February put a damper on NetWare sales. "I'd like to move us as far away from Microsoft as possible," Schmidt says.

Easy to say, but hard to do. Novell's bread and butter is still PC networks, and that puts it in Microsoft's cross-hairs. About 50% of the company's revenues still come from NetWare. That's down 5% from a year ago, yet still a long way from the 35% Schmidt wants to hit in two years. The new bundle should help him with that strategy because it can run on top of Windows 2000 and Linux, in addition to NetWare.

Things are going to get worse for Novell before they get better, though. Financial analysts predict two more bad quarters--with losses--before the Web bundle has a chance to catch on. Schmidt says he's convinced Novell can work its way out of its problems. And he says he's not fretting over his tarnished image: "To be honest, I was always uncomfortable with the halo effect." Good thing--because Novell's investors want a CEO who can deliver the worldly goods.By Jim Kerstetter in San Jose, Calif.Return to top

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