Novell: Talking Loud But Carrying A Smaller Stick

Can William H. Gates III utter the words "second-best"? Not likely. That's one big reason Novell Inc. faces a tough year ahead.

On Dec. 13, Novell, which holds 75% of the market for software that controls computer networks, began shipping a new version of its mainstay product, NetWare 4.1. The next day, it introduced a new business software suite called Perfect Office. "We have our core products refreshed and in good shape," says Robert J. Frankenberg, who took over as chief executive last April. "We're on the verge of seeing some very exciting new markets open up."

WAR CHEST IS HELL. Just in time, too. The same day it shipped NetWare 4.1, Novell reported a 30% dive in earnings, to $61 million, for the quarter ended Oct. 30. The main culprits: soft sales of NetWare and a bigger decline in sales of applications programs. Frankenberg is betting that the new products can reverse that slide. "This is make it or break it time" for Novell, says Forrester Research Inc. Director John C. McCarthy.

Perhaps. Both NetWare 4.1 and Perfect Office are getting good reviews. The problem lies in Novell's adversary--the steamroller known as Microsoft Corp. Gates's company, with $4.7 billion in revenues, is nearly three times Novell's size. The "millions of dollars" Novell says it will spend to boost its two new products pales next to Microsoft's available war chest: The company is spending $100 million alone on a broad advertising campaign.

Microsoft isn't Novell's only problem. The company is recovering from missteps of its own, largely the result of former CEO Raymond J. Noorda's determined--and many believe ill-conceived--attempt to challenge Microsoft at all costs. Noorda's acquisitions of WordPerfect Corp. and other companies, for example, flung Novell into the applications and operating system businesses. But they diverted attention from the networking products that account for more than 50% of the company's revenue. Customers found NetWare 4.0, released 18 months ago, buggy and difficult to use, and a recent Computer Intelligence Infocorp. survey indicated that only 5% of customers had upgraded to the new version. Since then, "interest has really dwindled in [NetWare] 4.1," says Bruce Barnes, an information systems manager at Union Oil of California, a Novell customer.

That trip-up gave Microsoft an in. Its rival operating system, Windows NT, which includes networking features, got off to a slow start, but a fresh version is picking up steam. Next year, says James E. Allchin, the Microsoft vice-president in charge of NT, "we're going to blow the roof off" Novell. Indeed, some customers are finding the new offering compelling. Forrester believes Microsoft will sell more than 90,000 copies this year, nearly double last year's volume. And 54% of the customers it surveyed said they were evaluating or planning to install Windows NT in 1996.

Novell is fighting back with NetWare 4.1. Reviewers say it's a more robust system, able to support more users and easily find them, no matter which server they're connected to. Novell also cut the price by 25%, making it more competitive with NT. "Novell has made significant improvements," says David A. Blake, technical marketing engineer at Hewlett-Packard Co., who has been testing the system.

In the meantime, Frankenberg insists that Novell's move into applications will pay off. "Microsoft is not about to do a great job of integrating their applications to our networks," he notes. Novell's new suite combines WordPerfect's word-processing package and the Quattro Pro spreadsheet that Novell acquired in March from Borland International Inc.

NOT BETTER LATE. But Microsoft has far more marketing clout in applications--and a stable of fully ensconced products. It already has captured some 85% of the $1.2 billion suite business with Microsoft Office. Against that, Novell's well-regarded suite "is not a dollar short," says Robertson, Stephens & Co. analyst Richard C. Edwards. "But they're coming more than a day late."

Market researcher Dataquest Inc. believes Perfect Office could capture 15% of the suite market after 12 months, generating up to $300 million in revenue. And a year from now, analysts expect, NetWare still will account for 62% of all the networking software in the market. But nobody, least of all Frankenberg, underestimates the power of Microsoft. "There's no doubt Microsoft has significant momentum," admits Frankenberg. Novell may have better products. But few are betting that will be enough.

Software's New Jihad
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