Novell revving up

NOVELL was left for dead years ago, another casualty of Microsoft's hegemony over computer operating systems.

At the height of its popularity in the early 1990s, Novell's NetWare software controlled 70 percent of the market in network server operating systems -- software that enables desktop computers to share files and communicate over a network. But for nearly a decade, the company has been losing market share to Windows NT, Unix and other programs at a rate of nearly 10 percent a year.

By 2002, NetWare's share of the market had shrunk to 7 percent. For the first nine months of 2003, the Provo-based company reported a loss of $53 million.

"People remember Novell as a company they used to buy things from in the 1980s," said Dan Kusnetzky, vice president for systems software research at IDC, a computing market research company.

But Novell made an effort at a recovery when it announced this month a $210 million deal to acquire Germany's SuSE Linux, the world's second-largest seller of the Linux operating system. In addition, IBM, which resells Linux from both SuSE (pronounced SOO- za) and Red Hat, the largest vendor of Linux, said it would invest $50 million in Novell.

With those deals, Novell is battling Microsoft on its home turf: the PC operating system.

"All those customers who thought Novell was gone can see that we're here, we're back," said Jack L. Messman, the chief executive and president of Novell and the former head of Cambridge Technology Partners, a consulting firm that Novell acquired two years ago.

The fight will clearly be different this time. Already, Microsoft has felt the sting of Linux, known by many through its Tux penguin logo and which many corporations see as a reasonable and less- expensive alternative to the Windows operating system. In only a few years, the program has gone from being a relatively obscure and largely unsupported program for technology enthusiasts to the fastest- growing operating system on the market, and it is acquiring some of Microsoft's traditional corporate customers.

Messman insisted that Novell's goal in acquiring SuSE is to develop the Linux market, not to win over Microsoft customers. But the distinction hardly matters. For Novell, the program gives NetWare customers more options.

"Now that we've got the migration path lined up, we are going to have a much broader following," Messman said.

Analysts say Novell's acquisition of SuSE, a company with $40 million in revenue and 400 employees, could help Linux win customers in the United States who might be wary of buying large volumes of software from a relatively unknown company with overseas headquarters. SuSE, while the top seller of Linux in Europe, stands to benefit from Novell's distribution network in the United States, where the Linux leader, Red Hat, is better known.

Novell expects the Linux operation to bring about $35 million to $40 million in revenue annually, growing at about 30 percent a year, consistent with the rest of the Linux industry.

The deal to acquire SuSE started as a development discussion between the two companies, led by Chris Stone, the vice chairman in the chief executive's office at Novell. Stone rejoined the company in early 2002 after leaving for three years to run a technology startup, and he now serves as Messman's right-hand man.

Messman is also in his second tour at Novell. A former venture capitalist, he was an original investor in what was then called Novell Beta Systems, founded in 1981, the same year that IBM released its first personal computer.

Two years later, Novell brought in Ray Noorda to run the company, while Messman stayed on the board. Within a few years, Novell was making a healthy profit selling software that connected clusters of PCs that could share files and printers.

Through the late 1980s and into the 1990s, NetWare maintained a loyal following among the computing engineers charged with selecting the software that would run on their companies' computers. But by the mid-1990s, corporate computing decisions had moved into the hands of business managers. These people tended to be more comfortable with Microsoft and its arsenal of applications that included not only operating systems but also word processing, spreadsheet and communications software.

"Novell kept talking about the excellence of the technology," said Kusnetzky, "while Microsoft's message was that their products were good for your business."

Noorda responded to the growing Microsoft threat by acquiring companies to fill holes in Novell's product line, including the Quattro Pro (spreadsheets) and WordPerfect (word processing). But with Microsoft controlling both Windows for PCs and Windows NT for network servers, there was little Noorda could do to outgun it.

In the early 1990s, Noorda joined the Justice Department's battle against Microsoft, a fight that would become a personal crusade, but that proved a fruitless and costly distraction for Novell as the case stretched on for years.

Novell directors, saying they were concerned about Noorda's advancing age -- he was nearing 70 at the time -- began looking for a successor. Robert J. Frankenberg, formerly of Hewlett-Packard, ran Novell from 1994 to 1996, followed by Eric E. Schmidt, a top technology executive at Sun Microsystem's who headed Novell until leaving for Google in 2001.

Meanwhile, the Microsoft juggernaut continued. By 1999, Windows had supplanted NetWare as the leading network operating system. "We may have had the product, but we had lost the war," Messman said.

Now, though, the company is ready to engage in battle once again, this time with SuSE as its primary weapon.

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