Novell's buyout and its effect on the industry

For years, Novell has served as an odd bargaining chip between Microsoft and enterprises looking to move to Linux.

Novell's Suse Linux distribution, while a distant No. 2 to Red Hat's leading Linux server business, has helped Microsoft keep some measure of control over its open-source competition--or, at least, to keep a close eye on it.

With Novell now up for grabs through a $1.8 billion buy-out offer from Elliott Associates, what is likely to happen to the Linux market, and to Microsoft, if it goes through?

The easy view is that Red Hat will benefit and Microsoft will shrug and move on, but reality may be more complicated.

Novell's Linux business remains a very interesting asset, even if the rest of its business clouds that fact.

I've been arguing for years that the parts of Novell are more valuable separate than together.

Novell, as Elliott Associates argues in its letter to Novell shareholders, needs a lifeline because the "company's effort to shift away from its legacy division through acquisitions and new strategies has largely failed."

Translation? Novell has struggled to meaningfully use its growing Linux business to prop up its declining legacy businesses.

But let's be clear: Novell's Linux business is growing, last quarter's road bump notwithstanding. If nothing else, it is now at break even. But there is much "else," as the company, especially with its Suse Studio, has been creating some great technology in that area of its product portfolio.

This makes it an interesting ante for Oracle or someone else to play in the enterprise software market.

Would Elliott sell? Almost certainly. Elliott is an investment firm more known for its trades in Congo debt markets than technology securities and is likely already scouring the market for likely homes for Novell's different divisions, with the Linux business the best of the bunch.

Importantly, an Oracle, VMware, or IBM could make Novell's Suse Linux asset stretch much further than Novell could, because each of these companies (among others) has a strong, revenue-generating software portfolio that largely obviates the need to make money on Linux directly.

This is good because, as IDC has called out, more and more of the Linux market is shifting to unpaid adoption rather than commercial subscriptions.

Oracle, in particular, with a multibillion-dollar application, database, and middleware portfolio, doesn't need Suse Linux to contribute the $40 million or so each quarter that it has for Novell. It just needs Linux to make its offerings a better x86 alternative to Microsoft offerings.

Yes, Oracle has to grow the Solaris (Unix) asset its Sun acquisition gave it, but its position is highly nuanced, as ZDNet's Paul Murphy argues, and requires a very healthy dose of x86 (Linux) to effectively compete with Microsoft.

While both Windows and Linux have been growing market share against Unix by lowering the cost of server deployments, Microsoft is king of the hill with 73.9 percent of total server units sold (or 41.6 percent of the dollar value) to Linux's 21.2 percent of units shipped (and 14.7 percent of dollar value), according to recent IDC data.

It's very possible that IDC is undercounting Linux's market share, as Steven J. Vaughan-Nichols points out, but Microsoft is still shipping more server units.

Every one of those Windows units sold is a threat to Oracle, VMware, IBM, and other Microsoft competitors. With Microsoft CFO Peter Klein projecting Windows Server shipments to significantly increase over the next 18 to 24 months, buying Novell's Linux business to spike Microsoft's growth seems like a promising strategy.

In sum, Novell's legacy has weighed down its ability to push its Linux business into top gear, a problem that won't afflict likely suitors for that business. These companies have largely relied on Red Hat to be a counterweight to Microsoft on the OS side. But with a healthy middleware and virtualization business, Red Hat starts to look like a credible threat to Oracle, VMware, and other erstwhile partners.

All of which positions Novell's Linux business to play a critical role in the software industry. Let the bidding begin.