Tech Industry

Does Corel's life jacket have a leak?

The Canadian software maker hopes a slew of deals putting its WordPerfect suite on low-end PCs will help keep the company afloat--but analysts are skeptical.

On the verge of extinction two years ago, software publisher Corel has been on a roll lately.

Learn more about Corel
Almost every major PC maker has signed deals in the past few months to use Corel's WordPerfect office software on low-end PCs, in place of more expensive Microsoft products.

But analysts say those high-profile deals are ultimately unlikely to help Corel turn around a growing string of losses that have depressed the Canadian company's stock to the point where it now trades below cash value.

"I think it's impressive that they managed to crack Dell (Computer) and (Hewlett-Packard)...and really give Microsoft a poke in the eye," said Jonathan Eunice, an analyst for research firm Illuminata. "But I have not heard a story behind it that says, 'We're going to be able to make money off this.' I haven't heard how this is going to help sustain a business."

Corel started out in the mid-1980s as a specialist in graphics software and notably features CorelDraw. Through a series of acquisitions and expansions, the Ottawa-based company's portfolio grew to include the WordPerfect word processing application and other office software, high-end graphics applications and an aborted venture into Linux.

The company's fortunes began to sag in the late 1990s, and Corel was on the verge of collapse two years ago when Microsoft revived it with a $135 million investment that gave Microsoft a minority, nonvoting share in the company.

Yet Microsoft has become one of Corel's chief targets as competitor, largely owing to recent deals with PC makers such as Hewlett-Packard, Dell Computer and Gateway, which replaced Microsoft's Works package on low-end consumer PCs with a limited Corel package that includes WordPerfect and the Quattro spreadsheet program.

While these deals have won Corel widespread attention for cracking Microsoft's presumed monopoly in office software, they won't have any immediate payoff for the Canadian company, which is practically giving the software to PC makers for free. While the company won't reveal the price it's charging, company executives said during Corel's most recent earnings call not to expect a significant increase in revenue from PC makers, or original equipment manufacturers (OEMs).

Instead, Corel expects to eventually generate income from sales to customers upgrading from the stripped-down version of WordPerfect sold to OEMs--either to the full WordPerfect suite or to later versions of WordPerfect itself.

"The purpose of it is really a seeding strategy," Corel CEO Derek Burney said of the OEM deals. "The significance is that we can get our products in the hands of millions of users who might not otherwise have a chance to experience them. It's a way for us to show the world that there is a value opportunity out there.

"The really exciting thing is to be able to count on those users using WordPerfect for a while, and we think they'll stick with us. The real revenue comes from when they upgrade."

Rob Enderle, an analyst with research firm Giga Information Group, said there's a chance for Corel to make some money from the OEM deals, considering that the WordPerfect franchise was essentially moribund a few years ago.

"They're growing their installed base on a product that was, for the most part, 'end-of-life' a few years ago," he said. "The customers will eventually go through a renewal cycle, and they want to migrate between products. If Corel can go after them at a price point they're willing to pay--under $200--they can get some business. The problem in the past is they've wanted to price their suite at the same level as Microsoft (has)."

But the entry-level customers buying the low-end PCs that WordPerfect will be installed on are unlikely to become lifelong friends of Corel once they realize the bundled version of the software includes no tech support, said Jeffrey Tarter, editor of software industry newsletter Softletter.

"These are entry-level systems--systems primarily intended for newcomers to computing," he said. "They're going to kids and the elderly and people with very limited experience with computing. To give those people very feature-rich, complex applications and expect them to figure it out--it's not going to make people real happy."

Such price-sensitive customers are also less likely to pay for upgrades, especially when free alternatives such as Sun Microsystems' OpenOffice package are available, Illuminata's Eunice said.

"If Corel's not giving away the next version, OpenOffice will," he said. "The idea is to commoditize the office apps, drive the price close to zero. It's very hard to make a profit on that basis."

Taking care of business
Corel has taken on a tougher challenge by trying to push WordPerfect to business customers. The company launched a sales and marketing campaign early this year aimed at getting enterprise customers to switch to WordPerfect.

Corel's Burney said the effort is just picking up steam as frustration over new licensing terms for Microsoft Office has shown cracks in what everyone assumed was a one-company market.

"It's certainly given us the opportunity to speak to some customers we wouldn't have access to otherwise," Burney said. "We've heard from enterprises looking for what alternatives there might be to Microsoft, and some are seeing that we do have a compelling value proposition."

Neil McFadyen, supervisor of computer operations for the Department of Mechanical and Aerospace Engineering at Carleton University in Ottawa, said his department is sticking with WordPerfect because it's a cheaper alternative to Microsoft Office.

"We have maintained WordPerfect because we find it to be a better program for technical publications that have engineering equations," he said. "But cost is a significant factor that has kept Microsoft Office out of our student computer labs. Despite the fact our university has a campus agreement, the fee...per seat to use it is too expensive."

McFadyen said students more familiar with Word usually make the transition to WordPerfect without much trouble. "Students generally complain at first about not having Microsoft Office, but then get along fine with WordPerfect," he said.

But some enterprise customers often take years to make purchasing decisions and are usually loath to make major changes in applications. And as with the OEM deals, there are risks associated with going after low-hanging fruit, Tarter said.

"The fact is, Corel will pick up some fringe customers in these markets," Tarter said. "Going after fringe customers has never been a particularly profitable strategy. If your strategy is to go after people who are ticked off at license terms, you've got a lot of people who are going to quibble about license terms and are going to be very expensive to service. These are the people who argue with every sales rep, argue about every upgrade, beat tech support to death."

Get smart
Corel is also relying on WordPerfect as one anchor for an ambitious "content solutions" strategy that will merge existing products with recent acquisitions focusing on XML, the lingua franca of Web services.

Extensive XML functions will be embedded in future versions of core Corel products such as CorelDraw and WordPerfect, Burney said. The XML coding will automatically reformat text and graphics for a variety of uses. A document written in WordPerfect, for example, could be set up to display in full text in a PC Web browser but in an abbreviated version on a cell phone screen.

"We put some intelligence behind that document, so it can not only be read by people, but it can be repurposed and used wherever it's convenient," he said. "Technologies like XML are confusing to people right now. We want to make it accessible throughout the enterprise and let people have the advantages of XML through a familiar, friendly interface."

The challenge there is that Corel's competitors, most notably Adobe Systems with its "network publishing" initiative, are already offering similar functions through a range of integrated publishing applications.

Corel is "already taking on Microsoft in one market, and now (it's) also tracking to be the low-cost Adobe," Eunice said. "When you're a smaller company, it's tough to pick on two large companies at once."

Even if Corel can undercut Adobe on price, Tarter said, companies are likely to prefer Adobe's unified approach over Corel's hodgepodge of software.

"Adobe had taken at least five years to focus on integration and recraft the products so they work the same," he said. "Most of the serious content producers are not going to trade off a few bucks of cost on the tools for a bunch of things that don't work well together.

"Corel just hasn't demonstrated that there's actually a market for this (low-end XML) stuff," Tarter said. "It's a theory at this point."

An analyst for a Canadian investment bank, who asked that his name not be used, said that recent efforts by Corel executives to explain the XML strategy to the investment community haven't borne much fruit. The company's stock has traded for less than $1 for more than a month on Nasdaq, giving it a market cap of $90.88 million, below the $97.14 million in cash and marketable securities Corel holds.

"They need to find some new growth market, and I'm not sure where it's going to come from," he said. "The valuation shows that there's not a whole lot of faith in the brand at this point."

Burney is confident that situation will turn around as Corel--which has already gone through several rounds of layoffs--makes short-term adjustments to return to profitability and as long-term growth initiatives begin to pay off.

"Given (the company's valuation) and the current economic climate, we're making some changes on the expense side to return to profitability as soon as possible, regardless of the economic outlook," he said, citing plans to cut $2 million to $3 million in quarterly expenses.

"I think we've come a long way, if you look at the financial condition of the company two years ago," Burney said. "But our work is not done. We need to show (investors) we have a profitable and growing business. Then I think we'll get our just deserts."