Novell strategy calls for delicate balance

The easy part is over for Novell chief Eric Schmidt.

The company the former Sun Microsystems Java guru took over in 1997 amid doubts about its prospects is on solid footing again. Novell posted a 17 percent jump in revenue for its most recent fiscal year, and some analysts estimate growth rates could soon reach 25 percent.

But Novell's renaissance stems from its core constituency, a sprawling base of customers that will snap up most any piece of nifty software the Provo, Utah, company can come up with, and Schmidt is now counting on a dramatic shift away from Novell's classic reliance on its core NetWare operating system.

Schmidt sees opportunity in so-called network services, a business based on sales of a collection of "back-end" products for corporations. Some of the software makes administration and management of corporate networks easier, while some speeds up Net access or allows a network manager to tie in partners and third parties in a secure fashion over the Net.

"The new service layer is going to be defined by somebody, and we want it to be us," Schmidt said in a wide-ranging interview with CNET News.com.

Yet Schmidt

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must traverse treacherous waters, making sure NetWare revenue does not fall so quickly that the company can't invest or work to gain a foothold in its new target markets: the Internet, e-commerce and supply chain software, which ties different systems together.

Meanwhile, marketing continues to be a weak spot, and it's unclear if there's a ready answer to the problem.

"I don't see Novell really developing that," said one former company executive who requested anonymity.

"My sense is until they come up with an overriding message, they're going to have trouble making their point," said Dan Kusnetzky, analyst with market researcher International Data Corporation. "Over time, who makes the technology decisions has changed. What used to be a decision made by a technical person is now a decision made by a business person.

"Their technology is very good, they just haven't found a good way to present it," Kusnetzky said.

Novell has never been as familiar to Main Street as rival Microsoft, which has a more consumer-friendly image and focus. Novell provides software that most users never see as they access and share files or sign on to their network---it just hums in the backround.

On Wall Street Novell has largely been an afterthought, until a recent rebound. While dot-com companies shoot through the roof, Novell retains a relatively humble market capitalization of about $7 billion. By contrast, recently public competitor Red Hat, which provides Linux-based software and services, has quickly ballooned to a $18 billion valuation.

Novell still has its skeptics. On the heels of its most recent quarterly earnings announcement, the company was downgraded by two firms, who noted sales of the company's newest software "are off to a slow burn," as Morgan Stanley Dean Witter equities analyst Charles Phillips wrote in a research report.

Schmidt may be hoping to evolve the company so it might be viewed as a Web infrastructure software provider like Inktomi, which boasts a high-flying stock and a nearly $9 billion valuation. But some view the notion as problematic, given a sales force that knows how to sell NetWare, not infrastructure software services, and a marketing team that even Schmidt has admitted is "struggling" to answer the question: "Where should our emphasis be?"

That has lead to some changes within Novell's marketing structure and executive mix, with two prominent marketing executives leaving due to disagreement with Schmidt's corporate vision, according to sources. Another well-regarded hire, Chris Stone, left for a start-up working on software similar to what Novell is building.

"It's just not the revolution people were hoping for," said a source who used to work at the company.

Novell's fortunes have always been intertwined with Microsoft's dominance. Its NetWare operating system has been the company's cornerstone, but steadily lost ground to Microsoft's Windows NT Server operating system for corporations, and has now lost its lead altogether. NetWare is expected to lose further ground when NT's successor, Windows 2000, ships early next year, and as the open source-based Linux operating system gains steam among mainstream corporations.

NetWare grabbed 22.8 percent of the network operating system business in 1998, compared with 38.3 percent garnered by NT, in a market in which 4.4 million units of operating software were shipped, according to IDC data. Upstart Linux experienced the largest growth gain for the year. In fact, Linux is expected to surpass unit shipments of Netware in 2003, according to IDC.

Another NetWare update is due out next week. But even though Schmidt lists Microsoft as Novell's primary competitor, he contends his company needs to move on from a NetWare-centric view of the world. "That's last year's debate," Schmidt said. "The problem in the company is there are still people playing out the old strategy."

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Schmidt hopes to define what he calls a "new space" in which the company can compete in markets for software that facilitate use of the Web. Novell hopes to market an esoteric batch of software, using its directory service as a linchpin and encompassing hot markets such as caching, e-commerce and network management tools. Schmidt said the company would soon discuss elements of a strategy called "iChain" to tie its corporate customers to each other over the Internet

But Novell has only its infrastructure to sell. The company has historically not been able to attract developers to write applications for its software, and that trend continues even though Novell has thrust its growing directory installed base forward as a lucrative niche developers can take advantage of.

Alternatively, Microsoft---for all of its software delivery shortcomings---has a wide array of application software it can use to tie into a new directory it has built for the long-delayed Windows 2000 upgrade, called Active Directory. It also does not plan to market that technology as a centerpiece of its strategy, but a component within Windows 2000 that gives users benefits.

"Microsoft will not go to customers and say, 'Here's Active Directory for e-commerce,' for example" said Peter Houston, lead product manager for Active Directory at the company. "We don't believe customers buy a directory, they buy a solution."

But some observers believe Novell is an undervalued asset that can take advantage of its expertise in an age where information is often strewn haphazardly across a network. That is where Novell's directory, or NDS, comes in: It can manage that information across a corporation or the Internet.

"I feel very good about where Novell's going right now," said Joel Achramowicz, an equities analyst with Preferred Capital Markets.

Another analyst was also optimistic. "Shortly, Novell will have evolved into a product-rich company, with many of the upcoming products expected to occupy unique leadership positions in the market, leveraging the company's basic directory technology into mainstream electronic commerce applications," wrote Stephen Dube, equities analyst for Wasserstein Perella Securities, in a recent report.

And some newcomers to Novell's executive team claim the future is bright and the company is poised to break away from its traditional constituency to expand into new markets. "This is Novell's challenge," said Carl Ledbetter, senior vice president of business and corporate development, and former chief at Hybrid Networks. "It is now a healthy company poised to do something interesting."