Is a Bad Economy good for Novell?

Recession. Depression. Economic Downturn. Economic Slowing. Call it whatever you'd like, but the fact of the matter is that the Economy has gone bad or actually, more aptly, the economy is not as good as it had been the past 10 or so years.

The 1990's saw widespread economic growth and prosperity, particularly in the IT field. That positive economy provided the catalyst for many things but some random events would spell bad times for Novell in the Server Market and fiscally for the Novell Corporation.

Upgrading:

Microsoft Introduced Windows NT in 1991 and by 1993 actually delivered on some of their promises with the actual release of the product. The first incarnation of this 'Server Platform', Windows NT 3.x was largely dismissed. Microsoft was the "Desktop" software company; what business did it have trying to be a Server? Novell had clearly dominated the LAN server market from early on and even today any "Old School" server administrator will likely still associate (wistfully) with Novell whenever they here such phrases as "File and Print Sharing" or "Directory Services". Novell even had hedged its bets back then and had the high-end server market covered. Not with a product, but with a considerably stake in ownership of the UNIX Operating System.

In 1995, however, things began to change. The Windows 95 desktop hit the market with a blitzkrieg effect. It seemed that everyone wanted it and Microsoft saw their sales sky-rocket. (It wasn't so much that Windows 95 was a great interface, it was more that Windows 3.1x was so God-awful that anything would be better. Windows NT 4.0 was released and it included a Windows 95-ish interface. It also included free additional functionality, such as a free web and FTP server and at the exact time when the Internet was gaining momentum in the non-tech world. Businesses suddenly wanted web pages and out of the box, Windows NT 4.0 could deliver. Subsequent product releases, such as SQL and Exchange Server offered services previously primarily filled by the higher-end server market. And again, with the Internet catching on publicly, now an email server was required to deliver the messages from your website visitors and all conveniently on one platform . . .

The Internet did seem to take Novell by surprise. The platform didn't natively support TCP/IP, the Internet protocol, until Novell 5 (the release previous to the current version). Novell's GroupWise did offer Email Server and Web Server functionality, but with pre-Novell 5 versions, it was TCP/IP encapsulated within IPX packets. This means that less data could be sent per packet, thus Internet related services ran markedly slower than their pure TCP/IP counterparts in Windows NT. This didn't help in the marketing numbers.

Windows NT was spun as the new way to go, the wave of the future, where Novell was regarded as a product of the 80's. With a booming economy, it was fairly easy for companies to decide to switch to Windows NT. The money was there, all most places needed was to see the next invoice for additional Novell licensing; the pricing was insane at the time and Windows NT was fiscally an option. Windows NT also isn't strict at all with it's licensing. You can have as many users as you'd like until the B.S.A. licensing Gestapo comes around. As a matter of fact, if you run 1 Windows NT server and setup the Windows NT Gateway for Novell that comes free with Windows NT 4.0, you could effectively circumvent the Novell licensing as well!

With the money available, the positive spin on Windows NT and a slow-to-learn Novell, the time was ripe for mass migrations and Microsoft was kind enough to provide the tools to do it with!

Inflating Egos:

With the money beginning to flow freely, the next casualty was in the personnel department. IT staff salaries began to grow and any company that refused to believe this, or refused to pay, quickly found themselves under staffed and with an ailing network. Novell is extremely robust, but not incredibly intuitive. Less experienced Administrators or in some cases, non-technical staff were left to try to administer abandoned servers. Sometimes they called consultants in and often were told "Well, migrate to NT and it will be a lot easier for you."

Sometimes the scenario was reversed though, where the older Novell guys that were making a decent wage were replaced when the servers were migrated to Windows NT. Microsoft certification, the MCSE for one, was becoming a one-way ticket to money and many technical newbies wanted experience running Windows NT. If you didn't mind a once-a-year turn over, inexperienced administrators could be gotten for next to nothing but the promise of learning Microsoft products. This may not be good for the network but it was certainly good for the accounting and it became a regular practice.

Many Novell Administrators became displaced and for the diehard Novell fans, somewhat disgruntled. This is so often the case that I actually overheard a conversation once that went like this:

    "Yeah, the firewall guy was giving us a hard time again - he's always so difficult about everything."

"What, is he like some super-paranoid young kid or something?"

    "Nah, he's actually sort of old, looks like Santa, with a pot belly, beard and suspenders."

"Ah, an old-school UNIX guy?"

    "No, that's the weird thing - he's actually an ex-Novell guy."

"Well, that's it! No wonder he's so pissy!"

Open Sores:

As if Windows NT wasn't enough, Novell would find a new enemy in the 1990's - Open Source, or more particularly, Linux. Although Linux is technically older than Windows NT, it wouldn't be a considerable threat at the time. The actual problem that Linux presents for Novell isn't as apparent as a direct assault on the market share, such as Windows NT had. Instead, it is that in this period of economic growth, the concept of open source seemed like an interesting, if idealistic, pursuit for many companies to pursue. By porting software to Linux for free or for restricted licensing, it seemed an ideal way to get publicity and favorable opinion of your product line. I suspect that corporations such as Novell never considered Linux a real threat. It could never take over as a server OS and so developing for it didn't seem like that much of a bad idea. (Novell themselves actually ported their NDS to the Linux platform.)

This period of growth and development for Linux was directly linked to economic prosperity and by the end of 1990's the operating system had moved from being a techie pet project to being an operating system ready from prime time. (After 3 years of redundant articles asking "Is Linux ready for Prime Time?" it's pretty safe to say that for at least some purposes, the answer is yes. I was doubtful myself until I found out that SIAC (Security Industries Automation Corporation), the company that handles the computer functions of the New York Stock Exchange had migrated to Linux. If it's ready to run the NYSE, it's ready for primetime.)

The Dream is over:

Like any good dream, the feverishly high stock market had to come to an end. This started probably about a year ago, but really hit home back in August when the quarter reports began to roll in with substantial losses. Why did this happen? Well, for one, it is absolutely nothing to do with the September 11th terrorist attacks. Any technical company that claims that their profits are in the toilet solely due to these attacks is lying and dishonorable. The reason for the fall of the market is linked directly to the reason it was bloated in the first place. With the stellar success of several early Internet companies such as Yahoo, every trader and would-be professional day trader that wanted to make a profit began to sink tons of money into any company that had an "I" that stood for Internet or an "E" that stood for commerce, investing without regard for the real potential of the company. When many companies failed to make their investors millionaires, the investors pulled out and blamed the tech industry for failure; when really their own bloated, false expectations were what had failed. With these losses, disgruntled investors began to mumble about bad tech stocks and a coming recession causing other investors to pull out and starting a chain reaction into a downward spiral.

Is there a recession? Sure, from what the market was 2 years ago but the market is more or less where it was about half a decade ago, before these traders began to invest based on delusions of grandeur instead of fact.

Good for Novell?

So, in the fourth quarter, Novell took a loss of $94.5 million. This was better than most expectations and isn't all that bad when you consider that many companies aren't just taking losses these days, but going out of business completely. The one benefit that Novell has in this situation is that any Novell Network managers that had been considering a migration at this time will not since there's no money to fund such a task at this point. What this means for Novell is a more even playing field. If Novell plays their cards right, lowers license costs and can develop better marketing technique, there is a good chance that they can retake some of the real estate that Microsoft's NT offensive managed to claim. They can at least hold their ground. Microsoft is in a better situation fiscally, but they haven't had actual innovation in their recent product releases. Windows XP, Office XP, even the .NET is simply a repackaging of early products. Microsoft is somewhat sitting on their laurels by developing a new product-licensing scheme to force upgrades instead of actually innovating new technologies and making money on new software.

The Linux Threat:

The greatest threat to the commercial contenders on the server market right now is definitely open source. Where a slowed economy puts Novell on a more level playing field with other for-cost solutions, Linux, being free (as in beer), has the definite advantage in this situation. Not only is it free and without licensing cost, but can do Novell Directory Services and even can replicate Microsoft's LDAP based Directory, "Active Directory".

Only the tradition of stability that is Novell can stand up to this threat and only with managers that are familiar with it. Novell can be much easier to administer as well, which is a minor advantage. This also reveals another way in which Linux is causing issues for Novell fiscally since Linux isn't much different from UNIX, they're somewhat interchangeable and Linux has begun to erode a fair chunk of the UNIX market. This wouldn't generally matter to Novell, but remember what we mentioned above, Novell owns part of "UNIX" and now finds it's revenues suffering from lower UNIX royalties.

The poor market provides the only true defense against Linux though. The bloated technical market provided an ideal growth spot for Linux; with fiscal conditions being what they are and the Linux developers being volunteers, the chances of Linux adapting quickly to emerging technology trends is less likely. (Especially considering that because of lay-offs many techs find themselves having their workloads doubled, thus not leaving much time for other pursuits such as Linux development.)

In the end though, it really does just come down to how Novell implements strategy at this crucial time. If they concede and perhaps lower their licensing and pricing on the gamble that they might have more business, they might just find that it works out. I guess we'll have to wait and see. Jack Messman, Novell's CEO, is a graduate of Harvard Business school, so I'm sure he's capable of sorting this out for himself.