Novell is banking on a transformation

Novell doesn't have much to celebrate as the year draws to a close. Its disappointing full-year results indicate the rough ride the software company has had and the uncertain prospects for 2001.

In September, it was forced to cut 16 per cent of its workforce in an effort to reduce costs after disastrous third-quarter results.

Chairman and chief executive Eric Schmidt said growth in new internet services had not accelerated fast enough to offset Novell's decline.

Novell is the first to admit that this year has been a difficult one following the 'dramatic declines' in traditional packaged software sales.

The company has reacted to its downturn in fortunes by attempting to transform itself from a traditional bread and butter software company to an ebusiness, internet services platform provider.

A rival to Microsoft?
The majority of products Novell will be pushing in 2001 will require that users buy Novell's eDirectory. The company's biggest problem, however, is not a lack of technology but ineffective marketing. It hasn't promoted and advertised itself as a rival to Microsoft, so is not seen as one.

Novell's decline began after the launch of Netware 4. Around the same time, Microsoft launched Windows NT propelled by the full weight of its marketing machine.

Customers migrated from Netware to NT, and because Novell's flagship product, Novell Directory Services (NDS), required a Netware server, many customers stopped using Novell's directory.

Only within the past year has Novell removed this prerequisite. The move may be too late for customers, however.

"By the end of 2001, we intend to have gained broad market recognition of Novell as an ebusiness, net services platform provider that delivers 'must-have' capabilities, including security, identity, acceleration and management," explained Schmidt.

Marketing is key
Novell's success will depend on its marketing strategy. The company must disassociate itself from its current image as a file and print company.

"Novell's future business is based on net services that enable traditional and new internet-based, IT resources to be mixed and matched as components of ebusiness solutions," said Schmidt.

Novell is staking its future on the success of this transformation. The company is pushing connector software DirXML and iChain as central to its new 'net services' image, and next year it will release Netware 6 and the new version of GroupWise.

However, analyst David Rhoad believes Netware 6 is "doomed, because the company does not have major application support".

Tony Locke, a senior analyst at Bloor Research, added: "The decision by Oracle to withdraw support for Netware hasn't helped - its lost a lot of its credibility."

The waiting game
Novell is aware that, overall, revenues will be 'soft' until the new ebusiness plan kicks in and begins to reverse sales in Europe. Revenue has declined there by 33 per cent year-on-year.

This year, Novell's packaged software sales fell by nearly half and accounted for only a quarter of total revenue. Locke says Novell has to start somewhere, having lost its traditional source of income, and that ebusiness was the obvious route to take.

"Novell has proved in the past that it can make good products," he commented. "I hate to say it, but it may all come down to marketing."

Novell spokeswoman Joanne Hughes said: "Novell will be concentrating on e-security and on e-government. We have to change the way Novell interfaces with the customer - there is no one vendor out there who can offer a whole solution."

"Gartner gives Netware at least five years. Network managers say that Netware is reliable. You don't have to constantly reboot it - it is still holding 56 per cent of the market share," she adds.

Hughes admitted that there are still a number of people reserving judgement. "There's a lot of evaluation going on" she said. "Novell never claimed that Netware was going to be the web application - Unix has that space."

An image problem
Novell knows that it is seen as a one-product company and is keen to reverse this image. "We see the internet as an extension of the network," said Hughes. "It's not a case of either the internet or the Lan."

She added that Novell will be looking at portal applications and accessing email from anywhere with the same functionality. Novell is optimistic about turning around its poor sales results and expects to achieve it over two quarters.

Mike Thompson, director of research at the Butler Group, said Novell's poor showing this year is hardly surprising and that the company expected it. "NDS had a lot of very strong support, but Novell failed to capitalise on it - marketing has been a major problem," he said.

Thompson thinks the rebranding may not give Novell the results it needs. "The rebranding is a very basic step," he said. "The company is moving into an area that is already densely populated. The applications that run on Netware are very limited - NT became popular because of the number of new applications it was able to support."

"Netware 6 won't save Novell. It is moving into the ASP market with its net services plans, but users will still need new applications for it. When network managers need to upgrade they will look at the competition - I think there will be a number of defections to Unix," he added.

Novell will always be seen as a third string network company. If the company's head of sales can turn its profits around in two quarters, he should be made chief executive.