Novell Bear's Den
by David Forrest ([email protected])

Taking a look at Novell's website, you'll notice that the company offers more than 22 different networking solutions. It's safe to say, however, that there are none more important to the economic viability of the company than their flagship product NetWare. Novell breaks their business out into three categories, all software. They include server operating environments, network services, and "other." In 1997, server operating environment software accounted for approximately 65% of revenue. Their NetWare product line (What is NetWare?) is by far the most important piece of their software line and, some would say, their company.

On the face of things, it appears that there's good news for Novell shareholders. NetWare 5 has officially launched, amid great fanfare. Novell has done a full-court press on their website's main page and in marketing campaigns to try and convince resellers and potential customers that NetWare 5 is the answer to all of their problems.

For those of us interested in the competitive landscape, NetWare 5 has two major competitors. First, Novell's NetWare product competes with Microsoft's Windows NT product. Both NetWare and NT are operating systems. These products provide the software "guts" that allow your company's computer network to run. Finally, both Novell and Microsoft compete with the proverbial "mother of all operating systems," UNIX, and now LINUX. UNIX and LINUX are open platforms, i.e. nobody owns the source code and anyone can develop and help to improve it. This is why UNIX is so strong.

According to several different sources, neither NT nor NetWare can scale well enough to compete with UNIX on the high-end. What does this mean? Basically, the more employees using your company's network (or any network running NT or NetWare), the more complicated things get and the more difficult it is for the software to handle things. UNIX kicks butt and everyone knows it. That's why monster shops with huge numbers of users all rely on UNIX.

Many Novell enthusiasts, and no doubt my esteemed colleague Louis Corrigan, will point to the fact that with the release of NetWare 5, Novell is first-to-market with the next generation software. In other words, NetWare 5 is already out there and being sold to customers. Microsoft's Windows NT 5.0 won't be released until sometime in 1999. This is true. They'll also argue that because of the lead-time, Novell is in a position to upgrade its NetWare 3.x and NetWare 4.x customers easily, and possibly even convert some NT folks over. This is also possible.

The crux of my bear argument is not that NetWare is really bad, or that they don't have a good lead-time. My bear argument rests on two things. First, I don't believe that Novell can overcome Microsoft's dominance in terms of name-brand recognition and marketing power. I don't believe that current NT users are going to jump ship to NetWare. I think they'll wait. Trying to learn an entire new OS is a pain and NT users probably won't switch. They'll wait until next year and see what sort of power NT 5.0 holds. NT 5.0 offers many of the same features that NetWare does.

The one good thing that Novell has going for it right now is that it can probably convert a lot of older NetWare versions to the new product before NT 5.0 comes out. After all, software resellers make their money by moving product and the only real choice they have right now is NetWare. They'll try and jam as many customers into NetWare 5.0 as possible before NT 5.0 comes out. This probably means that the next few quarters will be strong for Novell. But, after that, look out.

The second reason for my bearishness has to do with the fact that NetWare 5.0 doesn't support a lot of applications. According to a recent article by Eric Carr of Sm@rt Reseller:

"Lotus Development Corp., for one, has decided to no longer port Domino to NetWare because Lotus claims there's insufficient demand for such a product."

I don't hear Lotus complaining about the demand for NT. In fact, I'm quite certain that Lotus will continue developing for it. Novell suffers from some of the same problems that Apple Computer does in that, in recent years, software developers have stopped writing software for Apple's OS because they think the bang isn't there for their development buck.

The reality is this: the best product doesn't always win. Microsoft, while perpetually late to market and behind the development times, always seems to come on strong, emulate the best its competitors offer, and then crush the competition on price and compatibility. Novell may enjoy a few good quarters, and the stock may pop because of this lead time. (Heck, it had BETTER pop or something is really wrong).

Eric Schmidt has done a decent job of refocusing the company and slashing expenses. All I'm saying is that regardless of short-term movements, NetWare will never compete with UNIX and will most likely be slammed by NT 5.0 when it comes out. I don't think this company makes for a very good long-term investment.

Next: The Bull Responds