Preaching Love Thy Competitor
By Lawrence M. Fisher
The New York Times
March 29, 1992
Provo, Utah -- Four years ago, Novell Inc. was little more than a pesky fly on the rump of a giant computer software elephant named Microsoft.
Novell, a small, obscure company situated here in the shadow of Utah's Wasatch Range, produced software to hook desktop computers together so they could share peripheral devices, such things as printers and hard disks. The Microsoft Corporation, in Redmond, Wash., was large, rich and famous for its MS-DOS operating system, which had become the standard operating system software installed in millions of personal computers.
Then computing underwent a sea change. The price of desktop computers fell sharply. Computer makers started marketing them like a commodity. Corporations began hooking them into large networks. And Novell, in one of those instances of serendipity and visionary thinking that are the stuff of personal computer legend, found itself in the right place at the right time. Its Netware program to hook computers together became a best seller. Though Microsoft appeared with its own network software, it was too late.
Today, Novell is a powerhouse with 65 percent of the market for network operating systems, and networking is the fastest-growing part of the computer industry. Though Novell is only a third the size of Microsoft, some industry analysts have begun to say what would have brought derisive laughter from their colleagues just a few years ago: Novell, once the fly, is now positioned to become a dominant force in business computing in the 1990's and, perhaps, the equal of Microsoft.
"It's not that Novell particularly wants to own the entire world. They just want to control it," said Wayne Rash, a contributing editor at Byteweek, an industry newsletter. "They have completely taken control of network operating systems worldwide."
Not a Whiz Kid
In an industry largely built by precocious 20- and 30-year-olds, the credit for Novell's success goes to Ray Noorda, a laconic, "aw shucks" 68-year-old electrical engineer who was born and raised in Utah. Those who have worked with him inside and outside Novell say he is an autocrat, a technological visionary and a charismatic leader rolled into one and that he has created a company less inclined to boast about its technology and marketing prowess than to stress the need to cooperate with all comers -- even competitors -- to make the networking industry grow.
Mr. Noorda runs Novell from a tiny, windowless office here, drives a pickup truck to work and makes a point of always flying coach and taking advantage of senior citizen discounts. He calls Novell's business philosophy "co-opetition."
Mr. Noorda is avuncular, even grandfatherly in manner. "What he preaches is what you always wanted to hear from your father -- love, sharing -- and he uses those words," said Darrell L. Miller, a Novell executive vice president.
"Ray presents himself as a very down-home, fatherly, 'can I have a bite of your apple' kind of guy, but he's very smart, a true visionary," said Casey Powell, chief executive of Sequent Computer Systems, which recently entered a joint software development agreement with Novell.
Mr. Noorda has also used his Mormon faith to instill what one business associate calls "the Mormon work ethic" at Novell.
"One of the things I'm concerned about is who replaces Ray Noorda when he retires. Will we see the same Mormon work ethic?" said Stephen L. Parsley, director of management information systems at Litton Industrial Automation Systems Inc. in Hebron, Ky., a major Novell customer. "When you see somebody who is as charismatic as Noorda, you have to wonder, will things change?"
Indeed, if Novell is to become a dominant force in the 90's it will not only have to surmount the succession question but also repel what is expected to be a ferocious assault by Microsoft next year when it releases Windows NT, a version of the popular Windows software tailored to desktop computers in networks.
When asked about succession, Mr. Noorda just smiles, makes a show of checking his pulse and avoids a direct answer. He speaks instead about the coming confrontation with Microsoft.
"They'll make us work harder and avoid that dominant mentality, which I hate," Mr. Noorda said in an interview. "It simply will make us better. Believe me, we're working harder since they said they would do that."
While Microsoft and Novell are equally dominant in their respective markets and are both highly profitable, fast-growing companies, they could not be more different in nearly every other way. "Almost everybody's friend versus almost everybody's enemy," is how Marc G. Shulman, an analyst with UBS Securities in New York compares them.
Microsoft is brash and outspoken, seeks to own markets it competes in and is increasingly the software company other companies, like the International Business Machines Corporation and Apple Computer Inc., are united against.
Acquire and Share
Novell is humble and reserved and shares with all. Its strategy has been to accelerate growth of the networking industry, assuming its own share would grow with it. When Novell identifies a capability it lacks, it looks outside, to a joint venture or acquisition, and it has done more of both than any other software maker. It has made more than a dozen such arrangements.
Despite its accommodating nature, Novell, like Microsoft, has begun preparing for the coming battle over networking software. In December it acquired Digital Research Inc., producer of DR-DOS, the only viable competitor to Microsoft's MS-DOS.
Earlier in the year Novell bought a minority stake in Unix System Laboratories, an American Telephone and Telegraph spinoff, and later formed a joint venture with it, called Univel. It will produce an easy-to-use version of the Unix operating system, which is often preferred by engineers and scientists using desktop work stations. The strategy is clearly to make Unix widely available as an option on networks using Netware.
"Because the company stayed focused and because of a fairly unusual, almost altruistic goal, they have over the years wooed an incredible amount of support from would-be competitors," said Janet Hyland, director of network strategy research at Forrester Research Inc., a Cambridge, Mass.-based consulting firm.
To some extent Novell's cooperation with rivals is pragmatic, because a network operating system must work with other companies' software and hardware. "There's no way you can not be partner with a whole lot of people," said Mr. Noorda. "Rather than wait for that to happen, we decided we would partner with anybody and everybody that made sense."
The strategy has paid off. Novell earned $162.5 million on sales of $640.1 million in fiscal 1991. The company expects revenues in the $900 million range this year. In comparison, Microsoft earned $462.7 million on sales of $1.84 billion in its last fiscal year, which ended June 30.
That Novell might grow with such stunning rapidity seemed highly unlikely in 1983 when Mr. Noorda pulled Novell from the ashes of Novell Data Systems, a bankrupt personal computer maker. He saw that the one item of value was an operating system. Unlike Microsoft's MS-DOS, the Novell software allowed PC's to share peripheral devices on a local area network, or LAN.
"It was great that our hardware was so lousy because that gave us the idea that hardware wasn't really where the value was," said Drew Major, one of the original programmers and now Novell's chief scientist. "We were in the position at the right time to see a couple of things," he said. "It was a vision beyond 'let's share a disk or a printer.' "
Whether it was a vision or serendipity, by concentrating on software Novell wrestled the lead in networking away from the 3Com Corporation in Santa Clara, Calif., whose founder, Robert Metcalfe, had all but invented the technology while a scientist at the Xerox Corporation's PARC research center in Palo Alto, Calif.
Software for sharing disks and printers drove Novell's growth for most of the 80's. Then PC's became standardized and commodity-like and it became clear the real value lay in software to link them. And corporate customers began demanding more. They wanted to tie clusters of PC's linked with Netware into the minicomputers that ran business departments and the mainframes where data bases resided.
But there was one problem: bought at different times, from different makers, the hardware used different software programming languages and communications protocols.
Novell's brilliant stroke came in 1989 when it unveiled Netware 386. Earlier versions were limited to use with I.B.M.-compatible hardware, but 386 could also accommodate Apple's Macintosh and Unix, which had become a standard for work stations.
"They had the right product in the right year," said Mr. Metcalfe, now publisher of Infoworld, a trade magazine. Although there are now alternatives to Netware, customers have "little motivation for changing because there is nothing significantly better around," he said.
The beauty of Netware 386, or the current version, Netware 3.11, is that it allows users access to data in any computer on the network. "We look like a Macintosh to Apple people, a Unix server to Sun users," said Kanwal Rekhi, a Novell executive vice president. "It requires tons of software to unite all those disparate environments, and that's the value Novell brings to the market."
But timing might have counted for little if Novell had not hit on another key idea: using as broad a distribution channel as possible. Rather than maintain a costly sales force, it sold Netware through more than 13,000 independent distributors called value-added resellers, or VAR's. From mass-market discounters like CompUSA and Egghead Software to sophisticated systems integrators like Electronic Data Systems and Andersen Consulting, VAR's provide network installation, maintenance and education, all at no cost to Novell.
"How do you get a sales force as large as I.B.M.'s when you're a tiny company? You have to use a leveraged mentality," said Mr. Miller. Initially, Novell trained these resellers in the intricacies of networked computing. Now it franchises Novell Authorized Education Centers, for a fee.
"They've done a wonderful job of farming distribution out," said Robert H. Gill, an analyst with the Gartner Group, a market research firm in Stamford, Conn. "They train people who go out and train other people, and every time somebody gets trained, they get another Netware bigot, and make another dollar. They are getting paid to have people go out and be evangelists."
Mr. Miller said Novell also deliberately left holes in its own product line so others could fill them -- and market Netware by extension as they marketed their add-on product.
It was this broad base of independent companies dependent on Netware that saved Novell when Microsoft teamed up with I.B.M. to introduce a competing product, LAN Manager, three years ago.
"When Microsoft and I.B.M. decided to participate in 1989, they didn't understand this infrastructure we had built," Mr. Miller said. "The mistake Microsoft made was they came at us with technology, and technology was just a tiny part of what we had built," he said. "Their technology wasn't bad."
In fact, analysts say that Microsoft's technology in LAN Manager was in some respects superior to Netware. But it was tied to an unpopular new desktop computer operating system from I.B.M., OS/2, and has had only modest sales.
The experience chastened Microsoft, which now makes products designed to be used with Netware.
"We continue to sell aggressively against Novell," said Steve Ballmer, who has led Microsoft's efforts to compete with Novell. "On the other hand, it's clear to Novell and Microsoft that having Windows run well on Netware is something both our customers are going to insist on. It's not as much either/or as perhaps we thought two years ago."
Nevertheless, Microsoft is hard at work preparing its next assault on Novell's fortress. It has hired James Allchin, the architect of the Vines networking program, marketed by Banyan Systems Inc., a Novell competitor based in Westboro, Mass., and David Kutler, a networking specialist from the Digital Equipment Corporation in Maynard, Mass., which also has a product that competes with Netware. They have been given the specific goal of unseating Novell.
David Readerman, an analyst with Shearson Lehman Brothers, estimates that Microsoft invested $45 million and added 450 new employees in network support and development in fiscal 1991, plus $15 million to $20 million in training programs. He expects Microsoft to invest an additional $50 million in networking during the current fiscal year.
While Windows NT is not likely to sway customers heavily committed to Netware, it will be a significant challenge with new customers. "Novell generally responds rather than leads," said Mr. Ballmer. "That is not a formula for failure, but it does mean that if you can shoot far enough in front of them, there are opportunities to gain market share."
Looming over Novell's success and coming showdown with Microsoft is the Ray Noorda retirement question, a subject of frequent rumors in the trade press. While Mr. Noorda has set up a unit structure that gives the five executive vice presidents more responsibilities, he does not talk like a man planning to retire soon.
"I think about it a lot." he said. "I try to make sure that if anything should
happen there is at least a format for running the company."
He ticked off the names of his executive vice presidents, and said, "The board could look inside or outside and the company could run quite well."
Ms. Hyland of Forrester Research looks at it this way: "There is no heir apparent in the crew there now. The good news is that Ray seems to be a pretty young 68."
Right Man At The Right Time
Ray Noorda became a part of Novell almost by accident. In 1982 the personal-computer maker was on the brink of collapse, though a team of freelance programmers was still at work on a network operating system. "There was a succession of presidents as the company went down," recalled Drew Major, one of the programmers and now Novell's chief scientist.
Things were so tight there was not money for a booth at Comdex, the industry's big trade show in Las Vegas. So Mr. Major and his crew rented a hotel room to show off their prototype software. Ray Noorda wandered in, liked what he saw, and before long signed on as yet another president.
One of Mr. Noorda's first moves was to kill the hardware division. "We always realized that the only differential value we had was in the software," Mr. Noorda said. "To begin with, our aim was Netware somewhere; just get it sold. Then it was Netware everywhere, distribute it broadly. Then we said it has to be Netware anywhere, so we'll sell it through a lot of O.E.M.'s," he said, referring to original equipment manufacturers, who resell products under their own names. "Now we say it has to be almost invisible, so people buy it out of necessity -- Netware underwear."
Competitors say Mr. Noorda's folksy, low-key manner belies a core of steel. "Ray Noorda is a very smart, tough-minded businessman; turn-around situations are not where guys who aren't tough succeed," said Steve Ballmer, a member of the office of the president at Microsoft.
Mr. Noorda's decision to stop by Novell's hotel room a decade ago has paid off handsomely. He owns 11 percent of the company's stock, which closed Friday at $57.25, making his stake worth about $920 million.
When In Japan . . .
Novell's emphasis on partnering has served it well in the international market, which accounted for 51 percent of sales in the quarter ended Jan. 30.
When Novell entered the Japanese market two years ago, it first created a new Japanese subsidiary in which the five largest Japanese computer companies each took an equity stake.
"We thought our best bet for succeeding there was to look like, feel like and be like a Japanese company as much as possible," said Jeffrey Wade, a former Novell executive. "That meant Japanese employees, Japanese partners and a Japanese product."
Novell's Japanese partners -- NEC, Toshiba, Fujitsu, Canon and Sony -- gave Novell instant credibility, Mr. Wade said. Novell kept a 54 percent stake in Novell Japan and its partners' donations of engineering time and money paid for the company's entry into the country.
In Japan, less than 2 percent of personal computers are networked, compared with 35 percent in the United States and 22 percent in Europe, so potential sales are tremendous. Novell expects Japan to be its largest overseas market within four years.
Novell's "leveraged" approach to distribution has also traveled well abroad. In Europe, Asia and South America, Novell sells through authorized distributors, who in turn sell through resellers to users. As in the United States, training is provided by franchised Novell education centers.
The model is even at work in Eastern Europe, where Novell has 22 distributors and 150 resellers. Eastern Europe "is a remarkable piece of our business," said Mary Burnside, an executive vice president. "Major businesses, government-owned and private, are looking at this technology and actually buying," she said.
GRAPHIC: Photo: Ray Noorda of Novell Inc. A chance encounter a decade ago has grown into a stake worth $920 million. (Jim Wilson/The New York Times)
Graphs: "NOVELL," tracks revenues and net income for Novell, 1985-1st quarter 1992 (Source: Company reports); "The Major Cut," shows breakdown of Local Area Network (LAN) operating systems market (Source: Forrester Research) (pg. 6)
Chart: Novell: Growing With Others," shows Novell's acquisitions, investments and joint ventures, Nov. 1985-Dec. 1991 (Source: Novell, Forrester Research) (pg. 6)
Copyright 1992 The New York Times Company