Novell, Inc. History
Provo, Utah 84606
Telephone: (801) 861-7000
Fax: (801) 228-7077
Incorporated: 1980 as Novell Data Systems
Sales: $1.37 billion (1996)
Stock Exchanges: NASDAQ
SICs: 7372 Prepackaged Software
From a customer perspective Novell is expanding the value of its products from enabling file and print sharing on local area networks, to providing the servers and network services necessary for highly distributed Internet/intranet solutions. Novell software products include server operating systems, network applications, and distributed network services. These products enable businesses of all sizes to maintain distributed information resources across computer networks that integrate many different computers, operating systems, applications, and devices. Businesses deploy Novell networks to make more efficient use of information technology, improve customer service, and enhance communication and collaboration both internally and with customers, partners, and suppliers.
Novell, Inc., is one of the largest computer networking firms in the world, offering operating software, network management software, hardware, and services. Founded in 1980 as Novell Data Systems, a personal computer manufacturer, the firm spent its venture capital on designing hardware, leaving little money for marketing. By 1982 it was on the verge of collapse, unable to even afford a booth at the computer industry's Comdex trade show in Las Vegas. Raymond J. Noorda, a 58-year-old electronics engineer, saw the company's products in a Las Vegas hotel room and was impressed. Noorda was a 20-year veteran of General Electric Co. who had already turned around other fledgling computer-industry startups, including System Industries, Inc., and Boschert Inc.
The Noorda Years: 1983-87
In 1983 Noorda resolved to salvage Novell and became the firm's ninth president. He invested $125,000 of his own money and borrowed $1.3 million from investors, receiving a 33 percent stake in the company. Though Novell was primarily a hardware maker at the time, Noorda felt that its most viable product was an operating system that enabled personal computers to share peripherals such as printers and disk drives on a local area network (LAN). The firm subsequently terminated its hardware division and concentrated on networking.
That decision proved to be a timely one. The PC industry was booming, and as desktop computers permeated the business world, firms became increasingly interested in ways to connect them. Novell's solution was to do this with software, using one PC on each network as a file server that would manage both the network and access to network resources. Novell's main rival, 3Com Corporation, was building its approach to networking around hardware, chiefly adapter cards for Ethernet, the networking system invented at Xerox Corp. Initially the firms coexisted, with Novell reselling 3Com's adapter cards rather than making its own.
Having established its priorities, the firm, now named Novell, Inc., forged rapidly ahead. In 1983 it released Btrieve--the first multiuser database application for LANs--and a software package for computers implementing UNIX, an operating system mainly used for math-intensive applications. In 1984 Novell introduced its first software designed to analyze Ethernet networks. The following year it became the first independent network company to support Microsoft Corporation's new DOS 3.1 operating system and released a product that made it possible for Apple computers to be used on Ethernet networks. Novell also acquired Microsource, a distributor, and thus began the process of assembling a first-class distribution network.
Though Novell was a small company during the early and mid-1980s, its market was growing rapidly. According to International Data Corp., nearly 50,000 computer networks were installed worldwide in 1984, a number that increased to 200,000 by the end of 1987. Due to the strength of NetWare, Novell gradually emerged as the leading firm for PC networks. By 1985 the rapidly growing network market had attracted the attention of such large computer companies as Digital Equipment Corp., Apple, and Hewlett-Packard. At the time Novell was primarily linking IBM-compatible computers, so when IBM and Microsoft Corp. introduced their own file-server strategy, it was a more direct threat. Since Novell had been in the networking market longer, however, its networking customer base was larger and growing more quickly. In fact, Novell was confident enough to go public in 1985, raising the funds for continued expansion.
Unlike 3Com, Novell decided to fight the bigger companies directly by convincing businesses that it would cost less to use networks of PCs than the larger minicomputers favored by companies like Digital Equipment. The firm also opted to offer complete network systems, rather than just software. To meet this goal Novell acquired Santa Clara Systems Inc., a manufacturer of data storage systems and LAN products, in the fall of 1986 for $4.1 million, as well as another distributor, Cache Data Products.
As pressure from large firms increased, the competition between 3Com and Novell became an intense rivalry by 1986. 3Com introduced an operating system for networks and bought advertising that rejected Novell's assertion of its network performance leadership. When 3Com decided it would no longer allow Novell to sell its Ethernet adapters, Novell began producing its own and marketing them for $495 apiece, compared to 3Com's price of $595. Novell also released the first network operating system for computers based on the recently developed Intel 286 microprocessor used in a new generation of IBM computers. Novell's software was now used in more than two million computers and terminals worldwide, including the networks of the British Broadcasting Corporation (BBC), Hilton Hotels, and British Rail. Sales for 1987 reached $221.8 million.
The Novell Network: 1988-90
By 1988 Novell had a 50 percent share of the PC networking market and was working to link PCs, minicomputers, and mainframes. It bought CXI, a maker of connections to IBM mainframes, for $34.9 million in March and began a $5.3 million joint venture with Softcraft, a firm concentrating on database and programming tools. Competition in the computer hardware market was still growing, making PCs more of a commodity and increasing the number of businesses seeking to link them into networks. Novell's 1988 sales reached $347 million, 50 percent of which was generated by software.
Novell's greatest leap forward came with the release of NetWare 386 in September 1989. Earlier versions of NetWare worked only with IBM-compatible hardware, but NetWare 386 could serve IBM, Unix, and Apple's Macintosh computers simultaneously. A great deal of software was required to connect these different computing environments. Still, corporations found linkages increasingly desirable since different computer systems could be created for various purposes. For a short time Novell had the only software capable of managing this task, giving the firm a tremendous competitive edge.
Novell took advantage of its position in the computer networking industry by creating a massive distribution network without the huge overhead costs usually involved in using 13,000 independent distributors. Value-added resellers ranging from mass-market discounters to high-level systems integrators installed the networks, taught customers how to use them, and offered maintenance, all through their own sales forces, which Novell trained. This arrangement cost Novell almost nothing, and the firm soon began franchising its Novell Authorized Education Centers for a fee. Novell also left deliberate gaps in the NetWare product line that were filled by other companies, which then had a vested interest in NetWare's success. Sales grew to $421.9 million in 1989 and reached $497.5 million in 1990.
The combination of excellent software and distribution, as well as the support of many other companies, proved so strong that when IBM and Microsoft introduced LAN Manager shortly after the release of NetWare 386, they could not crack Novell's hold on the market. Some analysts even considered LAN Manager a better product, but it did not have NetWare's broad base of support and was designed for IBM's new operating system, 0S/2, which was then unpopular. Within a couple years, Microsoft was making products designed to be used with NetWare, while IBM was selling the software.
Novell moved aggressively into the Japanese market in 1990, founding Novell Japan with Canon, Fujitsu, NEC, Sony, and Toshiba as smaller partners; Novell maintained a 54 percent stake in the Japanese subsidiary. Having the five most important Japanese computer companies on board gave Novell instant credibility as it sought to expand into a market where less than two percent of computers were networked. Novell released a version of NetWare using Japanese characters, employed Japanese citizens, and generally presented itself as a Japanese company in order to succeed in the difficult Japanese computer industry.
Novell already had a growing presence in Europe, Asia, and South America, where it sold its products through authorized distributors. By late 1991, sales outside the United States accounted for half the firm's revenue.
Diversification or "Diworsification"?: 1990-92
In March 1990 Novell worked out a merger agreement with the Lotus Development Corp., one of the largest PC software firms and the archrival of Microsoft. The deal would have given Novell $1.5 billion worth of Lotus stock. Novell wanted to tap into the huge customer base of Lotus's top-selling spreadsheet, 1-2-3, which then stood at about five million, while Lotus wanted access to the networking market. The merger would have created the largest PC software company in the world, giving both firms advantages in taking on their chief rival, Bill Gates's Microsoft. Lotus and Novell planned to combine their customer service departments with that of WordPerfect, Inc., a privately held firm specializing in word processing software.
The deal fell apart at the last minute, though, when large Novell stockholders balked. Lotus would have held one more seat than Novell on the board of the new company, and the stockholders were reportedly afraid of becoming Lotus's junior partner in the merged company. Despite the aborted merger, the two firms continued to cooperate in a number of areas.
Novell soon joined with Lotus and other companies, including Apple and Microsoft, to devise a system to prevent tampering with e-mail messages. The goal was to make e-mail reliable enough to use for contracts and permanent records, dramatically expanding the uses of computer networks.
Beginning in 1991 Ray Noorda, Novell's president, chairman of the board, and chief executive officer, reorganized the company, dividing it into three divisions: the core NetWare division, general operations, and an entrepreneurial arm leading a move into huge, corporate-wide networks, which were expected to be the next major development in networking. Many analysts felt the restructuring was initiated to prepare the company for the eventual exit of the 67-year-old Noorda. Novell's share of the LAN market stood at an all-time high of 63 percent, comprising 11,000 companies and 10 million people. Microsoft, however, was spending nearly $50 million a year on networking to catch up with Novell.
One of the important areas of contention between Novell and Microsoft was expected to be the corporate-wide networks. NetWare had primarily been used to help small groups of people share laser printers and data. But the wide-area networks (WANs) needed by large corporations would entail linking hundreds of large and small computer systems, many of them not in the same building, or even the same country. Some corporate executives doubted NetWare's suitability for this task, and Microsoft sensed an opening. IBM, however, had been moving to limit Microsoft's power to set standards, and in February 1991 IBM decided to market NetWare, boosting Novell's position. Later that year Hewlett-Packard agreed to distribute Novell products and to work with Novell on developing and marketing computer network technologies for Hewlett-Packard computers. Compaq also agreed to work with Novell on better integration of networks.
To increase its strength in the growing workstation market, Novell bought a five percent stake in Unix Systems Laboratories, a subsidiary of American Telephone and Telegraph (AT&T), in April 1991. Novell and Unix formed a joint venture called Univel to focus on creating products based on the Unix operating system. The firms planned to develop an easy-to-use graphical interface.
Novell then bought Digital Research Inc. for approximately $135.8 million in stock. Digital's DR-DOS operating system, a clone of Microsoft's widely used MS-DOS operating system, was seen as giving Novell some muscle in providing software for file servers. The acquisition prepared Novell for an expected showdown with Microsoft in the networking market. Digital Research became Novell's Desktop Systems Group, which focused on operating systems software that increased the cooperation between workstations and a network. Novell was also working on a joint venture with Sequent Computer Systems to produce a computer able to simultaneously serve as many as 1,000 database users.
In April 1992 Novell continued expanding its multi-company networking abilities through the $5.2 million purchase of International Business Software Ltd., a developer of networking software for Macintosh computers. Novell also signed a marketing and product development agreement with Lotus, allowing the latter firm's widely praised Notes networking software to be more closely connected with NetWare.
The Windows NT Threat: 1992-96
Novell boasted 65 percent of the market for network operating systems in 1992, when networking was the fastest growing segment of the computer industry. The release of Microsoft's Windows NT, however, posed perhaps the largest threat Novell had yet faced. Windows NT was a version of the best-selling Windows graphic interface that was designed for use on networks. Since many corporate PCs were already using Windows and other Microsoft software, some industry analysts felt that Windows NT had a chance of winning a significant percentage of the networking market away from Novell despite the latter's huge advantage in installed systems.
Noorda seemed to take the Windows NT threat personally, and in 1994 made two costly acquisitions to refashion Novell into a diversified Microsoft-style software giant. His $855 million purchase of the number-two word processing program WordPerfect and $145 acquisition of the Quattro Pro spreadsheet brand immediately transformed Novell into the second-largest PC software applications company in the world. Novell's stock price began falling, however, when Wall Street became increasingly dubious about Noorda's decision to compete directly with some of the very software companies Novell relied on to sustain the popularity of its core NetWare product. Noorda retired in early 1994 and was replaced by Hewlett-Packard veteran Robert Frankenberg, who promptly began divesting Novell of Noorda's acquisitions.
Although Novell's revenues peaked at $1.63 billion in 1995, Frankenberg's efforts to streamline the company back to its core competencies distracted him from the Internet revolution that was transforming the software industry. By the time Frankenberg finally unloaded WordPerfect in early 1996 (for $750 million less than Noorda had paid for it), even the initially skeptical Bill Gates had decided that leadership in the software industry depended on integrating World Wide Web connectivity into every Microsoft product. Microsoft began giving away software that made Windows NT into an Internet-capable web server, and by early 1997 Novell's share of the network software market had eroded to 57 percent, down from 70 percent in 1993. Moreover, when NetWare's upgrade revenues were excluded, Windows NT could claim a 42 percent to 33 percent market share lead over Novell's once dominant product.
The Internet, Java, and Eric Schmidt: 1997
In late 1996, Frankenberg had resigned as CEO, and Novell began searching for a replacement equal to the Microsoft threat. In March 1997 it hired Sun Microsystems' chief technology officer, Eric Schmidt, the mastermind behind Sun's Java programming language. By promising to enable business applications to be written independently of any single operating system, Java seemed to threaten Windows' near monopoly on the operating system market. Moreover, the rapid growth of the Internet meant that corporate computers could not only be networked internally but connected to the computers of subsidiaries, vendors, and customers alike--and Windows' lock on the operating system market suddenly seemed increasingly beside the point.
Schmidt believed that, together, Java and the Internet marked the emergence of a new open environment or computing medium that even Microsoft could not hope to control. If NetWare could be retooled and repositioned as the platform through which corporate computer networks could connect their processes to the Internet (via their internal "intranets"), Novell could claim a major niche in the next generation of network software. "We have an opportunity," Schmidt told Red Herring magazine, "to become the primary Internet server platform in corporations as they move to computing platforms fully integrated between themselves and their customers and suppliers." Specifically, Schmidt hoped to position NetWare's Directory Services feature--which gave corporate networks an all-in-one tool for tracking network users, passwords, e-mail addresses, applications, and the like&mdash the indispensable organizing tool to enable corporations to manage the increasingly complex components of Internet-based business computing.
Within weeks of his arrival in 1997, Schmidt cut Novell's workforce by 18 percent, wrote off unsellable NetWare inventory, and set in motion Novell's reincarnation as an Internet-capable networking services provider. NetWare was rechristened IntranetWare, and by the fall of 1997 the first Novell products were released that didn't require customers to own NetWare.
The core of Schmidt's plan for Novell's future, however, was a new product code-named "Moab" that would integrate Internet features and the Java programming language in a single package. When Moab hit the market in 1998, Novell could stand to become the only supplier of a network software solution that replaced the thicket of products corporations had once had to buy separately to manage such tasks as messaging, connecting to the Internet, maintaining intranet security, filtering Web content, and publishing to the Web.
For that day to arrive, however, Novell had to overcome a number of obstacles. Wall Street analysts were taking a wait-and-see attitude toward Schmidt's turnaround strategy, Novell's stock continued to languish, and Novell had a history of missing its deadlines for delivering new products. Moreover, arch rival Microsoft was readying its own version of Novell's Directory Services (named Active Directory) to be integrated in future versions of Windows NT, and sales of Windows NT were on a pace to surpass NetWare's for the first time by 1998. Like many computer firms before it, Novell's rebirth seemed to rest on an unattractive proposition: betting against Microsoft.
Principal Subsidiaries: Fluent, Inc.; Novell de Argentina S.A.; Novell Austria; Novell Belgium B.V.B.A.; Novell do Brasil Software Ltda.; Novell Canada, Ltd.; Novell Columbia; Novell Czech Republic; Novell Denmark A/S; Novell Europe, Inc.; Novell European Support Center GmbH (Germany); Novell Finland OY; Novell GmbH (Germany); Novell Hong Kong; Novell Hungary KFT; Novell International, Ltd. (Barbados); Novell Ireland Software Limited Ireland; Novell Israel; Novell Italia S.R.L.; Novell Korea Co., Ltd.; Novell Latino America Norte, CA (Venezuela); Novell de Mexico, S.A.DE C.V.; Novell Netherland B.V.; Novell Norway; Novell Polska Sp.Zo.o. (Poland); Novell Portugal Informatica LDA; Novell Pty, Ltd. (Australia); Novell S.A.R.L.(France); Novell Services Asia Pacific Pty Ltd. (Australia); Novell Singapore; Novell Software Development Pvt., Ltd. (India); Novell South Africa Proprietary Ltd.; Novell Spain S.A.; Novell Svenska A.B. (Sweden); Novell Schweiz A.G. (Switzerland); Novell U.K., Ltd.; Novell Japan, Ltd.; Onward Novell Software Pvt., Ltd. (India).
- Atchison, Sandra D., and Evan I. Schwartz, "Can LAN Lord Novell Extend Its Territory?," Business Week, September 2, 1991.
- Chithelen, Ignatius, "Computers Talking to Computers," Forbes, September 15, 1988.
- Cortese, Amy, "Microsoft May Sound 'The Death Knell' for Novell," Business Week, March 25, 1996.
- Fisher, Lawrence M., "Preaching Love Thy Competitor," New York Times, March 29, 1992.
- Hatlestad, Luc, "Time Is Running Out," Red Herring, October 1997.
- Heskett, Ben, "Novell's New Strategy," NEWS.COM, October 28, 1997.
- Pitta, Julie, "How to Lose a Lead," Forbes, August 7, 1989.
- Reinhardt, Andy, "There's No Looking Back for Eric Schmidt," Business Week, September 1, 1997.
- Reiss, Spencer, "The Network Is the Network," Wired, August 1997.
- Wilson, John W., "Suddenly the Heavyweights Smell Money in Computer Networks," Business Week, April 27, 1987.
Source: International Directory of Company Histories, Vol. 23. St. James Press, 1998.