Inside the Microsoft-Novell deal

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Cath Everett ZDNet.co.uk

Published: 30 Apr 2007 13:43 BST

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...in federating the directories and improving interoperability on the identity-management side of things, Microsoft has other tricks up its sleeve.

"Microsoft is emerging as the common denominator in multiple strategies for identity management, which is not completely altruistic and could have strategic benefits by putting it in a stronger position at the hub of identity management across several providers' product lines," Goulde says.

Interestingly, in the case of the Sun deal, the software giant was also happy to fork out significant amounts of money to seal the pact. Microsoft paid Sun $700m upfront to resolve anti-trust issues, a further $900m to lay various patent matters to rest and $350m in royalties. Sun also agreed to pay Microsoft royalties on an ongoing basis for including some of its technology in its servers.

All of this means, ironically, that Microsoft has now paid out large sums to help out two competitors at times in their lives when an injection of cash certainly hasn't gone amiss.

"The money didn't hurt Novell, which is roughly running at break-even these days. It's not keeping it afloat, but it didn't hurt the balance sheet and the Microsoft revenue that it's recognised will help to manage the decline in NetWare [its flagship network operating system]," Goulde explains.

Again Goulde sees similarities with the Sun agreement, a company that is and was transitioning from Sparc to Intel-based servers and "a somewhat more Microsoft-friendly strategy". Goulde explains: "It could be interpreted that maybe someone at Microsoft wanted Novell to go in a similar direction, to transition out of the NetWare market to Microsoft’s benefit. And it saw that it could help that happen in a more gracious way."

Quocirca analyst Clive Longbottom also agrees that Microsoft's investment and coupon subscriptions have provided Novell with "that little extra" to "carry it through the bad times". But he adds: "Linux is Novell's future. NetWare is a cash cow on the maintenance front and the whole kit and caboodle has now been bet on the throw of the Linux dice."

What the deal means to Novell
Novell unveiled its repositioning strategy last year when it revealed that version 6.5 of NetWare would be the last independent release. The plan was to come out with a first version of its new Open Enterprise Server that ran both Suse Linux and NetWare alongside each other in a move that is worryingly reminiscent of the company's doomed SuperNOS initiative of the early 1990s.

This saw Novell attempt to combine NetWare and its UnixWare purchase on the same platform, but the effort cost it dear in both money and perception terms and contributed to its decision to sell UnixWare to the Santa Cruz Operation (now the SCO Group) in 1995, a mere two years after purchasing Unix System Labs and Unix SVR4 (which it productised into UnixWare) from AT&T Bell Labs.

With revenues of about $1bn today, the fallout of this debacle is that the company is still only about half the size it was after buying Unix in 1993 and WordPerfect's personal productivity applications in 1994, all of which was part of its disastrous bid to take on Microsoft.

As for the present day and Novell's new Open Enterprise Server initiative, customers were given the option of whether to run NetWare or SLES along with some services from the other operating system in the initial transition release. In the second release, which is due out in the middle of 2007, however, NetWare will disappear in the sense that it will no longer run as a physical operating system but as a virtual one on top of Linux.

The environment will also provide a framework for all of Novell's other products to fit into, including its identity management and Zenworks management products, which are considered crucial services alongside Linux and key planks in its strategy to restart growth.

"The idea is to enable NetWare to take advantage of the hardware and drivers that Linux supports because it's fallen behind here. Also Linux can run all of NetWare's network services so the migration from NetWare to Linux will be much smoother. Open Enterprise Server is at the centre of everything — that's how important this is to Novell," explains Ovum's Lachal.

And it also explains why the deal with Microsoft is so important to Novell. While Novell generated only $53m from its Suse Linux desktop and server business last year (out of total revenues of $967m) compared with...

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