At Brainshare 2006 in Salt Lake City, Novell CEO Jack Messman discussed the Waltham, Mass.-based software company’s launch of Suse Linux Enterprise Server 10 and channel conflict issues with CRN Senior Writer Paula Rooney.
CRN: What are your launch plans for Suse Linux Enterprise Server 10?
MESSMAN: What we announced today [March 20] is not just about SLES but offering SLES on the desktop, server, mainframe and other hardware architectures. That's a major advancement, and the key feature is virtualization. It's what they want. CIOs want to save some money, and typically they can take hardware utilization rates from 20 percent to 90 percent using virtualization. The other component of the enterprise edition is AppArmor application-level security, which we didn't have before. And OpenOffice's support for macros is a big step for Linux. There's also new code in SLES 10 that allows us to do a better job of capturing customer data and patching.
CRN: Why do you think desktop Linux will fare better than it has?
MESSMAN: There's such innovation, and we think there are number of things happening with Microsoft [Windows] Vista that will help us. Vista will require a lot of user training, file migration and a lot of new hardware. Those factors will cause customers to look at Linux. We've improved Linux over the past year. The deficiencies have been removed, and the feature set has been expanded. We're running our company on Linux.
CRN: Why will the Linux desktop compete against Windows more favorably now?
MESSMAN: Seventy percent of all uses can be handled by Linux at this point in time. The other 30 percent are knowledge workers who need that thick-client functionality of Windows. That's why Vista is coming with five or six different versions, and the business edition won’t have any of that [thick-client] functionality in there. Linux will compete with Vista, and it will do very well because it has the functionality and it's cheaper.
CRN: In the first quarter, Novell generated $58 million in open-platform products. What do you expect over the next year?
MESSMAN: The industry is growing at [between] 25 percent and 30 percent. If we didn’t exceed that, I’d be disappointed.
CRN: What are you seeing in the adoption of Linux?
MESSMAN: There are many wins we've had. [Investment firm] Bear Stearns and a few other big accounts. We're in this transition, and earnings were $18 million when you adjust for all the unusual things vs. $10 million in the first quarter last year. We told Wall Street we'll get operating income as a percent of revenue to between 12 percent and 15 percent by 2008. Now we're at 5 percent. We're going to make significant changes through revenue growth and cost control.
CRN: Any more specifics about cost cutting?
MESSMAN: It's about becoming more efficient than cutting cost per se. We have opportunities. I'm not looking to cut bodies but gain greater efficiencies. We don't take advantage of offshoring as much as other companies. In my opinion, we ought to do more of that, like our Linux guys using Prague [Czech Republic] and China. We can get our internal processes and G&A and do a better job of that.
CRN: How much did Novell save by dropping Microsoft licenses and using Linux?
MESSMAN: $2 million.
CRN: Do you see any action by Microsoft to discourage OEMs or partners from selling or offering services for Linux?
MESSMAN: They can take away your market development funds and give them to your competitors, who use them to lower their price and take you out of the market. ... They're known for those tactics, so they'll fight as long as they can. They can't afford to lower costs. So they'll eat prices on an individual basis and ultimately lower their prices.
CRN: What are you doing for the small- and midsize-business space?
MESSMAN: Look at the workgroup suite vs. that same Microsoft suite. In it, we can significantly lower the cost that Microsoft charges. It's about one-third of what Microsoft charges. And that suite vs. Red Hat, Red Hat doesn’t have all that functionality of NetWare, GroupWise or Zenworks. So we have a more robust product.
CRN: How will you compete against Red Hat?
MESSMAN: They had a six- to eight-year head start, and they’ve got the brand name and attacked a piece of the market that was ready for Linux: edge servers and small-business customers. But the Linux market is moving toward us in the enterprise, where we have strengths. It's a leapfrog strategy. We'll leapfrog Red Hat in the data center and consolidate backward. Red Hat is not the ultimate enemy, competitively. It's Microsoft.
CRN: When does SLES 10 ship? Partners say the end of the second quarter.
MESSMAN: Midsummer. I don’t know if that’s for SLES or the deskop, but both [will ship] sometime this summer.
CRN: How will partners play in the enterprise Linux push going forward?
MESSMAN: Many channel partners are selling to our enterprise accounts. Just because we designate a named account doesn't mean there is no partner in it. When there is a conflict, we resolve it. I'd rather pay two commissions--one to our sales force and one to theirs--rather than lose the business.
CRN: Some channel partners think Novell’s consulting unit is competing against them or picking select partners to work with.
MESSMAN: Some channel partners have complained we are competing with them in our consulting. But you have to put the numbers in perspective. There's $400 million to $500 million worth of services business, and we're only capturing $150 million of it. We need the channel. The channel should not look at us as the enemy. We should collectively work together. We can't possibly serve all customers directly. We have to go through the channel, and we need to leverage the channel. We need to help the channel be a better partner to us, and we need to be a better channel for the partner.
CRN: Is Novell's primary focus on the enterprise and direct sales to large customers?
MESSMAN: In terms of the type of technology, it is enterprise, but it applies to the SMB market as well. And in terms of how we get to market, we're going direct and indirect and to the enterprise, and they're not mutually exclusive.
CRN: How much business is direct vs. indirect at Novell these days?
MESSMAN: That’s a tough one. We have many customers we sell direct to, but we get them to order and place fulfillment through our channel partner. More than half of our business is fulfilled through the channel.
CRN: Novell’s channel chief said the company will let customers buy how they want. How will that impact the channel?
MESSMAN: A couple of years ago, we differentiated functions we wanted the channel to perform. When Novell started the channel in the 1980s, we sold product in the box. And then the box went away, and there was no need for the channel to have inventory. So the model changed, but we didn't change how we rewarded the channel. Now we're segmenting functions into rewarding demand generation, rather than rewarding fulfillment, and they get a lot of dollars from us. We pay [channel partners] significantly bigger commission to create demand. They don’t have to deliver the business, but they have to influence and name the opportunity so they get credit for it.
CRN: Are Novell salespeople compensated more for getting services contracts?
MESSMAN: The Novell salesman should not feel competitive to eliminate a channel partner, and the channel partner shouldn’t be worrying. You can name your opportunities and get influence commissions. That’s the demand agent program.
CRN: What are your biggest goals over the next year?
MESSMAN: To secure our place in Linux and open-source business. Secondly, to grow our identity business, and thirdly, to stabilize our NetWare business. It was decreasing 12 percent to 15 percent per year, and we wanted to protect our customer base. We've done that, and even if we decline 10 percent each year, it is a very profitable product and helps us maintain a relationship with the customer so we can sell them other products.
CRN: What motivated Novell to support NetWare through 2015?
MESSMAN: It shows our customers they can stay on NetWare. We've always said we won't force them, and it's our way of proving it to them. But it's almost a moot point since NetWare will be virtualized on SLES and OES [Open Enterprise Server].
CRN: We hear SLES will support a fully para-virtualized guest operating system. Is that true?
MESSMAN: The only thing delivered in SLES 10 is a virtualization techcology called Xen. And they could run on Xen, but why don't we do it for everybody? We'll do that para-virtualized in SLES 11.
CRN: Is the Linux business growing more slowly than you thought?
MESSMAN: Certain segments are a little immature. It went through the small- and medium-business phase, and now we're moving into enterprise and data center. And the market is moving into the Novell sweet spot.