Novell Layoffs Cast Cloud Over Big-Business Linux

For big companies that want to use the Linux operating system and get business-level support, there are only two main options: Red Hat Inc. and Novell. And one of those looked shaky last week.

After two years of refocusing, reinvention, and restructuring, Novell is reducing its staff by 10% to save money and suggesting that a change in CEO may be on the horizon. It's all part of trying to deliver on the growth promised when the company staked its future on open-source software in 2003. Novell's profits were up substantially between fiscal 2003 and 2004. But profits have slipped in recent quarters as the company struggles to make gains with its open-source and identity-management technology strategies, while also trying to make its aging NetWare networking platform relevant again.

Novell's cost cutting, which includes dismissing about 600 employees and cutting research-and-development spending, is expected to save the company more than $110 million annually. Roughly half of the layoffs are taking place in North America, while the rest will be spread across the company's worldwide offices.

Novell says it's focusing resources on Linux and identity management, but it won't comment on which areas of the business will take the biggest hit. The company's SuSE Linux and desktop computing groups, bolstered by staff from Novell's 2003 acquisition of Ximian Inc., are "very much alive and well," a spokesman says. Novell chairman and CEO Jack Messman, who's been under fire from analysts and shareholders, characterized the cuts in a statement as the end of a "comprehensive transformation" of the company.

Rising Star
The company last week also tagged Ronald Hovsepian as Messman's likely heir. He was promoted from executive VP to president and chief operating officer, and provisions were added to his contract that give him cash and stock options if he doesn't succeed Messman. Hovsepian was just promoted in May to president of worldwide field operations. That same month, Novell parted ways with former SuSE Linux president Richard Seibt, who'd been president of the company's Europe, Middle East, and Africa region. But the company still employs key open-source figures, including Miguel de Icaza, leader of the open-source Mono project launched in 2001 to let Unix developers build and deploy Microsoft .Net-based applications on different platforms, including Linux. Novell's VP of engineering for desktop and collaboration is Nat Friedman, a co-founder of Ximian.

The company's product line also is firmly tied to open-source software. Novell since March 2004 has offered Open Enterprise Server software, which is a combination of NetWare and SuSE Linux Enterprise Server, as well as networking services designed to interoperate between the two systems. The company's ZENworks resource-management application is designed to let companies manage both Linux and Windows 2003 server, desktop, and handheld environments.

Yet Novell hasn't found the trick to combining its once-successful NetWare business and the opportunities presented by Linux and open source. The company in August reported a 5% drop in fiscal third-quarter revenue from a year ago, to $290.2 million, and a 91% plunge in net income, to $2.1 million. In contrast, Linux rival Red Hat reported a 42% year-to-year increase in its most-recent quarterly revenue, to $65.7 million, with net income of $16.7 million.

Research firm IDC's most-recent data on Linux market share is from 2003, when Red Hat held a 60% share and Novell 20%. They're still the top two, with the next-biggest group being regional providers such as Red Flag Software and TurboLinux in Asia, and Mandriva Linux in South America. But in a tech market that likes to have choices, big-business Linux is looking more like a one-horse race.