US company intends to re-architect each of its existing network management products onto a Linux platform, writes Jamie Smyth, Technology Reporter

Novell, the US firm that dominated the market in the mid-1990s for software that enables desktop computers to share files and communicate over a network, is stepping back from the brink. The company, which bases its Europe, Middle East and Africa operations in Dublin, was staring into the abyss 18 months ago with mounting losses and no clear vision of the way forward.

The market share of the firm's core Netware software product slipped from more than 70 per cent in the early 1990s to less than 10 per cent in 2002 as Microsoft software dominated the desktop.

This sales slump led to Novell racking up losses of $16 2 million in 2003 and $247 million in 2002 when its share price hit a low of under $2 and Wall Street analysts questioned its ability to survive.

But just a year and a half later and the analyst community is beginning to talk about a significant turnaround based upon a radical new strategy to embrace Linux and open source software.

Linux is an operating system, originally written by the Norwegian programmer Mr Linus Torvalds, which has become a basis for the free software movement. Its source code can be downloaded for free and tens of thousands of programmers all over the world add new code via the internet.

Companies are increasingly using open source software as a base on which to run their IT systems rather than choosing proprietary alternatives such as Microsoft. Novell is desperately attempting to jump on the open source bandwagon.

"We believe Novell will be successful in transforming themselves into a leader in the open source market," says Mr Steve Ashley, an analyst with the US investment bank Robert W Baird.

But he warns the transition to open source will take time.

Unlike other firms, like Red Hat, who were born as pure open source software and service providers, Novell is coming to the market as a large and mature company, with a suite of existing products used to manage computer networks. Novell intends to re-architect each of its existing network management products onto a Linux platform, which will be a near-term challenge.

One man who has been fundamental to Novell's new strategy is Mr Richard Seibt, president of Novell's European operations.

The 25-year technology veteran joined Novell earlier this year following its $210 million acquisition of the German company that he headed, SuSe Linux.

"SuSe Linux was a very successful firm when Novell bought it and had attracted customers such as Deutsche Bank and Ford Motor Corporation to run their IT infrastructure on Linux," says Mr Seibt. "These customers are now even happier because Novell offers them a much wider worldwide support infrastructure."

Novell is a global company with 137 offices in 37 countries and so is a trusted partner for customers. Novell's main rival in the Linux space, Red Hat, has just one person based in the Nordic countries whereas Novell has about 70, claims Mr Seibt.

Mr Seibt says the rationale for selling SuSe Linux to Novell was based on the need to address speedily a market opportunity.

"We could have sought to perform an IPO and increased our own sales force but this would have taken too much time," he says.

The rationale for Novell was clearly to build a presence in the market for Linux-based software following an earlier acquisition of Ximian, another firm specialising in Linux-based systems.

"Open source is taking over the business and moving up the stack," says Mr Seibt.

"We at Novell will be the intermediaries between the open source community doing the coding and customers using the software."

Novell will build new applications that run on open source platforms and extend its application into middleware software products, says Mr Seibt, who quotes a decision by AIB to switch over to Linux as evidence the industry is moving to open source software.

Thousands of software engineers at industry giant Microsoft will quibble with this claim, but there are signs that Novell's strategy is now bearing fruit.

In the second quarter Novell's revenue increased by 6 per cent to $294 million. It also turned around a loss of $28.6 million over the same period last year into a profit of $10.3 million, before an exceptional charge for redeeming preferred stock during the quarter.

And the noticeable feel-good atmosphere among Novell management has even extended to the financial markets, enabling the firm to raise $600 million from the sale of bonds.

Mr Seibt indicates there are two potential areas where Novell is likely to look for acquisitions: new technology and consultants.

"We need consultants and a critical mass of people in each country to serve our customers and consult on open source software," he says. "We also need technology."

Novell will need to move fast to rise above the open source tide washing over the globe.

But key industry figures are beginning to stand up and take notice of Novell after years of stagnation.

IDC says Novell's move into the Linux space is long overdue and should enable it to pick up meaningful market opportunities in the near future.

The next three years will determine if Novell can claim a leading role in the IT world once again after a decade of decline. And its success is now tied into the fortunes of open source and Linux.