NOVELL FACES THE BATTLE OF ITS LIFE The Utah company got to be the world's biggest computer networking outfit by cooperating with its competitors. But it's on the offensive now in a war with Microsoft.
By Brian O'Reilly REPORTER ASSOCIATE Ricardo Sookdeo

(FORTUNE Magazine) – TRAILING OUT the back of nearly half the desktop computers at FORTUNE 500 companies these days are thin round cables that snake off into floors or walls and disappear. Where they go and what they connect to have become enormously important. The cables are the desktop's link to astonishingly fast growing networks that are revolutionizing how work gets done. Predicts Steve Jobs, co- founder of Apple Computer: ''What personal computers were to the Eighties, networking will be to the Nineties.'' Networks -- whereby specialized software, cables, and other hardware devices are used to allow even previously incompatible computers to talk to one another -- are changing the entire computer industry profoundly. They are about to touch off a highly public war between two of the world's most powerful software companies -- a fight that will determine whose products channel and regulate the rivers of information that will flow through networked computers. Microsoft, already the king of software that pops into desktops, is going after Novell, the driving force behind much of the kudzu proliferation of corporate computer networks. Novell software runs two out of every three PC networks in the U.S. Microsoft plans to begin shipping later this year ambitious new operating system software called Windows NT that can supervise networks as well as desktop machines. Novell, in turn, wants to combine its NetWare operating system for networks with other Novell software to run desktops that now use Microsoft. The outcome of the competition will determine whose software handles the operations of tens of millions of desktop PCs and hundreds of thousands of networks -- and who gets the bigger share of a software market worth billions. The battle between Novell and Microsoft won't be pretty. Says John Sculley, chairman of Apple: ''The problem Novell has is that Microsoft wants to kill them, and wants to get into all the stuff that Novell does.'' So far Novell has maneuvered brilliantly, acquiring artillery that will allow it not just to meet Microsoft's initiative but to counterattack as well. For a company marching off to war, Novell is surprisingly low-key. Tucked away in the Wasatch Mountains of Provo, Utah, it's headed by an easygoing chief executive, Raymond Noorda, 69 -- old enough to have fathered Jobs, Microsoft CEO Bill Gates, and most of the youngsters running Silicon Valley companies. Noorda's casual style is reminiscent of the late Sam Walton, founder of Wal-Mart, right down to operating from spartan offices, driving a pickup truck, and concentrating on a few simple business ideas. One idea Noorda has pioneered he calls ''coopetition,'' or cooperating with $ competitors. Figuring that whatever is good for networking is good for Novell, Noorda has put together an informal confederation of hundreds of networking hardware and software companies. Novell wants to make sure that big corporations keep moving important computer operations onto networks without fear that workers using networks by different makers will be left incommunicado. Therefore, it helps competing network software providers such as Banyan Systems, IBM, Digital Equipment, and even Microsoft get their products to work better with Novell's. So computer makers would develop good networking equipment without fear that Novell would favor its own products, Novell sold off its own network hardware business five years ago -- even though it was profitable and accounted for half of Novell's revenues. The company's reputation for cooperation has won it allies that may help it in the coming showdown with Microsoft. Whether it's the ideas or the pickup truck, Noorda's approach works. Like Walton, Noorda has become a billionaire from his company's stock. Since 1988, revenues have nearly tripled, to $933 million in the fiscal year ended in October, and they are likely to hit $1.2 billion this year. Earnings, $249 million in 1992, should reach $320 million by fiscal year-end. Networking is now a $10-billion-a-year industry growing 30% annually. Paul Johnson, a computer industry analyst at First Boston, projects that it will keep booming for a decade or more. FEW LARGE COMPANIES will get to sit on the sidelines as Microsoft and Novell face off. Three or four years ago networks were usually fairly simple, connecting perhaps a dozen PCs to one another and to a remote mainframe or two. But now, companywide networks are creating fundamental changes in the way corporations are organized. Brandt Allen, an associate dean at the University of Virginia business school and a specialist in corporate computing, says the old days when the engineering department didn't interact with marketing or finance are ending. ''What's causing those old vertical corporate structures to come down is a complete redesign of business processes,'' says Allen. ''And people see the possibility of doing it with networks.'' Novell's accomplishments, including its deft exploitation of these important trends in computing, explain why Microsoft wants in on networking -- and why Novell threatens Microsoft's dominance of software. In a typical Novell network, desktop PCs are fitted with adapter boards, made by hardware companies such as 3Com, that connect to a cable. The cables run to a computer called a server, often a PC clone with extra data storage capacity and a powerful microprocessor chip. The other computers are called clients and usually run Microsoft software. The server runs Novell's NetWare software, which lets the PCs talk to one another, and does other networking chores. The NetWare operating system installed on the server computer acts as a traffic cop, masterminding the flow of information over a network. (The latest version costs $4,695 for 25 users, $47,995 for 1,000.) It does for the network what Microsoft's MS-DOS operating system does for IBM desktops and their clones. Microsoft Windows, a popular addition to its operating system, makes desktops easier to use by creating cartoonlike graphics on-screen. About 90% of IBM PCs and their clones run MS-DOS or Windows. WHEN NetWare is on the server, more features -- electronic mail, for example -- can be added to the network by installing additional software and, sometimes, hardware. Run a cable from the server to an IBM mainframe, plug in another $15,000 Novell software package, and 250 PCs can communicate with the mainframe as well. Similar hookups allow connections to otherwise incompatible Digital minicomputers, Apple Macintoshes, Sun workstations, and other networks of IBM-compatible desktops. Significantly, NetWare lets IBM-style personal computers handle some tasks and communications functions once performed by vastly more expensive mainframes and minicomputers. One of the most popular uses of networked computers is to run database software. These products, such as Oracle 7 from Oracle or Sybase's SQL Server, work with NetWare to help a PC user retrieve highly specific bits of information from a variety of remote computers -- anything from mainframes to PCs -- and assemble all the information in useful form on his PC screen. United Parcel Service, for instance, uses networked PCs to track inquiries from customers about their packages. Novell owes its success to more than technology. Noorda, a former General Electric industrial engineer, ran several Silicon Valley startups before taking over Novell in 1982. He deftly exploited the cultural and organizational changes -- many of them made possible by the PC -- that shook up large corporations over much of the past decade. As companies downsized, decentralized, and created teams of workers racing to cope with foreign competition, Novell jumped in. Bypassing the bureaucratic corporate computer czars, Novell pitched its networks to the computer-smart young managers, often MBAs, who surfaced in, say, the marketing department or the regional office. Now the pendulum is swinging back. Corporate computer bosses are reasserting themselves after years of being short-circuited by young upstarts. The czars are embracing networks because their economics and flexibility are compelling. Flexibility may be even more important than price: Because PC networks require a lot of training and support, in the long run they are only about 15% to 20% cheaper to buy and maintain than comparable mainframe systems, says Johnson, the First Boston analyst. Today massive ''mission critical'' software programs, developed years ago by corporate programmers to run on million-dollar IBM mainframes and Digital VAXs, are moving over to powerful but inexpensive desktops connected to the network. But because IBM mainframes and VAXs have their own proprietary operating systems, these custom software programs must be rewritten to run on other kinds of computers. A 1992 survey of computer managers by Cowen & Co., a New York securities firm, concluded that 60% of new corporate software programs were being written for networks, along with 17% of existing mainframe and minicomputer programs. As part of the push to redesign business processes, corporate computer managers are under orders to get control of all those local networks and tie them into one big companywide system sometimes called the ''enterprise'' network. Which leaves them with one huge question. With all these added demands, what operating system can handle the colossally complex mainframe program that Amalgamated Widget wrote to handle its inventory and accounts receivable? NOVELL'S NetWare? Not really. When it comes to moving data from one place to another, NetWare is blazingly fast. But NetWare gets its speed by running on a special part of the computer's microprocessor chip, which also increases the odds that a glitch in a customer's software could cause the entire network to crash. Says Mary Modahl, a networking analyst at Forrester Research in Cambridge, Massachusetts: ''I've never heard of a company actually having a problem with that, but the concern is enough to keep some corporations from putting essential programs on NetWare.'' Microsoft DOS and the current version of Windows aren't up to the task either. DOS was designed years ago for the peculiarities of primitive IBM desktops and has long since been tweaked to its limits.

So Microsoft and Novell are battling to see who can establish a third operating system that will run those big corporate programs and attract the business of those big corporate information system managers. Microsoft is working furiously on a replacement for DOS -- Windows NT -- often postponed and now due out later this summer. Unlike Microsoft's previous operating systems, which have so-called 16-bit designs, NT is a 32- bit operating system, allowing it to handle digitized data in bigger, more complex chunks. Johnson of First Boston calls Windows NT one of the most ambitious software programs ever attempted. Companies that have seen early versions of NT say it is powerful and reliable enough to handle those big software programs that corporate computer types want to download from mainframes onto PC networks. As its name hints, NT will be specially designed to work well in networks. Microsoft is also beefing up a product called LAN Manager, originally written to work with OS/2, an elegant but unpopular IBM operating system for desktops. LAN Manager, like Novell's NetWare, supervises operations and communications across the network and in its new version will work with Windows NT as well. Novell is hardly cowering in the trenches awaiting Microsoft's onslaught. Rather, it is bringing the battle right to Microsoft's home turf. In an adroit move designed to attract those ''mission critical'' corporate computer programs being rewritten and moved off mainframes, Novell bought Unix from AT& T for $322 million. Unix is a powerful operating system long familiar to most corporate computer managers. Importantly, it runs on almost any computer, unlike operating systems written by IBM, Microsoft, and Digital Equipment. For years Unix was too big and complicated to work well on IBM-compatible desktops, but today's machines are powerful enough to run Unix easily. New programs also make desktop displays using Unix look more like easy-to-use Macintosh or Windows. THERE ARE drawbacks. Unix is tedious to program, and AT&T let numerous versions of it proliferate to the point of incompatibility. A program written for the Unix version that Sun sells with its computers may not run on Berkeley Unix, another variety popular in universities. But Novell has vowed to clean up Unix, and is working with such companies as Cygnus Support, a Silicon Valley startup, to develop products that make it easier for independent programmers to write new applications. Novell's toughest counterpunch to Microsoft: Ray Noorda wants to do more than get corporate computer managers to use NetWare to manage the network and Unix to run giant number-cruncher programs. He also wants those big customers to replace Microsoft DOS with Unix on millions of those networked desktops. Then, Noorda argues, from a central location the computer manager can control the updating or replacement of the applications programs workers use. That would make it easier for companies to negotiate volume discounts on software that's now often bought one piece at a time, and it would let them reduce training costs by standardizing on fewer varieties of applications software. Says Noorda: ''We think the network manager should be able to provide the desktop with the facilities and applications they need. And we think we can make the network a whole new distribution system for software manufacturers. You can sell applications through the server.'' Which company will prevail? Neither is likely to overwhelm the other in areas where the enemy is firmly established. Eric Benhamou, chief executive of 3Com, which makes networking hardware, says Microsoft will never dominate networking software the way it controls desktops. He says, ''You can achieve penetration in a virgin industry, as Microsoft did with PCs. But there is an incredible installed base of networks. The cost to users to wipe out their investment in software and training and start over with a new system is enormous.'' By the same token, Unix for the desktop will have a hard time displacing the Microsoft operating systems that run most of the 100 million IBM and clone PCs. Says Johnson of First Boston: ''DOS isn't easy to use and ((the current version of)) Windows is slow and buggy. Unix could replace it, but it would have to be a lot better than Windows to overcome the cost of switching.'' NONETHELESS, some corporate computer managers are starting to tilt into different camps, though few have begun any major system overhauls. Stash Jarocki, a vice president at Citibank, says Novell would be first choice at his company. Citi already has an estimated 30,000 computers on networks, 70% of them Novell. They handle record keeping for the commercial bank, branch banking in New York City and Germany, and trading floor operations. ''Novell has given us the assault vehicle for downsizing our computer operations from mainframes to networks,'' Jarocki says. ''If they can enhance the way NetWare and Unix work together, that will really open the door.'' Jarocki says he is tempted to put Unix on desktops too and have them run applications software that is loaded into the computer through the network, not bought piecemeal by individual employees. ''There are 18,000 applications written for Unix. They can handle virtually anything I need to do.'' And Microsoft NT? ''I've seen it. It's not a giant step for mankind. It's a brand- new operating system that has a long way to go.'' At Atlantic Richfield in Los Angeles, by contrast, Microsoft may prevail even though 70% of Arco networks now use Novell. Says John Coman, Arco's network manager: ''NetWare is easy to use, but it's unsophisticated, like every other existing local-area-network operating system.'' A marriage of Unix and NetWare doesn't impress him: ''Big deal. Unix is 25 years old. Novell is more concerned about selling NetWare than fixing Unix.'' Coman says he is eager to consolidate the network around one major supplier. ''We in the FORTUNE 50 can't keep throwing money at a smorgasbord of software. If Microsoft NT works, it wins.'' If companies with Arco's resources can't afford the smorgasbord, it's hard to imagine who can. Microsoft's size and aggressiveness make Coman worry about Novell's future too. ''Microsoft is another Godzilla. They have huge market share. Microsoft has more money to put more features in NT. We're not dumb. We'll move across if NT is a better product.'' Novell aims to turn that Godzilla image of Microsoft against it. Noorda portrays Microsoft as overly aggressive, determined to grab control of corporate networks and eventually force corporate computer managers to use nothing but Microsoft operating systems and applications. Says Kanwal Rekhi, an executive vice president at Novell: ''What will work against Microsoft is its desire to control customers. There is no such thing as a benevolent monopolist.'' Many in Silicon Valley support Novell's view of Microsoft. Says Fred Cutler, vice president of Oracle, the big database software company: ''Microsoft would like to be at the center and control everything. But customers who got controlled by IBM will never let themselves be controlled again. Companies like Ford are making sure they can pick and choose the best products for their computing systems.'' Not to worry, says Microsoft. ''Novell and the Unix crowd are being paranoid about Microsoft and NT,'' insists Paul Maritz, senior vice president and head of development for Windows NT. ''Naively or deliberately, they are making us a bogeyman to motivate themselves to be more aggressive.'' Microsoft would be foolish to make its products hard to work with Novell, he says. ''We don't intend to put Novell or Unix out of business. We intend to coexist.''

JUST POSSIBLY, Novell's greatest strength lies not in its technical skills or the shrewdness of its marketers but in its long history of treating others fairly. Must nice guys always finish last? Noorda's strategy of coopetition -- letting hundreds of networking suppliers and rivals flourish -- may well tip the balance in the coming competition. One example of Novell's treatment of ''coopetitors'' -- a word even Noorda stumbles over: When Novell decided to add certain network management features to NetWare, it gave 18 months' notice to Cheyenne Software in Roslyn, New York, which made a product that has similar features. Novell even gave Cheyenne technical assistance to help it improve a second product, which allows data to be backed up more efficiently. Now data storage management is 80% of Cheyenne's business, and its sales are more than double last year's. ''Novell is the most open software developer we've ever worked with,'' says Jim McNiel, a Cheyenne vice president. ''Bill Gates is the opposite. He'll shake hands with you up-front until he's ready, and then put what you've done in his own operating system.'' Cheyenne and scores of other suppliers would rather help Novell fight than switch to Microsoft. Says Michael P. Wallace, a security analyst at UBS Securities: ''Growing anti-Microsoft sentiment and competing software from some of the Unix vendors mean Microsoft is unlikely to get the support from software developers now that it got when it created DOS and Windows.'' Perhaps Microsoft and Novell will learn to coexist, and if Steve Jobs is right about the Networking Nineties there should be plenty of business for everybody. Anyway, Bill Gates might think twice about messing with Ray Noorda. As folks in other businesses have doubtless observed, you've got to watch out for slow-talking billionaires who drive pickup trucks.