99/04 - CEO
Novell Rides Again
By Michael Peltz
In less than two years, Eric Schmidt has brought Novell
back to life by emphasizing its core strengths and making
peace with Microsoft
When Eric Schmidt took over as CEO at Novell (Nasdaq:
NOVL; recent price, $19) on April 7, 1997, he brought more
than just 14 years of software- engineering experience. The
former Sun Microsystems chief technology officer, who is
credited with popularizing Sun's hugely successful Java language,
also brought the driver's-side door from an old Volkswagen
Beetle. The door is all that's left from an elaborate April Fool's
Day prank his fellow Sun engineers played on him in the
mid-1980s, when they bought an old Beetle, cut it apart, and
reassembled it in his office so it was running when he got to
work.
These days, a Porsche might be more appropriate for Schmidt.
In just a few years, his leadership has revived Novell. Last
September, the company shipped NetWare 5, an update of its
popular network-operating software, to rave reviews. For its
1998 fiscal year, the company earned $102 million on $1.1
billion in revenue, reversing a $78 million loss in 1997. The stock
price has also rebounded, rising from a low of $6.63 a share in
1997 to more than $20. In February, Schmidt discussed his
strategy with Worth financial editor Michael Peltz.
WORTH: What surprised you most when you got to Novell?
ERIC SCHMIDT: What I didn't know is that I was basically
walking into the mother of all turnarounds. The company was
actually losing, not gaining, revenue. And I didn't discover this
until my third day on the job. I basically went into a crash course
on how to do a turnaround. Of course, had I known that, I
would have been foolish to take the job--although in hindsight,
I'm very pleased I did.
WORTH: What was the principal strategy behind the
turnaround?
ES: Remember that Novell invented the local area network. This
means that essentially everybody is our customer. Most people,
however, don't even know they're customers. Novell software is
just part of their infrastructure, like a phone switch. My
predecessor [former CEO Raymond Noorda] expanded the
business to try to compete with Microsoft, and of course, we all
know that Microsoft beat him down. My strategy was to go
back to the roots of the company in networking, but do it in the
context of the Internet. We are not seen as an Internet innovator
yet, but this year we intend to fix that. We're an infrastructure
player trying to become a real differentiator on the Internet.
WORTH: Do you do that through application software?
ES: Again, think phone switch. Think Cisco Systems. If you
were to describe Cisco, you'd say they're the infrastructure of
the Internet. Do you ever use a Cisco product? Never directly.
But the odds of using Cisco indirectly are extremely high if you
use the Net at all. It's the same pitch for Novell. Our customers
are fairly sophisticated systems administrators. We have
developed some [application] tools, which we think could be the
beginnings of a real end-user play. But for now, it's better to
think of us as an important piece of the infrastructure.
WORTH: How important was it for Novell to start shipping
NetWare 5 last September?
ES: Until NetWare 5 shipped, nobody would listen to anything
we said. They would say, "You missed the Internet. You're
dead."
WORTH: The main competition for NetWare is Windows NT,
but Novell also has to work with Microsoft.
ES: That's part of the landscape of being in this industry. We
have tried very hard to stay underneath the Microsoft radar
screen. We have tried to work with them and told them all about
our new projects. In general, they have been nice to us. Bill
[Gates] invited us up to Redmond for a disclosure of their new
products, which would have been unheard of in the past.
WORTH: That explains why you've kept a low profile during
the Justice Department's antitrust litigation with Microsoft.
ES: Yes. Our customers want us to get along with Microsoft.
They've made it very clear. When you don't know what else to
do, do what your customers want. It's not a bad strategy.
WORTH: What sort of revenue growth do you expect going
forward, and where will it come from?
ES: The business is growing nicely. New customers are
deploying these kinds of networks through our channels. Existing
customers are growing their businesses. And finally we're adding
more applications on top of the architecture. About 60 percent
of our revenue comes from NetWare. The other 40 percent
comes from services and applications that run on top of it or
Windows NT. Over time, I expect we will get more revenue
from applications. In a positive-returns business, which is what
networks are, it's always a mistake to compete with the
entrenched bureaucracy. It's much better to pick an area that is
unoccupied, define it, and occupy it with a very large market
share, like 90 percent. We have done that with Novell Directory
Services.
WORTH: Explain how it works.
ES: Most of today's companies have mixed networks, lots of
different platforms and applications, and lots of employees. By
using the directory, they can authenticate their employees with a
log-in and a password, and then those employees can have a
single mechanism through which they access all the services they
care about. We call that single sign-on. I know that sounds
relatively simple, but it turns out to be very hard to do. One
typical product that's selling extremely well for us is called ZEN,
or zero-effort networking, which allows the server to configure
the desktop for you. So if you were on a ZEN-based network,
you could move to another site in your company, log in, and the
desktop that you're on would be configured as though it were
your home desktop.
WORTH: What sort of new applications are you planning?
ES: The ones I'm most interested in have to do with virtual
communities. Once everybody is on a network, how do they find
people? Why isn't it possible for all the communities of which I
am a member to know all the interesting Web sites that I need to
go to? Why isn't it the case that when I do electronic commerce
everybody already knows what I want? Why do I have to keep
entering my credit-card number? It's all about knowing who I am
and what I want.
WORTH: But aren't you concerned about protecting public
privacy?
ES: I'm a technologist, so I like to solve public-policy problems
through technology. The solution to privacy is to give people
control over their own privacy. One of the great mistakes with
the Internet is building these quasi-official repositories of
information about people without any regulation whatsoever.
WORTH: Are you concerned about the impact the year-2000
software problem could have on your business?
ES: I'm concerned about anything that's truly unknown. Our
products are Y2K compliant, so we're not worried about that
side of it. I do worry that there will be some sort of global
information-technology slowdown. But I think that history shows
that companies continue to invest in things that are revenue
producing. The key for us is to continue to show our customers
that our networks are critical to their business mission. Still, once
all this Monica Lewinsky stuff is over, we're going to have all
these television channels that will have nothing else to talk about.
So they will talk about the year-2000 problem. It's the next
Monica. It's something about which reasonable people can
disagree. It's something people are told is important, but they
don't have any great interest in personally. The analogies are
perfect. The only thing it lacks is sex. Obviously, I'm being
facetious, but the point here is that it's crazy that we don't know
the answer. I believe that we as an industry need to figure out a
way to answer it definitively.
WORTH: Are you hearing rumblings from customers that
they're going to cut spending?
ES: No. Customers have what are called architectural freezes.
They will not introduce a new piece of architecture into an
existing system after a certain date, which is typically between
March and August of this year. And then they will lift that freeze
after January or February of 2000. That is part of the reason that
it was so important for NetWare 5 to get shipped last year.
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