Novell CEO Messman Set To Up Channel Margin Vs. Microsoft

Novell Chairman and CEO Jack Messman spoke with Editor in Chief Michael Vizard, Editor/News Steven Burke and Senior Writer Paula Rooney about the company's plans to battle Microsoft with higher channel margins, new Linux initiatives and other issues at Novell's Waltham, Mass., location. Below are excerpts from the interview.

CRN: Talk in general about how you are going to step up the attack against Microsoft and get more partner share for Linux vs. Microsoft.

MESSMAN: Many of the promotions we used to do basically were putting money into the hands of the customer. And Microsoft learned one thing over the years: that is you never cut the price to the customer. You just put more money in the hands of the channel. It has worked very successfully for them. I think you are going to see more of that sort of a strategy for us.

CRN: Are you talking about bonuses for the partners and spifs?

MESSMAN: Microsoft seldom cuts the price to the customer. Recently with Linux they have had to come to the table. Did you see the article in Fortune with Bill Gates? It basically says that one thing Linux is doing is causing Microsoft to do something they have never had to do, which is discount. So Linux is bringing them to the table. In many cases, customers are reupping with Microsoft even after the hard work we did to get them there for them. But the next time around it will be different. They won't have as much. Back to what we are doing. Microsoft learned and they do it today. They keep the price high, monopoly price, and they then reward the Dells and IBMs and HPs and others of the world based on their loyalty to Microsoft with the MDF [market development funds] they send back their way. So they reward the channel. That is what we have to do more of.

CRN: Are you going to do it with OEMs or solution providers selling things like Linux Small Business Server?

MESSMAN: The OEMs are a different group of people from our point of view. We are going to do it with the channel people.

CRN: How big of a shift is that?

MESSMAN: Wait until you see the first one and then you can judge how big a shift it is. We are in the midst of working on a couple of these right now so I can't tell you.

CRN: Are they like MDFs for the channel?

MESSMAN: Well, there will be more margin for the channel. In the past, we erred on the side of giving more margin to the customer, when in fact the channel is probably a more important part of the decision-making process than the customer was. The customers we have found in many respects are not as price-sensitive as our salesmen say they are. But we believe that by putting the incentive more into the channel we will get more success than by giving margins to the customer.

CRN: How vulnerable do you think Microsoft is on the partner margin discussion?

MESSMAN: It is really at the discretion of the partner. If he wants to become more of a services company, which I think many of them do, they want to provide the technical service and the solution service. They can get this help from our intellectual property that we provide through Cambridge Technology Partners and the Communities of Practice. They can do that. But they have to make an investment. They have to get trained. They have to learn the solution, whether it is Linux or identity. Identity is going to be a big plus, I think. So it is up to them to get trained so they can implement these solutions. We will help them as much as we can. We will give them the intellectual property and all the tools we have. But it is up to them to decide that is where they want to go. That way they can get more margin by doing things other than reselling Microsoft or Novell operating systems. CRN: In terms of how you price to the channel versus the end user is there a time frame on that?

MESSMAN: We are probably going to test in some remote part of the world before we do it.

CRN: It sounds like you are going to do away with the manufacturer's suggested retail price.

MESSMAN: The standard margins that we give everybody is not going to change. The question is how do the dollars come out. For example, I think it is taken for granted that if you lower your price by half and the channel gets 40 percent of your price you have just lowered their income by half. That is stupid.

CRN: What is the relationship with Dell like?

MESSMAN: Dell is in the process of ramping up for us. It is a new relationship. We just signed them up a couple of months ago.

CRN: If I am a solution provider partner fighting with Dell will I get some help from you?

MESSMAN: We will give you the same help we would give the other guy, and to some extent the guy who gets there first and discovers the opportunity.

CRN: What kind of opportunity do you see with the white box guys?

MESSMAN: I would say the white box guys see that there is an opportunity around the world and they are working with us to develop programs for those markets.

CRN: There is ongoing speculation that IBM might buy Novell. What do you think about that?

MESSMAN: I would say that it probably would ignite a chain reaction because if a hardware vendor bought us then somebody would buy Red Hat tomorrow. Because there are three hardware guys, there would probably be one odd man out. We got encouraged to get into this business because they didn't want to see another Microsoft in the Linux space. They encouraged us to get into the Linux distribution business. They didn't want one. They didn't want three because three means they would have to make all of their hardware and software work on that. So they want two.

CRN: What about Computer Associates? When I look at what you and Computer Associates are doing you can match up those product charts and they would be almost identical.

MESSMAN: In the identity space for sure. We and Computer Associates and Sun and IBM have similar skills. We have been talking about identity now for four years and people thought we were crazy. And the Gartners and IDCs and the industry analysts tried to get us to change our words. They didn't like us saying identity-driven computing. Now they are starting to use it. They have come around. They see what we see. We had some of the basic technologies. We walked into this company in 2001 and we had 166 products. But no solutions. We used to make solutions. So we have condensed all of those products down. We are now down to 45 or 50. We have put them into suites that solve problems.

CRN: Can you talk about the other things you are considering as you get into the heart of 2005?

MESSMAN: I've told you about the potential change in our way of pricing to the channel versus the customer. We have these other 40 market plays, some of which do not apply to the channel. So there will be a matter of how those get brought out to the marketplace and which ones the channel can take advantage of.

CRN: Talk about the data center strategy.

MESSMAN: We haven't really fleshed out that data center strategy. The only thing we announced with the data center strategy is that PolyServe alliance. I think you'll see more of that. That is an important thing for us. We have always been in workgroup computing. We have recently announced what we are doing at the desktop. You have seen what we are doing with HULA. So we have some high-performance computing stacks and that type stuff. There will be some more announcements about the data center. CRN: How do you feel right now about competing with Microsoft? Is it getting easier or tougher?

MESSMAN: It has always been hard as far as I can remember. You've got to admire them. They are tough competitors and they have the resources to make a lot of things happen.

CRN: When you look at HULA and some of the new work being done how big is it going to be when you bring to market pure Linux products from the ground up?

MESSMAN: You have got to remember that the open source community is the guerillas who are going after the gorilla. We announced this open source project [HULA] to go after [Microsoft] Exchange and people are signing up in droves.

CRN: What is the ROI [return on investment] on being a Novell partner versus a Microsoft partner at this point in time?

MESSMAN: I have asked the guys -- particularly in North America -- to look at the current model for profitability in a channel partner. After we understand that better, we have to see what we can do to help. There are two elements of that: one is for the pure Novell partner and the other is the mixed Novell/Microsoft partner. We have to get partners who are willing to share those numbers with us so we can figure out how to do a better job.

CRN: What is the biggest obstacle to driving the Linux market forward in 2005?

MESSMAN: Well, I think it is the rate of adoption. There are a lot of people out there looking. The number of opportunities we see have increased. The number of contracts we have signed [where] the customer is obligated to pay us X dollars over a period of time, but then they only take a small delivery. That is the frustrating part. We see these big opportunities, but they don't turn into revenue recognition until the customer has implemented the products they have bought. That is why I have said at the earnings call I was frustrated or disappointed. We have had some good successes that don't turn into revenue recognition because of the way the new rules work. Until the customer actually pays for it -- under the way some of these licensing agreements work -- you can't recognize the revenue.

CRN: In terms of the Linux community and IT spending, are you more optimistic today versus a year ago?

MESSMAN: I wish I could say that I wasn't swayed by the fact that the overall IT market is under cost pressure for CIOs. One of the nice things about being in two of the high-growth areas is they tend to make dollars available to make sure the new stuff gets investigated. So we are seeing a lot of Linux opportunities. People are looking at it. People are investigating it, calling it out at the edge of applications and identity. With security being so important we are seeing a lot of activity in identity. Our Identity Manager was up 80 percent in the first quarter versus a year ago. And overall the identity business is up 19 percent. Other than the fact that the whole industry is suffering from low-growth pangs. If you can call 8 or 9 percent [growth] bad. Recently there was a management consultant doing a study of our industry and said that in the future a high-growth software company will be one that is profitable and grows at 8 percent per year. That doesn't mean there aren't segments that won't grow faster. It is amazing how it is not double digits anymore.