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Advice for Novell: Remember Bluestone

The acquisition of SilverStream is a good entry point into the Web services market for Novell, but that's all it is.

Guest Commentary
Advice for Novell: Remember Bluestone
by Simon Yates, Director, Web services and Application Servers

Corks were popping all over Boston earlier this week when Novell announced the acquisition of local software company, SilverStream. One "white knight" returned from Utah to save the Republican Party in the gubernatorial primary and another stepped in to save a struggling software company with plummeting revenues. But before we get too excited, Hurwitz Group would like to remind Novell of a similar deal: Hewlett-Packard/Bluestone. The parallels are uncanny.

SilverStream and Bluestone looked the same on paper. In October 2000, HP acquired Internet software platform, tools, and technologies vendor Bluestone Software for about $432 million on revenues of $28 million for the first three quarters of 2000. For the same period, SilverStream had revenues of $54 million. Factoring in the reality check on valuations afforded to unprofitable software companies today, and current market conditions, the deals would probably have been about the same size. But just two years later, market conditions for software companies are appalling and SilverStream recently cut its revenue forecast for 2002 in half and Novell picked up the pieces for $212 million.

The value proposition vernacular is identical. With the acquisition of Bluestone, HP trumpeted its plans to "expand its Internet software portfolio by adding Bluestone's acclaimed J2EE and XML application servers and tools - enabling customers to develop and deploy applications and services that take advantage of the emerging services-based computing model." Similarly, Novell, which had been openly shopping for an entry-point into the Web services software market, proclaimed "With the acquisition of SilverStream, Novell will be in the position to help enterprises leverage their IT assets by providing a services-oriented architecture...that enables organizations to get maximum value from the systems, users, devices, business processes, and information resources."

One brand, but continued innovation without interference. In both cases, Hewlett-Packard and Novell stated that the acquired firms would operate from their existing facilities. This would allow the firms to build products without the meddling of corporate headquarters to slow down innovation, but would provide the marketing and sales muscle needed to push these small software companies to the next level.

However, on June 4th, Hewlett-Packard announced plans to "retire" its middleware assets as part of an effort to attain profitability in its software division. This retirement likely includes selling off the Bluestone application server and jumping into bed (again) with BEA for its Java customers. With the announcement, a $432 million investment in Bluestone and its products will be written off less than two years after the acquisition. So what lessons should Novell learn from the failed HP/Bluestone effort?

Get the sales force in line to sell the new products fast. Novell believes that SilverStream has the potential to contribute approximately 1% to Novell's revenues in 2002 or about $100 million. That's a pretty steep hill to climb from $67 million in 2001. To meet this lofty target, getting Novell's services arm of 3500+ consultants into the sales cycle fast, and arming its field sales force with the right tools to add SilverStream products to its existing portfolio of directory and network management products should be a top priority.

Don't say one thing when you mean something else. In the case of Hewlett-Packard, adding Bluestone's J2EE and XML technologies turned out to be a euphemism for needing software to improve profit margins on hardware. Instead of selling BEA WebLogic, HP's sales force wanted to give away the Bluestone app server to run on the hardware/HP-UX box without eroding the price point on the total hardware/OS/app server package. Novell should not use the SilverStream middleware products as a way to drive sales of directory and network management products or as a vehicle for consulting dollars from the ex-Cambridge Technology Partners consultants.

Prevent brain drain from SilverStream. HP's disconnect from Bluestone lead to isolation instead of innovation. The marketing muscle was never really behind HP Bluestone, NetAction was not successfully executed due to some critical missing elements, and in the end HP decided abandon the middleware space and stick with profitable businesses like OpenView and OpenCall. Right away, Bluestone's top people began to leave, gutting the innovative spirit that was one of the reasons for Bluestone's early success. To make the SilverStream acquisition payoff, Novell must elevate top contributors to a rank of importance within corporate and ensure that key technology innovators play a significant role in the technical direction of the new Novell.

The acquisition of SilverStream is a good entry point into the Web services market for Novell, but that's all it is - an entry point. Novell is wading into increasingly competitive waters where giants like Microsoft, IBM, and Sun are fighting for dominance. Novell must deliver high quality middleware development and integration products just to survive in the Web services game. But to thrive, the vendor must be willing to fund the innovation required to establish leadership for the long haul and effectively couple it with its core strengths. If it fails to meet this standard, look for a clearance sale on middleware in 2004.

Copyright 2002 Hurwitz Group Inc. This article is excerpted from TrendWatch, a weekly publication of Hurwitz Group Inc. - an analyst, research, and consulting firm. To register for a free email subscription, click here.

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