At one time Novell practically owned the network software space. It's flagship product, Netware, was the defacto standard for linking desktop PCs to servers in a corporate office environment. Now, that business is slowly dying.
IN PICTURES: Eight Ways To Survive A Market Downturn
Linux: Little David to Microsoft's Goliath
To replace it, management has made a sizable bet on Linux, a freebie operating system produced by legions of spare-time code junkies fueled by lashings of hot coffee, Red Bull, Jolt Cola or some other stimulant to tweak the creative juices. Corporations get to profit from their efforts by giving away a cleaned-up package of this code, and making money from supplying service and maintenance contracts to their users.
To date, this open source business model has worked remarkably well. Linux has managed to capture about a 23% market share of the server market providing steady revenue streams for companies like industry leader Red Hat (NYSE:RHT) and Hewlett-Packard (NYSE:HPQ). Challenges still remain though, as top dog Microsoft (NASDAQ:MSFT), which holds a dominant 66% of the server market, continues to target upstart Linux's market share.
Oracle Sun Deal Could Trigger Further Consolidation In The Linux Business Space
Despite the ongoing threat of Microsoft, people are still willing to bet on Linux. The recent acquisition of Sun Microsystems (NASDAQ: JAVA) by Oracle (NASDAQ:ORCL) is seen as a big vote of confidence in Linux and the entire open source business model. Sun has championed Java, the programming language preferred by most Linux users, as well as having recently acquired MySQL, a top selling open source data base.
The move has also being interpreted as the first step in a much needed consolidation process for the entire Linux market. That has prompted speculation that Red Hat and Novell could be likely targets for acquisition. A deal involving Red Hat would seem more likely, given it has been gaining Linux market share at the expense of rivals like Novel, which, while showing strong revenue growth of late, is still about a year to a year and a half away from showing a profit in its open source business.
The Bottom Line
Further consolidation in the Linux space looks likely, but chances are it won't include Novell. That could have the effect of ratcheting up the competition to Novell's Linux offerings, just as the company's reliance to their success increases. (Find out which catalysts can turn struggling stocks around in our related article Turnaround Stocks: U-Turn To High Returns.)
