February 7, 2000 3:25 PM PST

Corel, Inprise bet on Linux tide change

Inprise and Corel are forming a bigger David to take on Microsoft's Goliath.

Software development toolmaker Inprise and software maker Corel merged today to tackle the burgeoning Linux operating system together and to better compete against their biggest foe--Microsoft.

Under the deal, Inprise will become a subsidiary of software maker Corel in a stock transaction valued at $2.44 billion, the companies said.

Separately, the two firms have struggled against the Microsoft juggernaut. With Microsoft undercutting prices, Inprise, maker of tools that help developers create e-commerce Web sites and business software, has seen its revenue and market share decline over the years. Similarly, Corel has struggled trying to sell software suites in a market dominated by Microsoft Office.

But during the past year, Inprise and Corel have latched onto Linux, a rival to Microsoft's dominant Windows operating system, and as a result, both have seen their sagging stock prices improve. Together, executives from the newly merged company believe they have found a market niche that can turn their fortunes around. But industry analysts are skeptical, saying the two companies still face challenges.

"I don't think doubling your problems necessarily helps the situation," said Hurwitz Group analyst Dave Kelly, referring to Corel and Inprise's history of financial trouble. "Clearly, they can create synergy and Linux makes for a good public relations message to the financial community. But I'm not convinced that will translate into revenue."

In a press conference today, Corel executives said Linux sales now account for five percent of sales and will reach 50 percent of overall revenue in five years. Inprise executives declined to comment on sales, but both companies generate most of their revenue now by selling to the Windows environment.

Corel's push toward the upstart, open-source operating system began with a Linux version of its WordPerfect software but accelerated dramatically in March 1999 when Corel chief executive Michael Cowpland announced Corel would produce a new version of the Linux operating system designed for use on ordinary desktop computers, instead of the server market where Linux currently is most widely used.

Inprise, one of the last remaining independent toolmakers, began supporting Linux this year by creating new versions of its tools that allow programmers to build business software for the operating system. Inprise interim CEO Dale Fuller today said Inprise's Delphi tool will enable software written for Windows to be moved to Linux.

Analysts, however, question how successful the two struggling companies will be in the Linux market. "They need to try to make Linux a relevant desktop environment, but these two companies need to sell the stuff now," said John Rymer, president of consulting firm Upstream Consulting.

Analysts say Corel will have a difficult job ahead as it tries to ride the Linux movement all the way to the heart of Microsoft's home turf: the average computer user. Microsoft has the advantage of selling its operating system and its office software in a relationship that reinforces the dominance of both software products so well that the link is an issue in the Justice Department's antitrust suit against Microsoft.

Corel hopes to sellCNET's Linux Center Linux and its office products side-by-side in the same way, but most analysts agree Linux still is more difficult for average users. For Corel, the desktop software strategy is fraught with peril.

For one thing, Sun Microsystems is offering its own StarOffice software suite for Linux and other operating systems for free. And Linux versions of StarOffice, along with another office suite from Applix, have been for sale for years, whereas Corel's will be brand new.

For Inprise, the toolmaker has faced declining profits for years as buyers' needs have changed. Profits for software development tools have declined over the years as software firms have reduced the price of tools to make their overall product line more attractive and lure developers to buy their more expensive technology, such as databases. It's a strategy that was perfected by Microsoft and sent Inprise into its current tailspin. And it's a strategy Microsoft's rivals have copied.

In the past year, for example, Sun Microsystems acquired toolmaker Forte Software, Motorola purchased Metrowerks and BEA Systems, and an investment firm bought Symantec.

"Tools is not a big business anymore and don't make a lot of money," said analyst Anne Thomas Manes, of the Patricia Seybold Group. "I don't think Corel bought Inprise because of its tools. Corel bought them because they're a major player in the Linux space."

Using Linux isn't the first time Corel and Inprise have looked to a trendy technology to make an end-run around Microsoft. For example, Corel embarked upon a plan to release a Java version of its software that would run on any computer able to use Sun Microsystems' Java software, but the effort faltered. Similarly, Inprise has supported several different programming models, including Java, and recently jumped into the emerging market for application servers, software that helps companies create e-commerce Web sites.

Manes said it's too soon to tell if the merged company will succeed. "There's a big dark cloud over the head of Inprise and Corel," Manes said. "But they found a niche, a good market, and are saying, 'we're going to be the No. 1 Linux company.'"

 

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