Novell inks deals for IBM servers, HP PCs

SALT LAKE CITY--IBM has made a promised $50 million investment in new Linux power Novell, tightening the companies' technology partnership. At the same time, Hewlett-Packard is expanding its own Novell relationship with a push into desktop computers.

As part of the new arrangement, announced late Tuesday, IBM may directly load Novell's SuSE Linux software onto its blade servers and all members of its four server lines, the companies said. Currently, customers may pay for SuSE Linux through IBM, which reorders it from SuSE.

IBM rival Hewlett-Packard is already permitted to load SuSE Linux onto its servers but is now extending the deal to desktop computers, according to Richard Seibt, SuSE's former chief executive and now head of Novell's European operation.

The expanded HP arrangement--announced Wednesday at the Novell BrainShare 2004 conference here--places more pressure on Microsoft, which is now the dominant power for desktop software. HP, currently the No. 1 seller of PCs, already displayed some independence from Microsoft earlier this month with an announcement of Linux PC sales in Asia.

"We're announcing today an expansion of that relationship to now include the desktop platform," Martin Fink, HP's Linux vice president, said in a speech at the conference. "We're going to be certifying, testing and supporting Novell SuSE Professional on a pretty complete range of desktops and laptops going forward," with the first models due "later in the year."

A message to Microsoft
HP asserts that the Linux move doesn't hurt its Microsoft relationship, which is "good, strong and powerful," Fink said.

"There are 160 million clients shipped every year. Linux today has probably about 2 percent market share," Fink said. "When 155 million of the 160 million clients out there ship with Microsoft, we need to maintain a very strong relationship with them. We're not going to stop doing that."

But IDC analyst Roger Kay said that HP indeed sends a strong message to Microsoft: "The days of desktop hegemony are over."

In practice, though, Microsoft has breathing room, Kay added. "I feel that overall that there's a huge inertia to Windows clients such that Linux will have a very hard time taking over an important proportion of that business," he said.

Fink refused to comment on pricing of Linux PCs compared with Microsoft Windows PCs, though he said Linux PC pricing will vary depending on whether customers have support agreements with HP or Novell and other factors.

Microsoft didn't immediately respond to a request for comment.

Novell's version of Linux "will become HP's standard Linux distribution across its portfolio of business desktop and notebook PCs," HP said in a statement, with sales beginning in North America in the second half of 2004 and extending later to Europe, the Middle East, Africa and the Asia-Pacific region.

In an interview, Fink declined to say whether Red Hat has the potential to attain the status Novell has with HP in desktop computing. "I have to wait until Red Hat creates something that's real," Fink said in an interview. And HP while will support customers who bought HP machines with MandrakeSoft's Linux, "the strategic choice of Linux for the desktop is SuSE," Fink said

Red Hat didn't respond directly to the Novell-HP deal, but spokeswoman Leigh Day noted that the company does sell a version of Linux for technical workstations today that includes general-purpose desktop computer software.

The bulk of Linux revenue today is to be found in servers, which are powerful, networked machines that handle tasks such as housing customer databases or hosting Web sites. Overall, IBM has the top server market share, but HP leads in the Linux category, according to market researchers.

Crunching numbers
Big Blue committed to the investment in November, when Novell announced its planned $210 million acquisition of SuSE Linux, the second-ranked seller of the open-source operating system after Red Hat. But Novell and IBM still hadn't hammered out terms by the time the SuSE acquisition closed in January, and as late as Monday, Novell Chief Executive Jack Messman said the companies were still haggling over pricing details.

IBM's investment solidifies its connection with Novell, whose SuSE division was more eager than Red Hat to support IBM's full range of servers.

In the deal, IBM bought Novell preferred shares that may be converted into 8 million shares of common stock for $6.25 per share. The preferred shares come with a dividend of 2 percent per year, which Novell pays in cash quarterly.

Upon conversion, IBM would own just less than 2 percent of Novell's 390 million outstanding shares, Novell said.

Because Novell's stock price has increased since the investment plan was announced in November, Novell expects to record a noncash dividend of about $26 million in the quarter related to the value of the conversion feature of the preferred stock IBM bought. The conversion feature will reduce earnings per share by about 7 cents per share for the current quarter, but it won't decrease net income, Novell said.

Red Hat on Tuesday announced its own deal with Big Blue, under which the operating system may be loaded on IBM servers that use its Power processor. IBM already could load Red Hat Enterprise Linux on its Intel processor-based systems.

Jim Stallings, general manager of IBM's Linux group, said in a speech here that the Novell deal also includes more joint sales, marketing and training work. Stallings said the work will include not just a previously announced program to coax Microsoft Windows NT 4 customers to Linux but now also a new program to wean them from Microsoft Exchange e-mail and calendar server software to Novell's competing GroupWise package.

Meanwhile, desktop Linux is heating up. Novell is focusing on a "complete Linux desktop," and Red Hat said Tuesday that it will release a desktop product later this year.

And HP isn't the only hardware company supporting desktop Linux. Sun Microsystems has its Java Desktop System product, and Stallings said IBM is interested as well. "This is an area of tremendous appeal to customers," he said. "They find that Linux is a lot more secure" than Windows.

Rights fights
Novell and IBM are two major forces opposing the SCO Group's assertion that Linux violates its Unix intellectual property. SCO has sued IBM for more than $5 billion, alleging that Big Blue violated the companies' contract by moving Unix technology to Linux. But Novell, an earlier owner of Unix that sold at least some of the technology to SCO's predecessor, argues that it still owns the Unix copyrights.

HP and Novell offer some legal protections for Linux users, and more indemnification is coming, Fink said. "We will work with Novell to amplify that program even further," he said.

With the expanded deal, Linux now spans a much broader range of computing gear, Fink added. "We will now have one solid consistent platform from laptops to the data center," he said.

The Novell agreement lets HP sell both Novell's lower-end SuSE Linux Professional version and its SuSE Linux Desktop version, which by comparison changes less frequently, is supported for five years and is integrated with server software.

Customers in Asia, Eastern Europe and India Enterprise version are expected to prefer the Professional edition, with North American customers preferring the higher-end product and using it for basic tasks such as entering data into servers using a Web browser, Fink said.

HP itself uses 4,500 Linux systems, handling tasks including e-mail routing and Internet domain addressing services, Fink said.

Novell, too is embracing Linux and other open-source software. The company has a goal to switch from Microsoft Office to OpenOffice.org by the summer, Novell Vice Chairman Chris Stone said, and to switch to Linux desktops by the end of the year.

Novell for years sold another operating system, NetWare, which has been steadily dwindling in use, after the product lost out to Microsoft Windows. The company is using Linux to offer a new future to its customers and business partners, moving NetWare's network services, such as file sharing and printing, to Linux.

Beginning with NetWare 7, due by the end of 2004, Novell said it will include a copy of SuSE Linux Enterprise Server in a package called Open Enterprise Server. While Linux will be available on its own, NetWare will always come with Linux, Chief Executive Jack Messman said in an interview Monday.