On the same day that Microsoft commemorated a quarter century of being the leading light in the software industry, its long-time rival Novell announced it was laying off 16 per cent of its global workforce after a disastrous third quarter.

A timely birthday present, perhaps, for the man who has everything. The gift may well have contributed to the spring in Microsoft's chairman Bill Gates' step last Tuesday as he mounted the podium at the Safeco baseball field in Seattle to address 19,000 employees, gathered to celebrate the company's 25th birthday.

Novell's decision to lay off 900 staff came shortly after it released its third quarter results on 16 August. The supplier saw net profits plummet by 83 per cent to $8.6m compared with the same quarter last year, while revenue also fell sharply to $270m from $327m.

According to Gartner analyst Neil MacDonald, the massive job cuts are bound to influence the thinking of users who are trying to decide whether to adopt Novell's Netware or rival network operating systems. And the situation is made more poignant because the real number of job losses is probably closer to the 25 per cent estimated by analysts prior to Novell's official announcement.

"The number could really be 20 per cent," MacDonald explains. "But by the time Novell took into account natural attrition, people who were going to retire or open positions that it doesn't fill, then it actually looks lower, so the number is not quite so scary when presented to the public."

How many of the job losses will affect the UK is uncertain at the moment. Novell UK's managing director Steve Brown is adamant, however, that the cuts will not affect service and support levels for UK users, but cannot say for certain who will be affected.

"One, it hasn't been decided on, and second, we like to tell the people involved first," he says. "But it is certainly my intention in the UK to maintain the interface with both customers and partners. The other thing is to look at operational efficiencies to scale the company to suit the business."

The good news
Despite the job cuts and poor financial results, however, analysts haven't written off Novell completely - yet. It still turns over more than $1bn per year and Netware still has a large installed base that can sustain the company for a good while.

Dan Kusnetzky, programme director at research company IDC, says that although the job losses have led to the perception that the vendor is going into a death spiral, this is not really the case. "In reality, Novell makes very good technology, but it has not been marketed as well as it could have been," he says.

MacDonald is also optimistic about the future of Novell's products: "If you're talking about 'should I buy Novell's products?', then I say go right ahead. If you have Netware 4, then Netware 5 makes a lot of sense. If you have a large server farm centralised, I think Netware 6 makes a lot of sense. The technology investments are viable for the next five years because Novell has a large installed base and because it is still doing fairly well in the network operating system market."

A lot of the supplier's troubles come down to its continuing struggle to compete with Microsoft's Windows NT and Windows 2000, which are eroding Netware sales, he added.

Meanwhile, Microsoft's Active Directory directory services offering, which is part of Windows 2000, is beginning to be seen as a real alternative to Novell's Directory Services (NDS). NDS was, until recently, perceived as one of the few real options for organisations wanting to manage huge numbers of files across large networks.

"Novell is very headstrong, very arrogant," says MacDonald. "It has had at least four or five years when it had a directory and Microsoft didn't. It could have taken very radical, bold steps such as giving the directory away for free or putting the directory into the public domain. Yet it refused to do so."

"It continued to milk the Netware and NDS cash cows," he adds. "That was a mistake long-term because, as an operating system, Netware is losing market share and within the next two or three years, the directory services will lose marketshare. Plus, its main competitor, Microsoft, is steadily making progress."

Predictably, Novell's Brown claims that Windows 2000 and Active Directory are not really a threat to the supplier. He asserts that users who have had a chance to assess Microsoft's products have realised that they are not as robust as their Novell equivalents.

"It has actually been better for us that Windows 2000 has been a shipping product. Those who have installed it and tried to maintain it now have a much better idea of what's involved in maintaining Active Directory," he claims. "It's actually a relief it's shipped, because it promised so much yet delivered so little."

A takeover target?
But although Novell's products will undoubtedly survive, there are still doubts over how long the company itself can continue on its own. Since the third quarter results were announced, acquisition rumours have been circulating, with IBM top of the list - again.

"These rumours come around every time Novell's stock goes in the tank. And that happens roughly every two or three years," says MacDonald. "I think IBM would be a horrible fit for acquiring Novell - a more likely candidate would be Computer Associates. CA has a business model where it acquires companies with reasonably large installed bases such as Novell has. I don't see it as particularly good for Novell customers, but it's a possible acquisition."

MacDonald is also doubtful about whether Novell's chairman and chief executive Eric Schmidt, who turned the vendor around after a similarly troubled period in the mid-1990s, will be able to come to the rescue again.

"The shine is off Eric Schmidt's armour. He has come back down to reality," he says. "I don't expect Schmidt to be around beyond the next two years. The best course of action, I think, would be for Novell to break itself up."

But Novell's poor performance has been bad news for all concerned: the 900 employees about to be axed, customers and partners facing difficult upgrade decisions, and Eric Schmidt, who is no longer the golden boy of Wall Street.

Every cloud has a silver lining, however. The Microsoft executives who must have been deliberating long and hard over what to give Bill in honour of the software giant's birthday celebrations, can finally relax.