21.Success from Failure

For every successful high-tech company there are hundreds of failures. Novell is a story of both failure and success. In 1982, Novell Data Systems was a small computer company located in Orem, Utah near the Wasatch Mountains. It had found some success building computer systems for local businesses, but the good times quickly took a downturn. They were soon finding it hard to make payroll, and they had to auction off office furniture to pay their employees. Some of the company's investors called in Ray Noorda to see if he could turn the company around.

The same year as their demise, four contractors were hired to write software to network CP/M computers to a common "disk-server." The disk-server split up it's hard-drive into virtual drives, one for each of the computers networked to it. Drew Major and the other programmers started working on a new idea for a "file-server." Instead of a private section of the disk, each networked computer would have access to all the files on the server. Then people could share data across the network. There were some problems to work out, like two people simultaneously accessing a file, but Major and the others recognized a big seller.

While they were working at Novell, they saw a demo of the first IBM PCs available in Utah and bought one right away. They saw great potential in the IBM computers, and decided to try out their new ideas on it. They were contract workers at Novell, so they weren't too worried about the eminent layoffs - they could just find other contract work while they worked on their file-server.

When Noorda toured the business to see if he could save it, he visited with Major and the other contractors and liked what he found . He immediately saw the potential of the file-server. Noorda decided there was something to save, but the business would have to change and drop everything except for Major's file-server.

During the next year, the four contractors (still not full-time employees) worked on their idea and eventually built a network operating system. They called it Novell Netware and shipped it as soon as it was ready. There were lots of bugs in the code, but it was on the market first.

Netware quickly became the dominant networking software for PCs, competing against a weaker operating system packaged with 3Com's ethernet cards. Noorda came up with a novel marketing plan -- essentially flipping 3Com's strategy. Novel began selling ethernet cards at near cost as long as the customer bought Netware to run on their networks. 3Com thought they were being ripped off, but Novel became their biggest customer for ethernet cards. It's a strange business.

22.Riding the Bear

Microsoft probably benefited the most from the growing IBM personal computer market. Because IBM didn't have the skill-set to write an operating system for their desktop computers, they chose to hire Microsoft, still a small Seattle company, to do the work for them. After the first MS DOS was released, IBM decided to keep the business relationship and let Microsoft maintain the operating system. Microsoft was pleased to serve, because they knew IBM ruled over the computer business and they would go wherever IBM went. Microsoft called it "riding the bear."

In the mid 1980s, IBM was working on a new personal computer, and they wanted a revamped and more powerful operating system to match the capabilities of the new computer. They contracted Microsoft to work with them to design and write the second generation operating system, OS/2. This new operating system added several new features, such as a graphical interface with windows and a mouse. However, they didn't want to add any networking for OS/2. IBM was still in the mainframe and minicomputer business, and some of the management didn't want to the personal computer division competing with the rest of IBM.

Bill Gates and the rest of Microsoft didn't see it that way, but no matter how much they argued and pleaded IBM would not add networking to OS/2. Microsoft just watched as Novell took over the networking market:

"Around '83 and '84 and certainly ... by '85 Netware was reaching critical mass. And so Microsoft felt really like there was a huge missed opportunity. In fact, I remember some memos Bill wrote, in sort of '84, '85, '86, where he said, you know one of the biggest disasters for the company is that ... is that we have no assets in networking or very weak assets in networking."

Rob Glaser, Microsoft

In late 1989, Bill Gates made his first attempt at buying the competition, Novell. He called David Bradford of Novell and offered to band together and compete against IBM, but Bradford refused the offer. So, Microsoft went to 3Com instead and offered to band with them and compete against Novell. Metcalfe was already frustrated with Novell, so he agreed with the arrangement. He believed that with Microsoft's relationship with IBM, they had an opening to the largest market, IBM PCs.

"What Microsoft failed to tell us was that their relationship with IBM was falling apart at that moment. Which came as a big surprise about three days after we signed the deal."

Bob Metcalfe, founder of 3Com

Later in 1989, Microsoft announced OS/2 LAN Manager and the headlines proclaimed that it would control most of the networking market by 1991. But that forecast fell short and Novell still controlled the majority of the market in 1991.

At 3Com, because their half of the partnership was falling short of their goals, the board of directors decided a change of management was in order. Metcalfe suggested that he should be CEO in 1990, but the board chose Eric Benhamou instead. Metcalfe quickly resigned from 3Com. He's now a content gentleman farmer in Maine and writes a weekly column in Info World.

After inventing Ethernet and founding 3Com he does have some advice to prospective entrepreneurs:

"It helps to have good parents, and then it helps to work really hard for a long period of tie and go to school forever, and then it works to drop quite by accident into the middle of Silicon Valley, where you're swept up into an inexorable process of entrepreneurship and wealth generation, and you pop out the other side with a farm in Maine. I hate to oversimplify."

Bob Metcalfe, founder of 3Com