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VNU Net: Corel: Linux or bust?

May 11, 2000, 21:28 (7 Talkback[s])
(Other stories by Karen Rollins)

By Karen Rollins, VNU Net

A couple of years from now, few people are likely to remember when Microsoft's dominance of the desktop office software market looked like it might be under threat. But fewer still may remember Corel, the vendor involved in the David-versus-Goliath struggle with the software giant, particularly as analysts warn that Corel's financial future is far from assured.

The battle began when the Canadian-based Corel bought the Wordperfect Office suite from networking specialist Novell in 1996. The software vendor pumped a substantial amount of money into research, development and marketing, and attempted to challenge the supremacy of Microsoft's Office suite.

The battle raged on, and at times it looked like Corel's Wordperfect slingshot might seriously wound the Redmond giant. But fairytale endings do not always happen in the cut-throat world of the IT industry, and it is Corel instead that is suffering.

Far from perfect
Corel has suffered heavy financial losses since it bought Wordperfect. Although it briefly stopped the rot in 1999 after releasing new versions of the suite and its CorelDraw graphics package, which pushed third-quarter turnover to a record $71.3m (£46.5m), its figures since then have plummeted by 38 per cent.

Corel's situation has not been helped by accusations of insider trading by the Ontario Securities Commission against Michael Cowpland, its chief executive.

For its first quarter ending 31 March 2000, Corel reported a loss of $12.4m on sales of $44.1m. The company admits that it expects to incur similar losses for every quarter throughout the rest of this fiscal year and reveals that continued losses have dramatically depleted its cash reserves. This means that it could simply run out of money after the summer.

As a result, Martin Brampton, chief analyst at Bloor Research, believes Corel is in real danger of exiting the software market altogether. He says the company's troubles began when it tried to pitch Wordperfect as a head-to-head rival against Microsoft's Office before finding it could not compete with the Redmond giant's marketing machine.

"Wordperfect simply ran out of steam. Corel relied heavily on offering it cheaply to a price sensitive market, but from a revenue point of view that strategy was not going to be a winner," he says.

Carey Gray, research analyst at the Butler Group, adds: "Microsoft owned the majority of the market that Corel traditionally tried to play in. Wordperfect could not compete and it is hard to see where Corel is going to get the cash it needs."

Looking out for Linux
In an attempt to find supplemental revenue streams Corel is now looking to the emerging Linux market. During the past few months, the company has released Linux-based versions of its products and launched its own version of the operating system.

It has also agreed to merge with development tools specialist Inprise/Borland, which is also trying to jump on the Linux bandwagon. The deal, if it goes through, would give Corel access to $200m in funds.

However, this purchase now looks as if it may be in doubt because of Corel's financial problems. The value of the deal has plunged, along with Corel's share price, from an estimated $2.44bn in February to $374m last week. As a result, Inprise/Borland has called in its financial advisors to reassess whether the move is still a good one for its shareholders.

A Corel spokesman said: "The ball is firmly in the court of Inprise/Borland and its shareholders. The only hurdle left is gaining the shareholder approval."

This means that Corel needs Inprise/Borland more than the tools specialist needs Corel, according to Clive Longbottom, an analyst at researcher Strategy Partners. He says the deal probably rests on "a flip of the coin" by Inprise/Borland's shareholders.

Brampton, on the other hand, believes that the deal will be scrapped. "The merger of two weak companies is not a recipe for success anyway," he says.

Robert Royce, sales director at Corel reseller Sanderson Management Software disagrees, says the deal would benefit the market. He also predicts that Corel will survive because of its channel and a loyal customer base.

"Microsoft may want to sweep the board, but most customers always appreciate some competition. Wordperfect has a band of devoted followers. It would be a pity if Corel was forced to leave the market as customers like to have a choice," he says.

But Longbottom says Corel's future does not look bright. "In the past few months Corel has been all over the place. It wants to play in too many markets and doesn't have deep enough pockets to sustain it all. It is also signing too many low-level agreements that don't make a great deal of sense. Corel's business model is hard to define as today they want to do one thing, but tomorrow it'll be something different, " he says.

Brampton believes Corel has suffered because of an unclear product message. "Corel still plays in the graphics market, and it has also been looking at the Linux desktop market. But a lot of its plans for Linux just look opportunistic and it is struggling to come up with any viable offerings," he says.

"The way forward for Corel is a massive restructure. The way out of its current financial trouble will probably lead to it having to sell off the only viable products it owns."

Time for a takeover?
Longbottom does not believe that the vendor will become a takeover target, but says that possible interested parties could include Linux specialists, Red Hat and Caldera.

"Corel will be on the rack for some time to come. It is all a hell of a mess and the only thing it can do is make massive changes in the messages it gives out to the industry and customers," he says.

Although Catherine Hughes, Corel's director of corporate communications, refused to comment on whether the company is likely to sell off all or part of its business, she said that Corel is examining its cost structure in an attempt to save money and stave off continued losses.

"We are examining ways to re-deploy resources and restructure spending to ensure the best return on our investments," she says. "We do expect our financial results over the upcoming quarters to mirror those announced in March due to the maturity of the Windows market and the fact that our flagship Windows products, Wordperfect Office 2000 and CorelDraw 9, are at the advanced stages of the product release cycle."

While Gray believes that Corel's current financial problems cannot be solved with the current management team, the company's attempts at cost cutting and its hopes of gaining access to additional funding, should the Inprise/Borland deal fall through, may pay off.

If the erosion of its traditional markets continues and its Linux business does not make a profit soon, however, the future for the software vendor does not bode well.

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