SCO, the 10-Q form, IBM, Linux and Microsoft

As most people involved with Linux and who aren’t hiding under a rock will know, SCO have begun legal action against IBM over alleged trade secret breaches in the US. They’ve also been bad mouthing the Linux community and claiming that code from Linux has been taken from their UNIX codebase. To this end LinuxTag and various German Linux companies have obtained an injunction against SCO in Germany to prevent them from repeating allegations which they refuse to publically prove.
Anyway, one of the latest developments in this have been quite interesting, in that Microsoft went and bought a UNIX license from SCO. The conspiracy theorists went ballistic over this, saying that MS were essentially funding SCO to damage Linux.
In the light of all this, SCO’s recent filing of it’s form 10-Q (a US Securities and Exchange Commission document, legally binding) makes for very interesting reading. The brief notes are:

  • SCO believes that the legal action may damage their business in the long run.
  • Apart from MS there has been only one other (unnamed) SCOSource licensee.
  • These two licensees contributed over $8 million to SCO’s revenue.
  • The unnamed SCOSource licensee has also been offered up to 210,000 shares of SCO at $1.83 a share. SCO is currently trading around $10!
  • SCO describes the SCOSource UNIX license as “perpetual”.

For more info read on….

First of all, here’s an interesting quote about whom SCO see their major competitors as:

More recently, the major competitive alternative to our UNIX products is Microsoft’s NT and Linux.

This explains SCO’s legal actions quite nicely, they want to hit one of their main competitors (Linux) as hard as possible, so they do that by attacking one of its major supporters (IBM) and then making cast-off allegations about Linux, Linux developers and Linux users.

Note that they don’t go after the *BSD people, partly because *BSD tends to have less of a profile, but also because large parts of their UNIX comes from the BSD sources – at least judging from the old UCB vs Novell judgement.

Now whilst SCO has been quite bullish in public about its legal actions, it’s real position is quite different.

Pursuit of the litigation against IBM and, potentially, others will be costly, and management expects the costs for legal fees could be substantial. In addition, the Company may experience a decrease in revenue as a result of the loss of sales of Linux products and initiatives previously undertaken jointly with IBM and others affiliated with IBM. The Company anticipates that participants in the Linux industry will seek to influence participants in the markets in which we sell our products to reduce or eliminate the amount of our products and services that they purchase. There is also a risk that the assertion of the Company’s intellectual property rights will be negatively viewed by participants in our marketplace and we may lose support from such participants. Any of the foregoing could adversely affect the Company’s position in the marketplace and our results of operations. The ultimate outcome or potential effect on the Company’s results of operations or financial position is not currently known or determinable.

So not only are SCO not confident about the outcome, but they think that it has the possibility of seriously damaging their business. Here we have one of two possibilities:

  • The didn’t realise the possible implications beforehand, and went in with both feet completely unprepared.
  • They did realise, but had someone agree to help bail them out in the future.

Interestingly, SCO also state about their SCOSource licensing:

These contracts do not provide for any payments beyond 2003, except that Microsoft was granted the option to acquire expanded licensing rights, at its election, that would result in additional payments to us if exercised.

Are we seeing here the possibility of MS coming along at a later date to provide more money to SCO ?

In an interesting slant on the slanging match with IBM, SCO says of the SCOSource licenses it has actioned so far:

These license agreements will be typical of those we expect to enter into with developers, manufacturers, and distributors of operating systems in that they are non-exclusive, perpetual, royalty-free, paid up licenses to utilize the UNIX source code, including the right to sublicense that code.

Also, SCO have been saying positive things about their UNIX business, but again this contrasts sharply about their legal statements on the matter.

Our revenue from the sale of UNIX based products has declined since we acquired these operations from Tarantella. This decrease in revenue has been attributable to the worldwide economic slowdown as well as from competitive pressures from alternative operating systems. If the demand for UNIX based products continues to decline, and we are unable to develop new products and services that successfully address a market demand, our business will be adversely affected.

So UNIX has not been paying as well as they thought it would.
SCO also doesn’t seem to be a very healthy business, either. Here’s another quote:

We do not have a history of profitable operations.

The April 30, 2003, quarter was our first quarter of profitability. If we do not receive SCOsource licensing revenue in future quarters and our revenue from the sale of our operating system platform products and services continues to decline, we will need to further reduce operating expenses in order to maintain profitability or generate positive cash flow. If we are unable to generate positive cash flow from operations, we will not be able to implement our business plan without additional funding, which may not be available to us.

These problems are emphasised by the fact that SCO started to put their UK arm (“SCO Ltd”) into administration on the 26th March 2003, and that completed on the 30th April.

So the 10-Q form makes for interesting reading, and throws some light on what is motivating SCO. As for MS’s involvement, well that’s probably too early to tell. The old quote “By their actions shall ye know them” is probably the most appropriate at this point.

Interesting times indeed..