“As the head of this company, I can promise you that we will defend Unix. We will continue to see that it has a bright future. Financially, we’re well prepared for this battle. We plan to be the ones standing after going 15 rounds.”
Darl McBride’s address to users and distributors of SCO’s Unix software at a conference in Las Vegas in August 2004 was as combative as ever.
But the CEO of the now-infamous company – the company that has dared challenge the legal basis of the popular open source Linux operating system – was hardly speaking from a position of strength. His words belied the increasing problems SCO is encountering in its various legal battles to defend its intellectual property (IP).
Not long before its annual conference, SCO’s legal campaign against users and suppliers of Linux was hit by its first major setback when a case it had filed against DaimlerChrysler was thrown out of court. SCO had argued that the car manufacturer needed a SCO Unix licence to use Linux, which it says incorporates code stolen from SCO-owned Unix System V. The judge rejected the claim, partly because Daimler had not actually used SCO Unix software for seven years.
But users were never SCO’s main target. The company’s ostensible strategy is to extract licence fees from the big Linux software distributors, such as IBM, which it sued in 2003. To date, IBM has said and done very little except to officially deny the claim.
But in mid-August, IBM’s legal team moved into action. It filed a motion for a partial summary judgement on SCO’s breach of contract claims, saying it has testimony that its original contract with Unix originator AT&T does not, as SCO claims, preclude IBM from re-using the code from “derivative works” (meaning IBM’s AIX Unix operating system).
IBM has also produced testimony from the Massachusetts Institute of Technology stating that it has not submitted parts of SCO’s System V Unix code to the Linux code base as claimed; and it says that SCO has undermined its own case by continuing to distribute Linux software – including products that it alleges contain infringing code – until as recently as early August.
SCO has naturally said it “disagrees with IBM’s interpretation” of the contract, but the prolonging of this and other cases, against Linux vendors Red Hat and Novell, is starting to take a toll on SCO’s balance sheet. SCO’s problem is that sales of its software have collapsed – and only successful litigation can save it. But as every month passes, its resources will dwindle, even if its resolve stays strong.
Over the first quarter to 30 April 2004, sales from its SCOsource division, which licenses its Unix IP, shrank to just $11,000, while overall losses reached nearly $8 million. Analysts expect SCO’s second quarter to show a further 49% drop in sales and predict a 233% drop in earnings over the full year. SCO has sold only 20 to 30 of its controversial Linux licenses worldwide, and is now looking to bundle them with its Unix products.
SCO still has a hefty $61.3 million left in cash and available-for-sale securities, but if it keeps losing money at this rate, the company will be lucky to last the legal course. SCO is due to meet IBM in court in November 2005.
SCO has another worry. Some $50 million of its war chest came from its only remaining large external investor, BayStar Capital. And BayStar seems to want its money back.
BayStar was introduced to SCO by Microsoft in 2002, and invested $20 million in SCO, presumably on the basis that it could earn hundreds of millions in compensation, as well as future Linux royalties if it won its cases. BayStar also persuaded Royal Bank of Canada (RBC) to add a further $30 million.
But RBC pulled out in May, selling most of its shares to BayStar and the rest back to SCO. Both RBC and BayStar were concerned that McBride and other SCO executives were discussing their lawsuits far too much in public.
BayStar agreed a settlement that involved exchanging preferred stock with common stock, which is tradable. But as this transaction was closing, BayStar issued a statement that another dispute was preventing the transaction from completing.
BayStar has apparently become concerned that private promises on licensing opportunities are being contradicted by public statements, and wants SCO to cut costs and focus on the legal battles.
BayStar has said its main hope for a return on its $50 million lies in David Boies, the litigator who led the US government’s antitrust case against Microsoft. Boies and his team are now representing SCO in its licensing battles.
A recent article in Wired magazine suggests that leveraging IP has been at the heart of McBride’s business plan from the start, regardless of the company’s insistence that it just wants to get back to selling Unix as a low-cost alternative to Microsoft.
The article describes how, after a stint at Novell and an unsuccessful acquisitions binge that cost him his job at Ikon Office Solutions (for which he sued), McBride joined Silicon Stemcell. This ‘incubator’ specialised in patenting ideas for new products, and then attempting to charge licence fees for their execution.
His litigation experience helped McBride to land the top job at SCO, then known as Caldera Systems. At that point, the company had just a few months’ worth of cash in the bank and its only real assets were the rights to System V Unix, acquired from Novell.
In a strange twist, BayStar may now sue SCO, posing a serious risk to its continued existence. Many analysts believe SCO’s last hope is that IBM will simply buy it out. But given IBM’s latest legal moves, which include a claim that SCO copied over 780,000 lines of IBM code into SCO Linux products, it seems that those in the Big Blue corner would rather go the 15 rounds and pummel SCO out of existence.