Lining Up for Linux Handouts

By Tom Steinert-Threlkeld  |  Posted 2003-06-01 Print this article Print

Unable to turn a profit on products, SCO group uses law to boost the bottom line.

The old rap against academics is: Those who can't do, teach.

The enterprise corollary must be: Those who can't market, sue.

PDF Download The latest exemplar is SCO Group, which claims to have obtained the intellectual property that originated with AT&T's Bell Labs and became the guts of the operating system known as Unix that is now widely used by large companies.

In the eight years since SCO asserts it acquired these Unix assets from Novell, SCO's record in marketing this property has been dismal, at best. And Novell even disputes the idea that SCO now owns the appropriate rights to back its claims.

Let's look at the past five years. The group's annual revenue grew 64-fold—to $64 million in 2002. Yet, remember that the original SCO (Santa Cruz Operation) recorded $55 million in revenue a quarter, back in 1996.

The current company's bottom line today? Pretty much nonexistent. It lost $8.0 million, $9.4 million, $39.2 million, $131.4 million and $24.9 million, from 1998 to 2002.

As of the end of October, bills coming due exceeded its ability to pay them. In business parlance, it had a working capital deficit of $6.3 million. Two years earlier, it had working capital of $88.7 million. So, by January, SCO had hired a new marketeer. His name is David Boies.

Boies is the guy who had Microsoft's massive and well-paid legal team on the ropes when he spearheaded the antitrust case for the U.S. Justice Department in the late '90s after the evisceration of Netscape Communications in the Web browser market.

Now Boies is seeking $1 billion or more from IBM, for allegedly violating SCO's "shared libraries" of computer code for Unix (see Linux Plays On, June '03, p.20). SCO contends IBM can't possibly be developing its own variants of Linux or Unix without misappropriating SCO intellectual property.

SCO is well within its rights to pursue any and all computer software or services suppliers that use code it owns, for commercial purposes. But litigation is an abysmal substitute for a real business strategy—like producing a version of Unix that is superior to all other variants.

Instead, SCO's latest operating plan appears to be to milk its intellectual property—while it still has value. SCO clearly recognizes that the proponents of Linux, from ragtag developers to mighty IBM with its tens of thousands of programmers, can and will find ways to develop wholly independent code.

This is a venerable strategy in tech circles. From 1986 to 1991, Texas Instruments enforced its Kilby patent and other claims on chipmakers, collecting $700 million of almost pure profit. Good thing, too. TI only earned $1 billion all told in that period.

There are companies whose entire businesses are built on enforcing and collecting on technology patents. One semi-celebrated example is Refac International. This outfit at one point took in close to $10 million on the rights to the flashing colons you once saw on alarm clocks. More trenchantly, Refac tried a decade ago to enforce a patent regarding the recalculation methodology used in virtually every electronic spreadsheet. Refac filed nuisance lawsuits against Borland, Lotus, Microsoft and others.

SCO is starting to take on a similar cast. Look at its results for the quarter ended April 30, 2003. The company reported an operating profit of $4.9 million.

Go back to the top lines. Revenue from operating system sales was $13.1 million. The big boost was from its licensing initiative, which added $8.3 million of revenue— and $6.1 million to its gross profit.

Simply put, SCO would still be an unprofitable software company, without getting aggressive on licensing.

To be sure, enterprise customers need all the healthy software vendors they can support.

But it remains to be seen whether SCO will take its profits, innovate and create a superior set of Linux and Unix software for which companies will consistently pay. That would be the only real victory in this initiative.

It's the only viable option for SCO. In the long run, the army of collaborators on Linux will excise any proprietary code that may lurk in its innards.

Tom was editor-in-chief of Interactive Week, from 1995 to 2000, leading a team that created the Internet industry's first newspaper and won numerous awards for the publication. He also has been an award-winning technology journalist for the Dallas Morning News and Fort Worth Star-Telegram. He is a graduate of the Harvard Business School and the University of Missouri School of Journalism.

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