SCO Files for Bankruptcy Protection

Published: September 20, 2007

by Timothy Prickett Morgan

It was not a very auspicious way to begin a trial this week. Last Friday, beleaguered Unix vendor and one-time Linux wannabee the SCO Group filed for Chapter 11 bankruptcy protection, only one full business day before its long-awaited trail in its lawsuit against Novell over who controls the rights to the intellectual property and copyrights to Unix gets underway. While various lawsuits SCO is involved in concerning who owns Unix, who is violating licenses, and who may or may not have dumped code into Linux are very much alive, the question now is will SCO be alive to pursue them.

After years of back-and-forth in the courts and in the press, SCO had the legal wind knocked out of it on August 10, when Judge Dale Kimball, U.S. District Court Judge for the District of Utah, made a ruling that Novell, not SCO, owned the copyrights to the Unix operating system. Among other things, he also ruled that Novell was entitled to some of the royalties that SCO collected to license Unix to Microsoft and Sun Microsystems after the first lawsuit, against IBM, was launched by SCO in a $1 billion suit announced in March 2003. SCO's hot-shot lawyers, Boies, Schiller & Flexner, pumped up that suit to $5 billion shortly thereafter, and then Novell, which sold some Unix rights (but not the ones that count, as far as Judge Kimball is concerned) to the predecessor of SCO Group, and Red Hat got caught up in the legal tangle. Because ownership of Unix has to be established before anyone can be sued for having put Unix intellectual property into Linux or for violating their Unix licensing terms, the SCO-Novell case had to be finished.

SCO is spinning the bankruptcy, which is technically a protection from creditors as the bills outweigh the cash flow and cash on hand, as a means of preserving its precious cash so it can pursue its legal actions, including its appeal of the August 10 ruling, which it announced it would pursue on August 30.

"We want to assure our customers and partners that they can continue to rely on SCO products, support and services for their business critical operations," said Darl McBride, president and chief executive officer at SCO, in a statement last Friday announcing the bankruptcy. "Chapter 11 reorganization provides the company with an opportunity to protect its assets during this time while focusing on building our future plans."

Early last week, SCO had a market capitalization of around $37 million, and in the wake of the announcement, the company's shares plummeted, as you might expect. As I write this on Monday morning, SCO's shares are trading at 28 cents a pop, and the company has a market cap of just under $14 million. The company's sales have been shrinking each quarter, presumably mostly because of the intense competition with Linux and Windows, and the company has been losing money each quarter for the past two and a half years as the lawyer's bills have mounted and its UnixWare and OpenServer sales have fallen. In the past ten quarters, SCO has lost $29.5 million and sales are down approximately 35 percent from sales levels in 2005. That's a lot of money to lose for a company that did not break $40 million in sales in a good year.

While the upside of suing IBM was potentially large, the downside is that the lawsuit has made SCO less able to capitalize on its Unix business and make a better stand against Linux and Windows. A cynic might suggest that the lawsuits are the result of SCO's top brass making a calculation that lawsuits over Unix intellectual property were a better way to preserve and expand Unix than to compete directly with Windows and Linux on the X86 and X64 platform. As I have said many times, I think SCO would have been better served to take OpenServer and UnixWare open source, embrace Linux services on top of a unified OpenServer and UnixWare, and make its vast customer base happy. This is exactly what Novell has tried to do with NetWare and Linux in the united Open Enterprise Server platform. SCO would have probably become a dominant Linux vendor by now, too, having had more traction in the X86 base than SUSE by virtue of OpenServer. But SCO decided to not go in this direction, and this could be the company's undoing ultimately. The biggest irony is that when these cases are done and if and when SCO is finished as a business entity, if this comes to pass, someone is going to sweep in, buy up what remains of the rights of Unix, and take Unix open source once and for all. This would be a good thing for all the Unix players, and could lead to the open sourcing of HP-UX and AIX as well as the bolstering of Linux.

In a separate announcement, SCO said that Savings Bank of the Russian Federation (Sperbank) has chosen Business Console, an SCO business partner, to upgrade 3,000 OpenServer 5 machines that it has in its branch offices to OpenServer 6. The deal has been in the works for more than two years, since before the launch of OpenServer 6 back in June 2006. Financial terms of the deal were not announced.

Ironically, the bottom of SCO's press release on the Sberbank deal has the usual "about the vendor" section, which in this case ends with this line: "SCO owns the core Unix operating system, originally developed by AT&T/Bell Labs and is the exclusive licensor to Unix-based system software providers." Well, apparently not. At least not until SCO wins an appeal in the Novell suit ruling, which will only happen if SCO can stay in business and continue to pay its lawyers to pursue three big cases at essentially the same time.

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