What SCO Wants, SCO Gets - (Linux Assault)

Forbes ^ | 06.18.03, 12:00 PM ET | Daniel Lyons,

[Ernest_at_the_Beach]

NEW YORK - Linux vendors are under attack. In March, IBM was sued for $1 billion by The SCO Group, of Lindon, Utah, which claims IBM has put SCO's Unix code into Linux, the open-source software program. SCO also has sent letters to 1,500 large companies warning them that if they are using Linux, they may face legal problems. Though IBM is the only company named in SCO's lawsuit, other Linux vendors, like Red Hat and SuSE Linux, could suffer collateral damage.

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So how are the Linux companies fighting back? IBM (nyse: IBM - news - people ) put out a statement saying it will fight SCO's (nasdaq: SCOX - news - people ) claim and has issued bulletins to its sales force, providing talking points to use with customers. Red Hat (nasdaq: RHAT - news - people ) is posting pro-Linux commentary and analyst reports on its Web site. SuSE Linux, a German company, claims customers aren't scared by the SCO lawsuit. "Everyone has seen through this," a SuSE spokesman says.

In other words, like many religious folk, the Linux-loving crunchies in the open-source movement are a) convinced of their own righteousness, and b) sure the whole world, including judges, will agree.

They should wake up. SCO may not be very good at making a profit by selling software. (Last year the company lost $24.9 million on sales of $64.2 million.) But it is very good at getting what it wants from other companies. And it has a tight circle of friends.

In 1996, SCO's predecessor company, Caldera, bought the rights to a decrepit version of the DOS operating system and used it to sue Microsoft (nasdaq: MSFT - news - people ), eventually shaking a settlement out of the Redmond, Wash., software giant. In 1997, Darl McBride, now SCO's chief executive, sued his then employer, IKON Office Solutions (nyse: IKN - news - people ), and won a settlement that he says was worth multiple millions. (IKON acknowledges the settlement but disputes the amount.)

McBride joined Caldera as chief executive in June 2002. Two months later he changed the company's name to The SCO Group, based on the name of an ailing Unix product that Caldera had purchased in 2001 from its creator, The Santa Cruz Operation, of Santa Cruz, Calif. The Santa Cruz Operation now calls itself Tarantella (nasdaq: TTLDC - news - people ).

As with the 1996 DOS lawsuit against Microsoft, in the current lawsuit over Unix and Linux this company aims to take a nearly dead chunk of old code, bought for a song, and parlay it into a windfall. Not only is the strategy the same--so are some of the players.

SCO is basically owned and run by The Canopy Group, a Utah firm with investments in dozens of companies. Canopy's chief executive, Ralph J. Yarro III, is chairman of SCO's board of directors and engineered the suit against Microsoft in 1996. Darcy Mott, Canopy's chief financial officer, is another SCO director, along with Thomas Raimondi, chief executive of a Canopy company called MTI Technology (nasdaq: MTIC - news - people ). In this cozy company, SCO even leases its office space from Canopy--a fact disclosed in Securities and Exchange Commission filings, along with the fact that SCO's chief financial officer, Robert Bench, has a side job as a partner in a Utah consulting firm that last year billed SCO for $71,200.

Canopy companies sometimes share more than a common parent. They form joint ventures and buy and sell one another's stock. Last November SCO formed a joint venture called Volution with Center 7, a Canopy company. In 2000, Caldera sold off part of its business to EBIZ Enterprises (otc: EBIZQ - news - people ), a Texas company in which Canopy holds a controlling interest and whose board boasts three Canopy execs, including Mott, according to SEC filings. Previously, Caldera bought shares in two other Canopy companies, Troll Tech and Lineo, and later wrote off the Troll Tech investment but sold the Lineo shares at a profit, according to SEC filings. In 1999, Caldera sold its own shares to MTI, then bought those shares back last year, according to SEC filings.

What's the point of all this horse trading? McBride says he has no idea, since those deals happened before he joined Caldera. "I wasn't involved in those transactions," he says.

Yarro says the investments were made based on each company's belief in doing what's best for itself. "There's no hidden agenda," he says.

Yarro won't apologize for the IBM lawsuit. "I'm not a guy who goes away quietly in the night. I fight," he says. "If you take something from me, if you break a promise, I'm going to come after you."

And he doesn't give up. In 2001, Canopy and Center 7 sued software giant Computer Associates (nyse: CA - news - people ) in a squabble over a business partnership that turned sour. Two years later the litigation continues.

The IBM lawsuit could bring a windfall to Canopy, which owns 46% of SCO. Another beneficiary could be John Wall, chief executive of Vista.com, a Redmond, Wash., company that last August struck a licensing arrangement with SCO. Wall got 800,000 shares of SCO stock in the deal and still holds 600,000, making him SCO's biggest individual shareholder after Canopy. Those shares, which were worth about $1 each when Wall made the deal, now trade above $10.

One team that won't benefit is the folks at Tarantella, the company that sold its Unix code to Caldera in May 2001. After the deal, Tarantella still held 3.6 million shares of Caldera. But last year Caldera bought back all of them, paying 95 cents apiece for most. All told, Tarantella was paid a mere $36 million for its Unix code--the same code that Yarro and McBride now hope could generate $1 billion from IBM.

These guys in Utah are no dummies. The crunchies in the Linux community should be paying more attention.

[RinaseaofDs]

You were the guy that painted MS with the broad brush, and then accused me of ignorance, which actually, I stand guilty of in this particular case.

We're all just watching another episode of Law and Order, Special Software Industry Suicide Division.

Oops, commercial. Time to tinkle.

[Liberal Classic]

Linux is going to be the next OS/2. I don't think so.

LOL Linux exceeded OS/2's installed base years ago.

[Liberal Classic]

In 1996, SCO's predecessor company, Caldera...

SCO was the Santa Cruz Operation long before Caldera acquired the rights to Digital Research. SCO isn't even run by the same people anymore.

[Liberal Classic]

It is most certainly a ripoff of Unix.

Repeat after me. Reverse engineering is good. There would be no PC revolution if Compaq had not have reverse engineered IBM's PC BIOS. Ironically, I think the code in question inside Linux will turn out to be IBM intellectual property put their at IBM's approval.

[Liberal Classic]

You were the guy that painted MS with the broad brush...

Aren't you the guy who that pained Linux people as Dungeons and Dragons players? :)

[Only1choice____Freedom]

Is that LOL for Laugh Out Loud or Lots of Luck?

Linux has M$ scared of losing their base (kinda like the Dem's.)

No company has ever ridden two successive waves of computer inovation. Ask IBM. It doesn't mean it can't happen. It means that when one wave takes hold so does the tendancy to ride the gravy train.

[Bush2000]

never mind. It is well known your astounding pervicacity is unassailable.

Never let it be said that you had any balls...

[Bush2000]

Now SCO gets to wonder if it's a bluff. David Boies doesn't come cheap. SCO has about $25 million in cash and near-cash; IBM can easily keep them in discovery proceedings, pre-trial motions, and so on until that runs out. It's chump change to IBM. It's gut-check time at SCO.

Wrong, Nick. These guys are working on contingency. And if it turns out the way they think it will, they'll reap hundreds of millions for their trouble.

[RinaseaofDs]

I painted them as people who

1. Don't believe that people that software is intellectual property. Open it up. Expose the design

2. Believe that they have power as long as people are obfuscated. The more complicated the system and the more completely they master it, the more indispensible they believe they are. What, after all, is a dungeonmaster?