The Most Hated Company In Tech

SCO's huge Linux suit against IBM is a long shot that may yield nothing but bile

He can't say he wasn't warned. In June, 2002, when Darl McBride was getting ready to take over as chief executive at struggling Caldera International Inc. in Lindon, Utah -- later renamed SCO Group Inc. -- he mused that claiming ownership of some of the underlying code in the popular Linux computer operating system could keep the company afloat. Even though Caldera's revenues were declining, it was losing $5 million per quarter, and its stock had slid below the $1 NASDAQ delisting price, the reaction of outgoing CEO Ransom Love was instantaneous. "Don't do it," Love says he told McBride. "You don't want to take on the entire Linux community."

McBride did it anyway. Last March, he shook up the computer world by filing a $3 billion suit against tech giant IBM (IBM ), claiming Big Blue had illegally inserted more than 800,000 lines of SCO-owned software code into Linux. Since then, McBride has turned up the heat. In December, SCO sent letters to more than 1,000 Linux customers accusing them of illegally using SCO's property. Now, the company warns that it will sue a Linux user within days. One potential target, SCO says, is Internet search phenom Google Inc. The company, which says it has not talked to SCO about its claims, uses Linux computers and is on the verge of its initial public offering.

As a result of all this, SCO has become the most hated company in the tech world, surpassing, at least temporarily, Microsoft Corp. SCO has infuriated dozens of businesses and thousands of volunteer programmers who helped Linux become the world's second-most-popular operating system for server computers, with tens of millions of copies in use, trailing only Microsoft's (MSFT ) Windows. Linux is open-source software: free in its most basic form and owned by no one. Many of the tech world's top companies -- including IBM, Hewlett-Packard (HPQ ), and Dell (DELL ) -- have hitched on to this rocket. For its most ardent fans, no words are too harsh for SCO. "They're a cornered rat, and I think they have rabies to boot," jabs the normally mild-mannered Linus Torvalds, who started Linux as a college student in 1991.

The retribution against SCO has been fast and furious -- a volley of arrows from all sides. Since it sued IBM, SCO has been slapped with two countersuits, one by IBM and the other by Red Hat Inc. (RHAT ), the largest seller of Linux software. SCO's Web site has been shut down three times by hackers. And McBride has even received death threats. One was so unnerving that SCO's security had a sharpshooter in the room when McBride spoke at a tech conference in Las Vegas in December. "The theater of this -- it's sort of beyond belief for all of us," he says.


But, in the end, this dispute may amount to little more than theater. While emotions are running high, BusinessWeek interviews with SCO executives, industry leaders, lawyers, software experts, and corporate tech buyers all point to a single conclusion: SCO likely won't stop Linux.

Its legal case against IBM and Linux customers is not clear-cut. What little evidence it has made public is inconclusive, according to lawyers and software developers who have examined it. While there are similarities between some code that SCO claims it owns and material in Linux, it's not clear to software experts that there's a violation. To win against IBM, SCO will have to prove that IBM programmers placed the code in Linux -- which may be hard to document. Besides, SCO might not even own the technology. Software maker Novell Inc. (NOVL ), a backer of Linux, has competing claims. "There are real flaws in SCO's arguments," says Thomas C. Carey, partner at law firm Bromberg & Sunstein in Boston.

The most convincing evidence of Linux' resilience is what's happening in the marketplace. Even though corporations are nervous about lawsuits, they haven't lost their hunger for Linux. In the third quarter, the most recent for which data are available, sales of computer servers that use Linux were up 49.8% from a year ago, to $743 million, far outstripping the 2% growth for the rest of the market, according to market researcher IDC. Red Hat landed 3,000 customers last quarter, up from 1,000 in the quarter that SCO sued IBM. And in a new wrinkle, entire countries, including China and Israel, have announced plans for widescale adoption of Linux on desktop PCs. "SCO seems to have had no impact so far," says Dan Kuznetsky, an analyst at IDC.

There's still a possibility that SCO could damage Linux' momentum. Corporate tech users may to some extent be cowed by its threats. Despite more than 20 attempts by BusinessWeek, not a single corporate Linux customer would talk on the record about SCO's claims for fear of drawing legal fire. And if the case goes to trial as scheduled in April, 2005, it will be on SCO's home turf in Salt Lake City. SCO's lead lawyer, famed litigator David Boies, could try to sway the jury by portraying giant IBM as a bully putting the screws to a small Utah outfit.

A win would be a huge windfall for SCO. With server-software licenses costing $699 per machine, Google alone, if found liable, could be on the hook for $7 million in license fees. The market for Linux servers is expected to have topped $4 billion in 2003. Add the fledgling market for Linux pcs and Linux in consumer electronics, and you have an opportunity not seen since the early days of the PC.


But who stands to gain the most from an SCO win? Microsoft. Linux is the primary force standing between Microsoft and domination of the computer world. The software giant is happily fanning customers' fears with an anti-Linux campaign while pumping money into SCO. Even though neither company has disclosed a dollar figure, sources close to SCO say Microsoft has spent more than $12 million on SCO licenses. Microsoft says it needs the licenses because it sells technology that allows its customers to run applications that were designed for Unix, the operating system Linux was modeled on. Critics believe it is just helping SCO finance its lawsuit.

In SCO's hometown, below the snow-capped Wasatch Mountains, the dispute has pitted neighbor against neighbor. "I have had friends, good friends, tell me they can't believe what we're doing," says Ralph Yarro III, SCO's chairman and the head of the Canopy Group, a private investment firm that also has backed Utah Linux companies.

Canopy manages the money of Ray Noorda, former CEO of Novell, just up the road in Provo. Noorda is now retired after years as a bitter rival of Microsoft, so it's ironic that his money is backing a company aligned with his bête noire. Noorda is no longer active in Canopy on a day-to-day basis, and some of his longtime friends are appalled at how his money is being used. "I think about that, and it makes my stomach churn," says one Noorda friend. Yarro agrees the situation is a bit awkward, but he says this is about SCO's intellectual property claims, not Microsoft. Noorda could not be reached for comment.

McBride, like Yarro, once worked for Noorda at Novell. And like him, he feels no discomfort with what he's doing. He argues passionately that if companies allow their intellectual property to be inserted into open-source products, it could destroy the software industry. "I know people want us to go away, but we are not going to go away. We're going to see this through," McBride says.

He certainly doesn't look the part of a bogeyman. A jocular father of seven children, the 44-year-old McBride is a devout Mormon who worked as a missionary in Japan and returned there several years later to start Novell's Japanese business. After Novell, he was briefly president of Franklin Covey Co.'s (FC ) online planning business when Caldera recruited him.

Since taking charge, McBride has done right by his shareholders. SCO's market capitalization, around $5 million when he arrived, has leaped to $219 million. In its most recent fiscal quarter, SCO had $24.3 million in sales, up 57% from the year before, owing largely to license fees from Microsoft and Sun Microsytems Inc. The non-licensing part of its revenues is mostly sales of its version of the Unix operating system. Barring a $9 million charge related to hiring Boies, the company would have had a $7.4 million profit. "There may be a bunch of angry Linux people out there," says McBride. "But I have to answer to a bunch of angry shareholders."


At the heart of this dispute are the original copyrights to Unix. It's a high-performance operating system sold by the likes of Sun Microsystems (SUNW ), IBM, and HP. Unix was originally developed at Bell Labs, but AT&T (T ) sold the copyrights and a version of Unix to Novell in 1993, which in turn sold the Unix product to Santa Cruz Operation Inc. That company later entered a joint venture with IBM to create yet another version of Unix. After that deal went nowhere, Caldera in 2001 acquired the Unix software business from the Santa Cruz Operation -- hoping to merge elements of Unix and Linux -- and later changed its name to SCO Group. But its Linux business never took off.

To law and software experts, SCO's legal claims are not strong. First, it's not clear that it even owns the intellectual property. Novell claims it sold Santa Cruz Operation the right to sell its Unix software, but ownership of the original code stayed with Novell. It has a contract that it claims backs up that assertion. SCO has an addendum to the contract that it says dealt with the copyright issue, but lawyers who have studied it say the language is ambiguous.

Even assuming that SCO owns the software, the few pieces of code it has made public haven't convinced experts that there are substantial copyright violations in Linux. One small piece of code that was clearly part of Unix has been removed. Software industry analysts who have examined pieces of SCO's Unix code say they see some similarities between it and Linux. Robert Enderle, principle of industry consultant the Enderle Group, examined about 100 lines of code and says some similarities were "remarkable." He believes SCO's claims should be taken seriously but cautions: "Whether they can defend ownership of the code is still to be determined."

SCO faces an uphill battle with IBM, too. It has to prove IBM actually provided copyrighted code to the Linux community. IBM says this didn't happen: It says it has always had a strict wall between its Linux developers and anyone working with proprietary software and can prove it in a courtroom. Also, SCO may not even have a right to sue. In its countersuit, IBM claims that because SCO worked on and sold Linux software, it must abide by an open-source contract that bars a company that sells the work of the Linux community from turning around and suing the companies that distribute that work.

If SCO starts suing customers, those customers will have potent defenders. Novell and Hewlett-Packard Co. have indemnified their Linux customers against SCO's legal claims. And on Jan. 12, the Open Source Development Labs, with the backing of companies such as IBM and Intel (INTC ) Corp., announced a $10 million legal defense fund for Linux customers.

It might be easier to shrug off SCO's case if it weren't for Boies. After all, he brought Microsoft to heel for the Justice Dept. The 63-year-old is putting his reputation on the line. He likes backing David against Goliath. "You have a very small company with a very big legal issue, and you knew that that very small company was going to be confronting the giants of the industry," Boies says. "Even at my age, it's hard to resist."

Not that he's doing it for free. In an unusual compensation arrangement, SCO says it paid Boies and the other lawyers $1 million in cash and gave them 400,000 shares of the company, now worth $15.77 apiece. Deutsche Bank (DB ) estimates the share price could hit $185 if SCO wins -- and if so, the lawyers would get a $74 million payday. They also receive 20% of the revenues from SCO's intellectual-property licensing.

Those terms make SCO look more like a lawsuit than a normal company. In this litigious society, there's not much shame in that. But unlike the case with regular companies, if this suit doesn't pan out, McBride and his shareholders may be left with very little. If so, a weird episode in tech history will end with a whimper, and a lot of people will be celebrating.

By Jim Kerstetter in Lindon, Utah

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