Time for a SCO update

The company released its second quarter results on June 10; those who are interested can see the press release or, for far more detail, the 10-Q filing. The results were as bad as expected; actually, they were even worse. The company lost $15 million on $10 million in revenue. The SCOsource program brought in all of $11,000 over the quarter. SCO management says things will get better soon, of course.

About one year ago, SCO acquired a web services company called Vultus; this acquisition, somehow, involved the transfer of some 300,000 shares of SCO stock to the Canopy Group. Quite a few questions were raised at the time; there did not seem to be any sort of legitimate business reason for SCO to make this acquisition; it seemed, instead, to be a way of shifting money over to Canopy. The questions have come back; this quarter's 10-Q filing includes a $2.4 million writeoff acknowledging that Vultus is, in fact, worthless.

Also found in the 10-Q is the fact that SCO has spent $2.4 million of its scarce cash buying back its own stock. These purchases appear to have done little to prop up the company's stock price, however.

The most significant news of the week was almost certainly the rulings in the Novell case. Three separate motions were decided:

• Novell had tried to get the case dismissed on the grounds that SCO did not show that Novell's copyright claims are false. Judge Kimball denied this motion for now, though he noted that the question of falsity remains open.

• Novell also moved for dismissal on the grounds that SCO did not plead any specific damages. This motion was granted; as of this writing, SCO's suit against Novell is officially dismissed. SCO, however, got 30 days to refile the case with the required pleadings; SCO claims it will do so.

• SCO had moved to get the trial shifted back to Utah state court; this motion was denied.

The most important ruling by far was the one keeping the case in Federal court. SCO was hoping for a quick contract case where it could talk about the "intent" of the agreement that transferred the Novell license administration business to (old) SCO. State courts cannot rule on the validity of actual copyright transfers, which are a Federal issue. Judge Kimball has decided, however, that the existence (or lack thereof) of a copyright transfer is a crucial part of this case. If no copyrights were transferred to old SCO, then the current SCO Group has no basis for a "slander of title" claim. And the Judge has his doubts on whether that transfer happened:

In state court, SCO would not have had to face this particular line in inquiry. In Federal court, instead, the company will have to start by proving that it does, indeed, own the copyrights it has been claiming; furthermore, this proof will have to be made to a clearly skeptical judge.

One might well think that this whole issue is irrelevant. Beyond the small bit of Unix code leaked into the kernel by SGI (and long since removed), there has been no evidence that any proprietary Unix code has found its way into Linux. Even if SCO wins its case against Novell, it loses against Linux. But the fact that its copyright ownership claims are being challenged in Federal court may yet be the factor that brings the whole enterprise crashing down. Sales of "Linux licenses" will be even harder than before, and, if the judge rules that SCO does not own the copyrights, the rest of SCO's legal offensives will simply collapse.

Judge Kimball also issued some rulings in the IBM case. SCO's motion to bifurcate the case (an attempt to split IBM's patent counterclaims into a separate trial) was denied by the judge. This motion was denied without prejudice, so it could come back at some future time. SCO's motion to delay the case was partly granted, however; the actual trial, should it ever happen, will be in November, 2005. The judge has made it clear that he is not interested in any further delays after this one.

In the AutoZone case, SCO has filed a memorandum opposing AutoZone's motions to put the case on hold, or, at least, to move it to Tennessee. Says SCO:

In other words, poor SCO would not be able to go fishing through AutoZone's files looking for actual evidence.

Finally, the SCO Group is, for the first time in a while, making a big show of wanting to be a software company. One announcement was for UnixWare 7.1.4, which includes a number of bleeding-edge features: support for disks larger than 128GB, pluggable authentication modules, MySQL, PostgreSQL, Apache 2.0.49, Tomcat, Perl, PHP, Samba 3.0, Sendmail, and more. It seems that free software isn't such a bad thing after all. SCO has also announced an embedded offering, "SCOoffice server," and "Legend," an upcoming version of OpenServer with support for "64-bit advanced computing." All told, it looks like the company is truly putting some effort into its (still proprietary and obsolete) Unix offerings.

One might well wonder why SCO is doing that. The company had been told by BayStar that its litigation was its only worthwhile effort; why drain money from the lawyers to prop up its software offerings? One clue was to be found in the conference call that accompanied the second-quarter earnings report. While SCO claims to be staying the course (and doing great), the whole tone of the conference was subdued. Those who sat through the "Chris&Darl shows" of last year note that, now, the swagger is gone (and Chris Sontag, SCOsource manager, has been just about invisible recently). SCO's management may well have gotten past the denial and figured out that it has lost. If so, they might just be thinking about trying to run a software company once the litigation storm has run its course. That might even work as a "plan B," but only if SCO can overcome a couple of small obstacles: having any sort of company left after those it has attacked are done with it, and offering software that people actually want to buy.