SCO CEO Says No Linux Is Legit
1:26 PM EDT Fri. May. 16, 2003
From the May 16, 2003 issue of VARBusiness
Earlier this week, SCO put out a press release that put the Linux community on notice that it believes Linux is an unauthorized derivative of UNIX and legal liability may extend to commercial users. McBride says he understands why thousands from the Linux community are upset over his company's position, but insists that SCO is only trying to defend its intellectual property. Many, however, wonder what has gotten into the heads of the company, which previously filed a lawsuit against computing giant IBM for misappropriation of trade secrets, among other things.
VARBusiness: How many enemies do you need, my friend?
McBride: Well, I've been saying we didn't go into this trying to win Miss Congeniality, and we're not in first place in that right now, that's for sure.
VB: So what's the thinking, then, behind the legal activity?
McBride: I understand why people are upset. And I understand why people are asking, 'Those SCO guys, what are they doing now?' But I would turn the question around to them and ask the question: 'What would you do if you were in our shoes?' What would you do if you had turned three independent programming teams loose on the question of 'Is our UnixWare inside of Linux?' and all three of those groups came back independently and said yes.
VB: But being in the legal right isn't always the same as being in a position to move on so many people. So how did you decide to proceed? What's the potential upside to collect or get the violations to stop?
McBride: At that point in time when the teams came back and said, 'Yes, there are violations, and it's not an insignificant amount of code we are talking about,' we, after much dissecting of the problem and kicking it around, came to that we conclusion that we needed to send out an alert or notice to let people know that these problems existed. That notice came in two forms. One was a press release that went out [on May 14,] while the second was a letter that went out to customers.
VB: How many customers did you send that out to?
McBride: We sent that out to the Fortune 1000 and the Global 500 public companies.
VB: What's been the response back, or is it to too early to tell?
McBride: Well, the phones have been ringing off the hook. People are trying to understand what is going on, and we understand the concern that have, which is the same concern we had when we found out there problems. The typical response is 'what do you want me to do?' And our answer to that is the same thing that we did, 'go get opinion of counsel.' The second thing we are offering up is for people to come to our offices in Lindon, Utah, and go under non-disclosure and take a look at the evidence that we are talking about. We'll be glad to accommodate that.
VB: If people want to fight you, do you have the resources to take on a lot of Fortune 500 companies and a lot of global giants, and IBM, simultaneously?
McBride: We're not trying to go fight people with this right now; we're trying to let them know about the problem. We didn't send out a fight letter. If you look at the letter it's really more of a notification letter. The responses that have come back have been more of an educational nature,i.e., 'help me understand what it is.' So we're trying to help accommodate that and help given understanding to where the problems are.
VB: Ultimately, at the end of the day, is it about settling individually with some Fortune companies and varieties of others, or is there some other remedy that might be amenable to you guys?
McBride: I think there are multiple paths for how this can get ultimately resolved and rationalized. We're not really stating that this is the path. We think it's a very complicated situation that we are dealing with. You have vendors that don't want to own a Linux OS because of intellectual property issues involved; that's been a well stated fact for a long period of time now. You have vendors that distribute the code and issue a license agreement that says 'we do not warrant the intellectual property validity of this product.' You have developers that are contributing code that are on the honor system and there's not a policeman to check in the code at the Linux kernel level to ensure that there are not violations. So, there are a lot of moving parts to this problem, and we're not pretending to have all of the answers right now. But, one thing that's interesting, T.C., is if you look at the online music business and the path that that's gone through over the past few years, it started off where Linux is now where millions of people around the world were excited about online music, Napster, because it was music for free. You now have millions around the world that love Linux because it's Unix for free. Free models have a way of not sustaining for a long period of time. And I believe that's the case here as well. But if you look at how the evolution continued on the music side, you have the [Apple] iTunes product line that came out two weeks ago and in the first week you have over 1 million songs that are downloaded for a buck a song. I believe that at some point, you are going to see a more rationale business model attached to Linux than something that is called 'free software.'
VB: I have heard this [comparison] before, but the one thing that those who say this isn't an apples to apples comparison is that there was no question in the world of online music who owned the intellectual property. It was out and out thievery. In the Linux case, some say there's a broader interpretation of who does own things. I guess you guys are stepping forward and saying 'well, from our perspective, at least, it's pretty clear cut.'
McBride: I don't think you are going to have any challenges worldwide with the argument that SCO owns the majority of the Unix operating system intellectual property. The arguments will come in that we don't all of it. And that is a challenge in this case, versus the online music business, I would agree with that.
VB: What are the Red Hats of this world, the other distribution companies, doing?
McBride: It's a good question. We have had over the last six months, various discussions with distributors about intellectual property issues and how to resolve them. We've worked with these guys on the front end. We've thrown out different models. We've looked for ways of working together and we've been politely told that they are not interested in working out those kind of deals.
VB: Hmm.
McBride: They were polite, though. [laughs] They let us know in a very kind way.
VB: How about Linus [Torvalds] himself?
McBride: Similar kind of situation. In that case, we just didn't hear anything back. We sent off an e-mail and didn't get any response back.
VB: I've looked at some of the message boards and seen the comments. You guys, I think, probably were smart enough to expect some of that. But, does any of that resonate or change your thinking or influence how you are approaching this?
McBride: The Linux community on these message boards will get very vocal, many times without even understanding what the underlying issues are. So it's a little bit like being Shaquille O'Neil and driving home from the game that night and listening to the call in show. It can drive you crazy if you listen to every fan that calls in or non-fan. And these chat boards can drive you crazy if you try and follow the logic, or lack thereof that goes on on some of these boards. So I believe what we have to stay focused on is what is the right thing and stay focused on what is the right thing at an industry level and what is the right thing at a customer and industry partner level, and, in the end, try to apply some leadership to the equation to problem to help resolve things.
VB: Is there anyway to get a real Linux version from your perspective without violating SCO IP?
McBride: Based on the understandings we have right now, we don't see how.
VB: Shift gears for me and take a look at the progress made to date, or where do you stand in regards to the legal activity with IBM?
McBride: Right. In that particular case, they came back with the response a couple of weeks ago that basically filled several pages [with] denials. Our attorneys are calling this the whip-lash injury response, which is full of denials and doesn't really say anything. So, we don't have much to gauge based on what they came back with. In that particular case, the next interesting benchmark or time frame to look at is June 13th, which is the time that the AIX license comes due. We had to give them notice on the termination of AIX of 100 days, and that deadline will be due on June 13.
VB: You're kind of going past me a little, what's the net that I need to know about that?
McBride: So, at the same time we filed the lawsuit against IBM for the misappropriation of trade secrets and other things, we sent a letter to IBM informing them of a material breach of their AIX contract with us. And, based on the contract stipulation, we can terminate their AIX contract based on material breach of it. We would send out a notice, a 100-day notice letter, and at the end of the 100 days, we would have the right to terminate that contract. So we are about 28 days to go on the countdown of the AIX contract.
VB: What's to prevent IBM from scooping up all your shares on the open market and doing business with you that way?
McBride: Well, they'd have to scoop up all the shares from one shareholder, first, that basically owns about 50 percent. It's not as simple as it would be with many public companies that have 95 percent of their stock in the public float, or 80 percent. The point is we have one shareholder%85 whom they'd basically have to convince to make that happen.
VB: Lastly, it's a roll of the dice. You're getting headlines, both positive and negative. Is this the course you wanted to take for SCO? Is this proving to be a bigger distraction than you anticipated? What are your thoughts there?
McBride: Well, we didn't go into this trying to get headlines. We went into this trying to protect and defend our crown jewels. We own the Unix operating system, which is one of two main operating systems in the world. There's Windows and Unix. Microsoft owns the Windows operating system and SCO owns the rights to the Unix operating system. It's an extremely valuable property that has not been as polished up and played out in the market place as it could have been over the last couple of years. And that's the path that we are going down. We are very proud of our heritage on Unix. We believe it has an incredible life ahead of it, and by focusing more fully on that Unix core OS and then our extended SCOx web services strategy that wraps around it, we think we have an incredibly bright future. The quarter that just passed, our second quarter ended April 30, we just gave guidance on [on May 14.] Our revenue, sequentially from Q1 to Q2 has gone from $13.5 million to $21 million. We have hit our first operating income quarterly [target] in the history of the company. We just didn't eek out an operating income number; we blew it away. We are going to announce around $4 million of operating income for the second quarter. These numbers going up are a function of the renewed emphasis that we put on Unix last fall. As you remember down in Las Vegas last fall, it was an unpopular thing to do at the time to come out and say we are the Unix guys. But you can see after a few quarters of focusing on that core asset, financially we are doing better as a company.
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