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McBride blames IBM, Novell for SCO's fiscal woes

Michael S. Mimoso, Editorial Director

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DCO validates SCO's concerns

SCO Group president and CEO Darl McBride said the Developer's Certificate of Origin announced recently by Linux author Linus Torvalds validates what his company has been saying about the Linux development process.

McBride has alleged from the beginning of his company's multi-billion dollar suits against IBM and Novell that the process is flawed and enables illegal code contributions to proceed into the Linux kernel with minimal checks and balances.

Torvalds has disputed this claim all along, but last month developed the DCO, which each code contributor must sign as to the integrity of their code.

"When we talked to people in the open source community about our intellectual property concerns, their initial response was to address errors in the review process," McBride said today.

The DCO, however, does not address code already included in the Linux kernel, only code contributed going forward. Torvalds recently told SearchEnterpriseLinux.com that he was certain of the integrity of that code.

"If there is one positive thing on the SCO lawsuit is that it has caused a lot of discussion -- most of it has obviously been just flamage and noise, but it sure as hell has made people more aware of the issue," Torvalds said.

SCO Group president and CEO Darl McBride has been somewhat muted despite some brisk recent activity on the company's legal front against IBM, Novell Inc. and commercial Linux users.

This morning, however, McBride had to face the music with shareholders during the Unix vendor's quarterly earnings call, where he reported sharply reduced earnings and sparse revenue from the company's licensing business.

McBride put the blame squarely on his rivals for raising doubts in the minds of potential licensees about the legitimacy of SCO's ownership of System V Unix. SCO has levied a $5 billion suit against IBM, alleging that Big Blue illegally contributed Unix code to the Linux kernel. .

Novell, the original owners of the Unix copyright, said it never transferred ownership of the copyright to the Santa Cruz Operation, a predecessor of SCO, back in the early 1990s. SCO is standing by what it states in the contract between the two parties, that the copyright was indeed transferred.

"We disagree totally with what Novell has said and with what it has put in the public marketplace," McBride said. "We have put all that in front of the court. Now, this is a war of patience that we will let the court work through."

In the meantime, SCO continues to bleed money, reporting that revenue for the last quarter was down more than $11 million year-over-year. SCO blamed the shortfall, which amounted to a net Q2 loss of $14.9 million or $1.06 per share, on the lack of SCOsource licensing revenue. The bulk of this revenue came from its Unix business, the company said.

SCOsource is the arm of the Lindon, Utah, vendor's intellectual property protection and licensing business. SCOsource revenue was $11,000 for the quarter, compared to $8.25 million in Q2 2003. SCO has collected $31,000 in SCOsource revenue since last October.

SCOsource expenses, meanwhile, reached $4.4 million. The bulk of that money is going to the high-profile legal team fronted by David Boies, who tried and won the antitrust case against Microsoft. McBride said those expenses will remain consistent as the court case, expected to reach trial in April, plays out. This week, SCO asked for a delay in the trial until September 2005.

McBride said SCO has been diligent in providing the courts with samples of the code it believes IBM has contributed to Linux. He said IBM has not been as forthcoming.

"IBM is trying to slow the case down," McBride said. "It took IBM nine months to produce AIX code for us. We have been diligently going through that code and will respond to the court. The pieces are on the table. It's in the court's hands.

"Mark my words, there will be a day that will come when you all will see documents that will contradict IBM's public posturing," McBride said.

SCO did announce a high-profile licensee, Web host EV-1 Servers of Houston, in late February. Revenue from that license will not appear on SCO's ledgers until the end of the third quarter, McBride said.

"[The licensing program] is not really slowing down. We have a sense that some [customers] are watching, some are moving [away] and others are waiting," McBride said. "We're not hearing heavy door slams. That's not the way I'd describe it."

We have put all that in front of the court. Now, this is a war of patience that we will let the court work through.
Darl McBride
President, CEOSCO Group Inc.

McBride said SCO will have the cash to pursue its legal fight, despite the recent stock buy-back announced with regard to the investment of BayStar Capital. BayStar announced its desire in April to cash out of its SCO investment and SCO capitulated on June 1, announcing it would buy back BayStar's stock for $13 million and give it 2.1 million common shares of stock, valued at $10.1 million.

"We have enough cash to get us to our destination," McBride said. "We've got the legal firepower and cash necessary."

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