SCO licensing drive helps swell profits

The SCO Group has reported a profit in its second financial quarter, partly as a result of its SCOsource initiative to collect...

The SCO Group has reported a profit in its second financial quarter, partly as a result of its SCOsource initiative to collect licensing fees for its Unix operating system software.

That initiative includes the filing of a $1bn lawsuit against IBM, which alleges IBM engaged in illegal practices to damage SCO's Unix operating system software and benefit IBM's Linux business.

This is SCO's first profitable quarter since the company was founded as Caldera in 1994, said SCO president and chief executive officer Darl McBride.

Since 1994, the company has gone through a variety of transformations and reorganisations until its most recent name change to SCO.

SCO reported net income of $4.5m on revenue of $21.4m for the second quarter, ending 30 April, compared with a net loss of $6.6m on revenue of $15.5m for the same quarter in 2002.

SCO reported a net loss of $724,000 on revenue of $13.5m for its first quarter of 2003, which ended little over a week after the launch of SCOsource.

In 2003's second fiscal quarter, SCO generated $13.1m in revenue from its operating systems business and $8.3m from SCOsource .

SCO expected SCOsource  to continue generating revenue in coming quarters. The company has more than 6,000 licensees of its Unix operating system software.

SCOsource was announced in January along with SCO's hiring of attorney David Boies and his law firm Boies, Schiller and Flexner to examine possible intellectual property infringements.

In March, SCO sued IBM for US$1bn alleging misappropriation of trade secrets, unfair competition, interference with contract and breach of contract regarding the Unix software SCO has licensed to IBM. SCO charges IBM with engaging in these allegedly illegal actions to benefit its Linux business.

McBride reiterated yesterday that SCO firmly believed it has a strong case against IBM and stands ready to make good on its threat to revoke IBM's Unix licence, which IBM uses for its AIX Unix flavour, if the companies fail to reach an agreement.

The deadline set by SCO for revoking that licence is 13 June. At that point, SCO will decide how and when it will proceed.

Since the filing of the lawsuit, SCO executives have said the company has evidence that proprietary Unix from SCO has been copied illegally into Linux software, including the Linux kernel, allegations that have made the company very unpopular in the Linux community.

SCO had three teams independently examine Linux software and all three teams concluded there is significant misappropriation of SCO Unix code in Linux, McBride claimed.

Specifically, SCO claims all Unix flavours in use today are based on Unix System V, whose software code and licensing rights SCO owns. Novell yesterday issued a statement saying it did not transfer Unix System V copyrights and patents when it sold the software to SCO in 1995. SCO countered by saying that it owned "contract rights" to Unix and that its lawsuit against IBM does not involve patents or copyrights.

The language in 1995's contract was confusing regarding the transfer of copyrights and patents, but SCO attorneys concluded that there is no question SCO acquired those copyrights and patents, McBride said.

SCO also announced recently it was suspending its own Linux business, which generated a small percentage of its revenue, and sent letters to about 1,500 large companies warning them they could be held liable for intellectual property violations related to their use of Linux software.

The liability stems from provisions some Linux suppliers include with their products which shield them from intellectual property violations stemming from Linux code, effectively passing the "hot potato" to the end-users who buy the products, McBride said.

McBride acknowledged many Linux backers are angry at SCO, but said likewise there are many companies that think SCO has a valid claim and have approached SCO with questions and concerns.

Linux is an operating system that can be obtained free of charge and whose source code can be modified, copied and redistributed by anyone. In addition to the kernel, which is developed by Linux Torvalds and volunteer programmers worldwide, it also includes GNU operating system software from the Free Software Foundation Inc. SCO said recently it hasn't yet found infringements to its proprietary code in GNU software.

SCO expected third-quarter revenue to be in the range of $19m to $21m, with two-thirds coming from the operating systems business and one-third from the SCOsource licensing initiative.

So far, SCOsource has signed two licensing deals, so the potential for more business in the pipeline is very big, McBride said.

SCO is also counting on its forthcoming SCOx web services strategy to boost revenue in coming quarters.

Juan Carlos Perez writes for IDG News Service

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