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Monday, July 7, 2003

Let's Play Clue

Back in August of 2001, Caldera predicted, "In two to five years Linux will surpass where Unix is now."

That's before IBM allegedly contributed the AIX code to Linux, according to SCO's Complaint. Yet, back then, Caldera already knew it was going to happen. How, then, could they, with a straight face or without suddenly sprouting a very long nose, say Linux was not serious competition and could never equal UNIX without IBM's contributions?

Also, take a look at the chart on Caldera's 2003 Proxy Statement Pursuant to Section 14A on page 33, and you will see the graph pointing almost straight down since 2000. As Caldera's 10Q for April 30, 2001 put it succinctly:

"WE HAVE NOT BEEN PROFITABLE AND WE EXPECT OUR LOSSES TO CONTINUE. Caldera has not been profitable. The server and professional services groups recently acquired from SCO have not been profitable and their revenue has been declining. . . .For the three months ended April 30, 2001, we incurred a net loss of approximately $11.7 million. As of April 30, 2001, we had incurred total net losses of approximately $78.0 million since the inception of our business in 1994. As a result of the acquisition of operations from SCO, we expect to continue to incur net losses because we anticipate incurring significant expenses in connection with the integrating of the businesses, developing our products, hiring and training employees, expanding our market reach, building awareness of our brand and integrating the products offered by the server and professional services groups of SCO."

Their 10Q for January of that same year says pretty much the same thing, though they say they hope to be profitable eventually:

"We have never been profitable and do not expect to achieve profitability until at least fiscal year 2002."

Later, in April's 10Q they admit frankly that their business strategy was unproven:


"Our business model incorporates as integral elements of our product offerings both commercial products and open source software. We know of no company that has built a profitable business based in whole or in part on open source software. By incorporating open source components in our product offerings, we face many of the same risks that other open source company's experience, including the inability to offer warranties and indemnities on products and services. In addition, by developing products based on proprietary technology that is not freely downloadable we may run counter to the perception of Linux as an open source model and alienate the Linux community. Negative reaction such as this, if widely shared by our customers, developers or the open source community, could harm our reputation, diminish our brand and decrease our revenue. Our business will fail if we are unable to successfully implement our business model."

That is, of course, exactly what happened. The Linux community did react negatively. Yet, they knew they needed to appeal to the community in order to be successful:

"Our business model also depends upon incorporating contributions from the open source community into products that we open source. The viability of our product offerings depends in large measure upon the efforts of the open source community in enhancing products and making them compatible for use across multiple software and hardware platforms. There are no guarantees that these products will be embraced by the open source community such that programmers will contribute sufficient resources for their development."

Well, duh. And they acknowledge another big risk factor:

"Our strategy for marketing Linux solutions to businesses depends in part upon our belief that many businesses will follow a trend away from the use of networked computers linked by centralized servers and move toward the use of distributed applications through thin appliance servers, or specialized servers, Internet access devices and application service providers. We also are relying on electronic solutions providers making these technologies available on Linux and on Linux then becoming a desirable operating system under these circumstances. However, if businesses, which at present favor Microsoft and other non-Linux operating systems, do not adopt these trends in the near future, or if Linux is not viewed as a desirable operating system in connection with these trends, a significant market for our products may not develop."

So, did IBM damage a thriving business? Or might there have been other factors? Surely even if they had, this at a minimum would seem to speak to the issue of damages. All of Caldera's SEC filings from 2001 onward are here, by the way, if you want to go digging yourself. Or, if the link won't work, go to this page and search for Caldera. More on their financial troubles here and here.

Yet in SCO's complaint, they told this story to the judge:

 "40. The simplicity and power of this 'UNIX on Intel' business model helped SCO grow rapidly.  SCO gained other large enterprise customers such as CitiGroup, K-Mart, Cendant, Target Stores, Texas Instruments, Walgreens, Merck, Sherwin Williams, Radio Shack, Auto Zone, British Petroleum, Papa John[base ']s Pizza, Costco and many others. 

"41.  As Intel[base ']s prominence grew in the enterprise computing market, SCO[base ']s early version of OpenServer also grew into the operating system of choice for enterprise customers who wanted an Intel-based computing solution for a high volume of repetitive, simple computing transactions. . . .

"53. SCO was ready to offer large enterprise customers a high-end UNIX computing platform based on inexpensive Intel processors.  Given the rapid growth of Intel[base ']s performance capabilities and Intel[base ']s popularity in the marketplace, SCO found itself in a highly desirable market position.  In addition, SCO still had its SCO OpenServer business for retail and inventory-targeted functions, with its 4,000 applications in support. 

"54.  Prior to the events complained of in this action, SCO was the undisputed global leader in the design and distribution of UNIX-based operating systems on Intel-based processing platforms. . . .

"77.  As long as the Linux development process lacked central coordination, its direction was primarily aimed at meeting the computing needs of the Linux programmers themselves.  As such, it posed little or no practical threat to SCO or to other UNIX vendors since the Linux developers did not have access to sophisticated high-end enterprise class multiprocessor systems, nor did they have any particular interest in supporting such systems.

"78.  The entire direction of Linux development changed with IBM[base ']s entry into the open source community and its concerted efforts to control the community for its own economic benefit.

"79.  In furtherance of its plan to destroy its UNIX competitors, IBM has announced its intention to make Linux, distributed to end users without a fee, the successor to all existing UNIX operating systems used by Fortune 1000 companies and other large companies in the enterprise computing market. . . .

"124.   As a result of IBM[base ']s breaches before termination, SCO has been damaged in the marketplace for violations by IBM in an amount to be proven at trial, but not less than $1 billion."

Either they are in deep denial, or they hope the judge is clueless, or the attorney isn't too familiar with tech history. Or the Iraqi Minister of Information wrote it? This judge isn't clueless, so that leaves... hmm. . .Maybe the para wrote it. You think?

Another thing: Caldera is known to have had teams of programmers deliberately trying to make a combined UNIX and Linux product back when it was Caldera. Caldera's entire business model back in 2000 and 2001 was merging Linux with UNIX. Ransom Love, then CEO, even announced he planned on open-sourcing UNIX eventually, and it was in that spirit that Caldera's "April 30, 2001 10Q said:

"In May 2001, we completed the acquisition of the server and professional services groups of SCO. This acquisition significantly increased our personnel, products, operations, and geographic locations. One key issue will be the integration of Caldera's Linux product offerings with SCO's UnixWare product offerings. This product line integration will involve consolidation of products with duplicative functionality, coordination of research and development activities, and convergence of the technologies supporting the various products."

In this interview, Love is clear about the goal of merging the two, all the way to high end:

"With UnixWare we can now take Linux to 32-way systems. And while we are not going into the embedded space, we will concentrate on thin-client implementations as well as those server implementations.

"With the technology we have we want to move into the high end, and the Unix kernel is two to three times more scalable than the current Linux kernel. But there are always trade-offs in putting everything into a single kernel, so what we want is a single-build environment, so we have to create a single application layer.

"On IA32 you can run smaller applications on Open Linux, or bigger back-office applications on OpenUnix, while on IA64 you have OpenLinux and IBM's AIX5L, which shares 70 percent common code with UnixWare. When we talk about unifying Unix and Linux, the two have a huge amount in common. A lot of people are running their businesses on Unix, while Linux has a tremendous population on Web servers and other front-end servers. So we are taking both and combining them into one platform. . . . Our mission is to enable development, deployment and management of a unified Linux and Unix operating system."

Here's another one. This article from February of 2001, said, "The partner push will involve cross-selling and cross-development between the UnixWare and Linux communities."

And they were doing this at the same time that Project Monterey was going on. Here's a snip from their Form 425 filed with the SEC at the time of the acquisition of Santa Cruz' assets in 2000:

"23. Will the new company promote both Linux and UNIX products?

"The new company will focus on providing an Open Internet Platform (OIP) for eSolution Providers (eSPs.) Open Internet Platforms will be based on Linux, UNIX and Monterey 64.

"24. What does this mean for Project Monterey?

"Caldera, Inc. will carry the responsibilities of Project Monterey forward though the dvelopment of comprehensive commercial grade software. Project Monterey will be one of the products offered as part of the Open Internet Platform.

"25. Is the new company planning to participate in the IA64 Linux Project?

"Yes. Both Caldera Systems and the Server Software Division have participated in the development of the IA64 Linux Project and will continue to collaborate as Caldera, Inc."

And in their 8K dated May 14, 2001, there is a press release from a week earlier, in which the plan is plainly laid out, calling the new strategy "Unifying UNIX with Linux for Business."

As recently as their 10K filed January 29, 2003 for the fiscal year ending October, 2002, SCO referred to their UNIX engineers setting goals for Linux:

"The Linux operating system continues to pursue the goals laid out by the UNIX engineers, but at an accelerated pace. Linux not only adheres to open standards, but is built and maintained by a worldwide group of engineers who share the common goal of making open systems and open source ubiquitous. The increasing demand for anytime and anyplace access to information can only be satisfied in an environment where programs can be connected seamlessly. For these and other reasons, the same OEM's who embraced UNIX years ago are adopting Linux today. Linux can be used to power many of the current and future internet and software needs of businesses, academics and technical institutions around the world. Specifically, the benefits of Linux include: comprehensive internet functionality; flexibility, customizability and stability; interoperability with multiple systems and networks; low acquisition and maintenance costs; and compliance with technical and communication standards. . . ."

Next, they say that while UNIX sales weren't outstanding, they seemed to have stabilized:

"Sales of UNIX-based products and services have historically been declining. However, in the last three quarters of fiscal year 2002, our revenue stabilized at approximately $15.5 million per quarter. . . . We . . . anticipate that our SCO OpenServer and SCO UNIXWare products will continue to provide a consistent revenue stream, although they will represent a decreasing percentage of total revenue. These UNIX products have a strong customer base and constitute a well-known brand with a reputation for quality and reliability.

Now, there wasn't a complete merge of the code, by any means, and Love never did open source UNIX SystemV, although he did release some older UNIX code, but for sure their programmers, just to make the two OSs work together smoothly, had to work with both codes.

And there was another party involved for a while too -- HP, whose UNIX flavor also stems from SystemV, as you can see from the incredibly clear chart, used here with permission, and originally in this article:

"SCO acquired UnixWare 2 and the UNIX source code from Novell in 1995 and entered into a partnership with HP in the ongoing effort to develop a 64-bit version of UNIX. With the sale of UnixWare and the UNIX source code to Caldera, Caldera will step into the shoes of SCO in the continuing effort aimed at Intel's 64-bit target."

According to the Register's Andrew Orlowski, he and other reporters heard SCO say that they had taken a slice of the Linux kernel and put it into UnixWare, but the next day, after a huge uproar, SCO denied it, and said it wasn't so.

If you are curious to know HP's take on UNIX, this article gives their rosy prediction and recommendations. ("Use us!" Natch.)

There is one more horrible possibility: that someone took Sun's almost-open-sourced-but-not-really code and fell into "The Solaris Trap" that LWN warned about in 1999. Solaris has SystemV roots too, as you can see on the chart.

Speaking of history, if you're needing to brush up on your UNIX history, you might like to read Bell Lab's page. Or, for more UNIX history, although it's talking about its very beginnings, not the SCO mess, you might enjoy Dennis Ritchie's memories of when UNIX was still fun.

So, if there is identical code, which has not yet been proven, whodunnit? Your educated guess is as good as mine. But does IBM appear to be the only possibility? That's what the trial will determine, and SCO will no doubt argue that even if they can't prove exactly who did it, IBM is still liable because they encouraged it by their statements. But from what we have seen so far, and with so many suspects to choose from, Colonel Mustard in the Library with the Wrench seens as good a guess as any.

comment [] 4:38:52 AM    

Something Seems Off in SCO's Claims

I have been pouring over 10Ks and 10Qs and every other SEC filing I can get my hands on, and one thing is very odd about SCO's claim in its complaint, that IBM's support for Linux is killing UNIX. I checked some other companies that sell UNIX, and while all companies are struggling with the economic downturn, including even IBM, both HP and IBM say that their high-end servers are selling well. Surely, if IBM's contributions were destroying the UNIX market, HP would be feeling it too, not just SCO? Or is that logic too simple?

Here's a snip from IBM's 10Q for 5/14/03:

"Revenue from pSeries UNIX servers decreased in 2002 versus 2001 although high-end pSeries server revenue increased in 2002 versus 2001."

They aren't having any trouble making money from operating systems software either, according to the 10Q for this past March:

"Operating-systems software revenue increased 8 percent to $568 million (2 percent at constant currency) in the first quarter of 2003 when compared with the year-ago period. The increase in the first quarter revenue was primarily driven by higher revenue across all of the eServer software products. Software gross profit dollars increased 12.7 percent and the gross profit margin improved 3.5 points versus the first quarter of 2002. Lower support and services costs contributed to the increases in 2003 versus 2002."

So in what way is Linux destroying business? Here's what IBM says about its support of Linux (not much):

"Technology Innovations[~]IBM has been moving away from commoditized segments of the IT industry and into areas in which it can differentiate itself through innovation, and by leveraging its investments in research and development (R&D). Examples include IBM's leadership position in the design and fabrication of Application Specific Integrated Circuits; work on designing smaller, faster and lower-power-consuming semiconductor devices (using such innovations as copper technology, silicon on insulator, silicon germanium and low-K dielectric); work to design "autonomic"or self-managing computing systems and build the "grid" computing networks that allow computers to go beyond sharing communications and actually combine processing power; and the company's efforts to advance open technology standards such as Linux."

What it says about open standards is a bit more eloquent:

"Open Technology Standards[~]'Open standards' is not a complex high technology catch phrase. The way we use electricity is a good example of an open standard. The outlets in each house and business universally accept any electrical appliance. An example of closed standards would be if every television maker required people to buy a certain type of electricity, perhaps from the television maker itself. So if you wanted to switch television brands, you would also need to rewire your house's electricity. In many ways, this is how the technology industry is today. Many different software products do not run on certain hardware or are not compatible with other software. Certain hardware does not communicate with other hardware. Open standards will solve this situation.

"The broad adoption of open standards is essential to the computing model for e-business on demand. Without the open standards that enable all manner of computing platforms to communicate and work with one another, the integration of any customer's internal systems, applications and processes remains a monumental and expensive task. The broad-based acceptance of open standards[~]rather than closed, proprietary architectures[~]also allows the computing infrastructure to more easily absorb new technical innovations. IBM is committed to fostering open standards because they benefit customers, because they are vital to the on demand computing model, and because their acceptance will expand growth opportunities across the entire IT industry."

So that's why they are doing what they are doing, according to this exhibit attached to their 10K for 2003. All the IBM SEC filings are here.

Hewlett Packard also was not singing the blues about high end offerings, according to this January 31, 2003 quarterly report:

"The combined company revenue decline across business critical server products in the first quarter of fiscal 2003 reflected the ongoing decline in enterprise capital spending as customers continued to delay purchases, coupled with competitive pricing. UNIX® server revenue declined in all business units excluding the high-end, and in all regions excluding Asia Pacific. Revenue declines in low-end and mid-range products were moderated by revenue growth in high-end UNIX® servers which reflected continued strength in Superdome products. The increase in UNIX® server revenue in Asia Pacific was due to a mix shift toward mid-range and high-end servers. NonStop servers continued to be impacted unfavorably by weak spending in the telecommunications and financial services industries.

"The revenue decrease in industry standard servers for the first quarter of fiscal 2003 was attributable primarily to declining average selling prices as price reductions were taken in all regions due to the competitive environment, as well as a continued mix shift toward low-end products. . . .

"The improvement in gross margin was driven by gross margin improvements in software and business critical servers. The software gross margin improved due to a mix shift toward higher-margin OpenView products and services. The gross margin improvement in business critical servers reflected a mix shift toward high-end UNIX® servers, lower product costs reflecting favorable pricing on components and lower warranty expense from continued high quality on UNIX® servers, offset in part by competitive pricing across all business critical servers."

So, could it be that SCO just isn't doing something right? Both IBM and HP offer both UNIX and Linux, and they aren't experiencing what SCO says it is experiencing.

Oh, and by the way, SCO VP Broughton sold another 5,000 shares on June 30.

comment [] 12:56:44 AM    

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