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Thursday, September 25, 2003

Visions of Ka-ching Dance in Their Heads

When SCO CEO Darl McBride wrote his open letter last week, he seemed to indicate a hope there could be a viable future partnership between his company and Linux. There is more than a hint as to what that partnership might be like in two research papers prepared back in March and April by Renaissance Ventures, a VC firm that invested in SCO.

The first document is an explanation of Renaissance's reasons for thinking SCO was a good investment. I know you've been wondering what in the world those folks in the stock market have been thinking. The second is an analysis of the SCO v. IBM lawsuit. They are both so blazingly wrong in both facts and conclusions that I fully grasp for the first time how some people may have invested in SCO, based on such misinformation.

First, the investment document. It is based on SCO's telephone conference call in February of 2003. You can listen to it yourself on mp3 here. Renaissance thought it sounded like SCO's bottom line was about to get "prettier" because they believed what SCO reportedly told them in that phone call, namely that most companies were reacting to the new SCOsource licensing program in a positive way.

Renaissance also bought the story -- hook, line and sinker -- that SCO owned the UNIX tree trunk, so to speak, and that all other versions of Unix were branches, or derivatives, off of their tree, including, so they imagined, Linux. (I'm using their language, by the way. They actually mean GNU/Linux, the kernel plus the applications, not Linux the kernel.) They planned on hijacking the GNU/Linux applications and if that meant the death of Linux, so what?

That's their business proposition? And GNU/Linux gets what out of this, other than ripped off and ruined?

Their original strategy was based on the fantasy that the world was clamoring for the ability to stay with UNIX and yet run GNU/Linux applications, and there they'd be, like a troll hiding under the bridge, ready to exact a toll on all those wanting to cross.

SCO, in their daydream, thought they could be the gatekeeper making it possible for companies already on UNIX to sort of transition to Linux, which they knew everyone wanted to do, without leaving their UNIX environment behind. Next step? Backcharge for UNIX shared libraries they believed had been used inappropriately and start scooping the money up in royalties for UNIX code.

Why they imagined companies would rather follow that convoluted, expensive route instead of just running Linux itself is one of those mysteries the tech community can never solve, because it's not based on technical realities but on financial yearning. The tech makes no sense at all. But the ka-ching started ringing in Renaissance's ears, and you know how compelling that can be, like when your telephone starts ringing and you think you have to answer it. But the whole structure is based on a lack of technical knowledge and not enough true facts and a grievous miscalculation about the market. If ever there was a situation illustrating the importance of CEOs and financial analysts comprehending tech, this story is it. Money got invested in a dream that isn't coming true.

Let me let you read it for yourselves, because it's beyond my descriptive abilities to capture all the repulsive nuances, not that this is a subtle document. They begin by describing the conference call and then explain the math potential as they see it:

"We believe management's forecasted $10 million of SCOsource revenue in 2Q represents near-term settlement of possible license violations in arrears (related to heretofore unlicensed use of the SCOsource shared libraries) from one or more large vendors of Linux solutions, but we are unable to glean more specifics at this time. . . . SCO management also stated . . . that the vast majority of interactions with customers and other software vendors with respect to the SCOsource initiative were positive. Our view is that lumpy, and possibly large, bookings of SCOsource license fees will continue for several quarters while these negotiated settlements of prior license violations in arrears work their way through the pipeline. SCO's resulting balance sheet should soon look a lot prettier, though we doubt the market will value such lumpy SCOsource fees as part of a consistent and predictable earnings stream -- until all or most SCOsource arrearages are cleared and these license fees become part of normalized product revenue.. . . We currently estimate the net present value of SCOsource 'Extraordinary Items' (arrearages settlements related to prior license violations . . . to be $35.8 million or $3.18 per share, exclusive of the company's current cash generating status and its earnings power based on current and new products."

So much for experts. How much of that came true? But prior violations? What could that mean in the Sun/MS licensing picture? Or maybe the Renaissance pundits missed the boat on that guess too.

The vast majority reacted positively? Was that truthful? Were investments made based on that information? Well, for sure Renaissance bought in for that reason, at least in part, and we know that because they say so in this paper. The report also mentions that "SCO effectively owns the root of the UNIX tree that has branched -- through license agreements with SCO and its predececessors -- into various flavors of UNIX, including IBM's UNIX ('AIX'), Hewlett-Packard's UNIX, Sun Microsystems's UNIX, Silicon Graphics' UNIX and Linux; and Linux is derived from UNIX."

That isn't accurate either. Linux is not a branch off of the UNIX root. If people invested based on a belief that Linux is a derivative of UNIX, they got snookered.

It gets more misguided as the report continues. They say they think a "large and growing number of business enterprise customers desire to marry their existing UNIX applications and environments to Linux products, and because of the legal need to license the UNIX shared libraries from SCO, it will drive many customers to SCO's products (that include the shared libraries) in preference to the products of other Linux vendors."

Says who? Dream on, fellows, dream on.

They do. They say that because Caldera has spent years "marrying" Linux and UNIX, it can now "deliver its legacy UNIX customers a migration path to robust, new Linux-based business software applications and server products." Because they believed that all such Linux/UNIX integration projects "require the UNIX shared libraries to port UNIX applications to Linux" and that many systems integrators "have made unlicensed copies of these shared libaries from other non-SCO sources," the licensing program would be a money maker for SCO. They note a January study by Goldman, Sachs that said Linux would emerge as the dominant operating system in corporate data centers, so in Renaissance's mind, this meant dollars and more dollars as far as the eye could see for SCO, the gatekeeper.

They imagined a market for the offspring of this unholy marriage Caldera had brokered, the hybrid UNIX/Linux monster, and so they decided to hog that area of the enterprise market. The problem with the plan is, there doesn't seem to be a huge market for what they are offering.

So there you have it, ladies and gentlemen. What Sco Wanted and why some invested in what they thought would be a sure thing. SCO would spiff up its legacy code with the new and robust Linux applications and products and make money -- from the hard work of thousands of good-hearted and creative programmers who volunteered to give free software to the world and were beating proprietary UNIX in the market. They thought Linux needed its UNIX shared libraries to go forward, so that, in their mind's eyes, equaled "Profit". They now have done an about-face and are offering the Linux Kernel Personality so customers can escape from Linux back to UNIX, but that's another sad story.

And the killing off of Linux? If it led to profit, so be it, according to the Renaissance analysis:

"One possible outcome of the IBM lawsuit is the death of Linux, in which case, we believe, SCO owns the bulk of the intellectual property -- the 'root of the UNIX tree' -- for the world's dominant, hardened enterprise operating system. Certainly software markets would be in disarray, but given the practical alternative to unplugging the lights, we believe a worst-case scenario of the world abandoning Linux and flocking back to UNIX would not be so bad for SCO. SCO once held the dominant UNIX market share, and we believe SCO's current management team is capable of delivering that again if it needs to do so."

Hmm. This is a stickup, as business model. So, this entire legal scheme was built on mistaken facts, not enough tech comprehension, and a moral vacuum. All Renaissance needed to do was ask one of their sysadmins and he could have explained in less than 5 minutes that they were barking up the wrong tree. Linux isn't a derivative of UNIX, it doesn't need UNIX shared libraries and it can live without everything SCO "owns", which isn't, by the way, all of Unix, merely one flavor.

I think computer science 101 needs to be taught in business school. Maybe a refresher course in ethics would be good too.

The world can't afford to let boneheads make decisions that affect all of us. Do we want tech idiots with their finger on the button, so to speak? Software runs the world now. The economy, the world's security, business, the military, education, governments, even the entertainment world, which represents the US' largest export (at least that's what they told us when they passed the DMCA), all depend to one degree or another on software, and GNU/Linux software is playing a significant role in all these fields. I think you could make a reasonable argument that GNU/Linux is too valuable a resource to allow a group of greedy, small-minded idiots to disrupt its progress. Not that I'm calling anyone in particular an idiot, mind you. The business model SCO proposes is to kill off the golden goose, GNU/Linux, for short-term financial benefit to themselves. A world that would let that happen would be foolish indeed.

What makes GNU/Linux software work is the open source model, the ability to share ideas and work together freely. It's not communism. It's the scientific method, which works well for physicists, doctors, and researchers. It's ideal for software creation too.

If they are allowed to achieve their dream, SCO would close off the software, block the sharing, and the ideas would dry up. They are too shortsighted to care. But somebody needs to.

What about the Renaissance paper on the lawsuit? It's equally illuminating, particularly with regard to whether or not SCO had any thought of suing Red Hat prior to Red Hat filing suit against The SCO Group. There is an entire section on Red Hat, written by those Renaissance scholars. Your first guffaw will occur when you read that United Linux is causing Red Hat to have to play catch-up in "the enterprise space":

"We believe SCO is the top of the food chain in a Red Hat/SCO Group universe".

Ah, yes. If wishes were fishes. Why do these financial wizards reach such a fascinatingly wrong conclusion? Because SCO follows a business model they have seen before and recognize; it gets 80% of its revenue from software sales and subscriptions (back then) and Red Hat gets about half its revenues from services, not from sale of software "which carries higher profit margins", the report says. So, they thought SCO would end up top dog because it is following an old-fashioned business model they understand, because they've seen it before. Were they right about United Linux and Red Hat?

The undeniable fact that software is becoming a commodity is not on their radar at all, so they don't see that there is little future in that quaint business model SCO clings to for dear life. It's impossible to resist sharing one last little snip of their wisdom, their prediction in April that IBM was sure to settle the lawsuit:

". . .SCO refers customer inquiries related to resolving any unpaid licenses back to IBM, hence . . . resolution of IBM's customers concerns has become a core business issue for IBM more than an intellectual property dispute, with meaningful impact upon its reputation and relationship with its customers.

"We believe SCO's claims against IBM are well founded and that SCO has additional credible claims it can make against other vendors of Linux products. Please refer to our base report on SCO dated March 6, 2003 for a discussion of the deep intrinsic value of SCO's intellectual property ownership.

"At the end of SCO's 100-day fuse on SCO's contractual cure, on June 13, 2003, SCO has the specific authority per the license agreement to revoke IBM's AIX / UNIX licenses and require IBM to return or destroy all copies of its software products subject to the license. We believe the aforementioned contractual cure would be upheld by the court and mandated upon IBM, and would then wreak havoc on IBM's large corporate customers bringing serious injury to IBM's business reputation and customer relationships, unless the matter is settled prior to trial. We believe the business risk to IBM is too high. Therefore, we believe IBM will settle the case prior to trial."

Now, there's a business model. Destroy your competitor's reputation so they feel they have to buy you to shut you up. Last I looked, they have some legal names for that, which you'll find in IBM's counterclaims. And who do you think they mean in the report when they say that SCO "has additional credible claims it can make against other vendors of Linux products"? Red Hat, maybe? You think? No, we all know that SCO has crossed its heart and hoped to die it never dreamed of suing Red Hat, and since they told that to the court, it must be true.

Finally, here is how Renaissance Ventures describes itself on its homepage and its About Us page:

"Renaissance Ventures, LLC and its affiliates invest in special situations across multiple asset classes including mis-priced equity and debt securities and buyout situations in both public and private markets. Renaissance generally looks for businesses generating positive free cash flow in stable or growing industry sectors where it can apply its operational, strategic and cost savings expertise."

"Renaissance subscribes to contrarian theory and believes the best opportunities now exist in microcap public companies that are orphaned from Wall Street with no institutional sponsorship. We will invest in mis-priced public securities and take an activist role in enhancing returns or sponsor management buyouts of undervalued public companies with high intrinsic value."

So now you know. The world of finance. Feeling like the little boy in the Emperor's New Clothes, huh? Or is it closer to the feeling you get when you pick up a rock and see loathsome creatures crawling around underneath?

comment [] 9:30:06 PM    

Ethics? Or Pure Tech? And Whither Groklaw?

There is a discussion between Dee-Ann LeBlanc and Richard Stallman going on at LinuxWorld that is pertinent. As usual, they both look beyond the immediate and speak about the big picture. First, LeBlanc, in what she calls a cry from the heart, suggests that Linux is in danger of losing its focus:

"SCO, GNU, governments, megacorps, movements, distributions, projects, licenses ... Linux is no longer simply about building the best operating system and tools possible for the sheer joy of it. Our little operating system has grown up. . .but when the politics become more important than the work, will we have lost the heart and soul of what makes Linux great: a community that settles for nothing less than the best?

"I'm not saying that we shouldn't fight the good fight. But between circling the wagons against outer forces and fighting within the various inner factions, it's far too easy to lose focus. Yes, Linux is a movement. Open source is a movement. Let's just not forget that Linux is born of one part experimentation, one part innovation, and a whole lot of fascination with making a technology the very best that it can be."
Stallman responds by pointing out, of course, that Linus didn't start the movement in 1991, but that because many think so, they don't realize that it began with what he describes as a "political" purpose. The word politics has some negative connotations to some of us, but that is the word he has chosen and it's his purpose he is describing, so he gets to choose whatever word he thinks fits best:

"Some go so far as to say that technology should not be sullied by non-technical concerns - espousing an idea of 'pure technology' that explicitly rejects the lesson, so painfully learned from World War II, that engineers have a duty to consider how their work may affect society.

"But you cannot keep your freedom by making technical advance your only goal. In 1983, we computer users had lost our freedom to cooperate: the only way you could buy a modern computer and run it was to sign a nondisclosure agreement, promising not to share with your friends, you could not tell what the program really did, and you could change it only by patching the binary. Regaining this freedom required 20 years of persistent effort, but we can lose it again much more quickly if we fail to defend it."

What particularly grabbed my attention, as I'm sure you've discerned, was the description of computer use in 1983, the part about changing it only by patching the binary. Anything sound familiar to you in that phrase? There is a modern effort to shove us all back to 1983, where you couldn't look at or modify a thing and were stuck in binary-only functionality. That is, to me, the subtext of the SCO story, including the FUD about indemnification.

They want to destroy the GPL, no doubt about it, either by tossing it overboard legally if they can do it or by eroding its freedoms, bit by bit. The Marx Brothers' haircut scene comes to mind: a little snoop here, another snoop there and then, oops, too far. I believe the push for indemnification is part of the plan. No "practical" considerations can be worth going back to 1983.

But having said that, is there any reason why we can't have both? Sleek and elegant technology written by ethical people for the good of all? Isn't that, if you think about it, what we actually do have and are fighting for? If we focus only on the tech and as a result end up back in 1983's tech prison, that's the end of LeBlanc's innovative technology, because no one will be allowed to write and share. And if we ignore her cry from the heart, the operating system won't be the best it can be, and that is a large part of the enjoyment. If ever there was as time to unite and work together, this surely is it, no matter which side we come down on. There is room for all and a need to be alert and give room to the ideas and feelings of others. This, to me, the one thing the community has yet to address fully or to master.

Let me explain: after the open letter came out, I was contacted by a number of reporters. One of them told me this story: he said that his impression of the Linux community was that they are weird, and he was trying to figure out how I could be so seemingly "normal". "Who are you?" he asked, only partly in jest. He meant how did a nice girl like you end up in a place like this? He was a nice guy, so I thought it was worthwhile to ask him what he meant and how he formed that opinion.

He explained that every time he writes about SCO, he gets hate mail, telling him he is an idiot, or worse. Journalists, unlike bloggers, can't introduce their personal opinions into stories, but he felt readers don't understand his position, namely that if SCO folks put out a statement, he has to write what they said, because it's his job. And that's true no matter what he personally thinks.

He's right about that. Of course, I pointed out the flaws we see in the media's coverage so far. But, as another reporter told me when I said the same thing to her, journalists are generalists, not specialists. They have to be able to write about a lot of different areas, but that means they aren't necessarily experts on the subject at hand.

These are rational answers. I told the first reporter getting the hate mail it isn't Grokkers writing to him. I jokingly told him it must be the Slashdot crowd. (joke. I read Slashdot myself, but you know what I mean.) We laughed, but the truth is, there is a problem identified here, and winning the battle may require us to make whatever changes necessary to be more effective. Bradley Kuhn, for example, some years back was willing to cut his hair and put on a suit to reach others who care about such things. He was right to do that and I respected what he did. It might feel good in the moment to vent, but we can be smarter and more committed than that. What is the point of writing ethical software if we mistreat our fellow humans verbally?

We have been given a second big clue. Reporters may not all understand the details of this story, but that doesn't mean they are idiots or sellouts, not that some of them aren't both. But for most, they just don't understand the tech. We can respectfully help.

So, if by any chance anyone reading this has written such letters, would it be good to write again and apologize, explaining your frustration, if you like, or at least from this day forward write only thoughtful, helpful, and respectful letters to the media? The world at large doesn't have the same sense of humor tech people do, so it's easy to be misunderstood when we are horsing around. After these two conversations with the reporters, I believe it can make a tremendous difference in the anti-FUD fight to consider thoughfully their impression of our community and how we can shape it more accurately.

Speaking of the big picture, I have been thinking a great deal about Groklaw's future. The shift to the website plus the Open Letter have meant that I have to think about what Groklaw should become now. Its popularity has grown tremendously, and it has now some recognition. I feel the weight and the responsibility of both those factors. I can't, as one individual, carry the load all by myself, particularly as an afterhours project, and do as well as I want to. It's also clear to me that what is appropriate for a blog isn't appropriate on a news site, and so we have to go beyond my personal views to reflect the broader community, which means accepting some of the restraint the reporter was complaining about.

I have decided to ask some others to step in and help me as editors. I have an attorney willing to handle certain aspects of the law and someone else I've invited to do patent stories, and someone else I have asked to do the technical angles of stories. I will continue to do what I do, particularly legal research, and provide the final oversight, such as it is, which means I can fire them all, ha ha, and shut down the site any time I want. And I'll keep my blog as my own spot for commentary of a certain type. In other words, Groklaw is broadening into a full-fledged investigative news site for stories of particular interest to us in the community, covering legal news. It was that before, but with new editors, it will be able to reflect a broader perspective than just my own.

This means we need more bandwidth or someone willing to mirror Groklaw. Our gracious host has already born a financial burden without a whimper, but if others have bandwidth to spare, even if only in crisis times, it would be wonderful to hear from you. Also, if anyone has any brainstorms on how to make Groklaw pay its own bills without going commercial, as in grants, nonprofit setup, etc., I'm all ears. We can continue as we are, but it would add to the quality if I had more time to devote to Groklaw. Groklaw is a phenomenon, no doubt about it, and no one is more surprised than I am. So now, by making these changes, I'm acknowledging that it's grown bigger than just me, and it's time for some help. I hope to maintain the integrity and tone of the site, while we implement the growth strategy. I'll be providing more details as they develop. As always, your ideas are welcome, and as you see, I do listen.

UPDATE September 30, 2003: I have for the moment decided to leave Groklaw as it is. I have always had an informal board of advisors, and I've enlarged it now. All in this group will be free to write for Groklaw, under my editorial direction. But Groklaw will continue to be primarily what it has always been. I let all the criticism of my stand on HP get to me for a while. But time has shown me I was right anyway, so I have learned a good lesson: to stand on my own, if I must, and to trust my judgment. I'm new to all this, so you could say I'm learning on the job. I want to thank Michael Froomkin especially for his invaluable input, which particularly helped me to think this through and to remember that I've been open and frank about who I am and what I do from day one, including my limitations, and I don't need to be anything but what and who I am to make a contribution. And neither do any of you. We can contribute according to our skills, means, abilities, and that is enough.

comment [] 6:24:19 PM    

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