SCO Turns Up Heat on Linux Users

Signaling its intention to turn up the pressure on Linux users, the SCO Group has announced a stepped-up initiative to collect licensing fees from hundreds of enterprises that use both Linux and Unix. Toward that goal, SCO said it has sent out letters warning that it “will take appropriate action to protect our rights.”

The company said the warnings were sent to “select Fortune 1000 companies” that are Linux end users, notifying them that they may be violating the Digital Millennium Copyright Act by using software that allegedly borrows heavily from SCO’s Unix code.

In addition, legitimate Unix licensees were asked to provide written certification that their deployments are in “full compliance” with their source code agreement with SCO and that they have not “breached confidentiality provisions” by giving Linux programmers access to the Unix kernel.

Seat at the Table

The letters offer recipients a chance to negotiate with SCO and appear to be the final warning before SCO proceeds with lawsuits against Linux users, something it has hinted it will do since filing a $3 billion-dollar lawsuit against IBM last spring.

Earlier this month, IBM won a key, if early, victory in the legal saga when a judge ordered SCO to better explain how Linux code is similar to Unix. SCO has until mid-January to respond to that judge’s ruling.

Analysts said the letters could be viewed as either a sign of desperation or a final courtesy warning before suits that are clearly in the works are formally filed.

Message Backfiring?

In a conference call, SCO Chairman Darl McBride said that by the first of the year, there will be “several thousand letters” in the hands of Unix licensees and “hundreds” of letters to Linux users regarding possible DMCA violations. Options for Linux users will range from stopping use of the platform to buying a range of licenses from SCO, he added. McBride also said the company will be booking more Unix license agreements with major companies in coming quarters.

However, IDC analyst Dan Kusnetzky told the E-Commerce Times that SCO likely is scaring away some companies that otherwise might be interested in buying from its software menu.

“Every time they threaten customers, be they their own or Linux users, they are making themselves a less appealing voluntary vendor,” Kusnetzky said. “The legal front could have big payoffs, but as far as winning new customers, it’s clearly not a recipe for short-term success.”

High Stakes

Gartner analyst George Weiss agreed that SCO has staked much — possibly its entire future — on the success of its legal campaigns. While the company stands to reap millions, if not billions, if it is successful, it may be putting its current software business on the line, he added.

“The fact that [SCO] went out and got financing specifically for the legal fight is a red flag,” Weiss told the E-Commerce Times. “It says that the legal matters are what have the company’s attention and focus right now. The outcomes of those cases are what will determine the company’s health, which is a risky proposition.”

Indeed, the IBM case is not likely to reach trial until 2005, and in the meantime, SCO must defend itself against counterclaims by Linux vendor Red Hat and others. That could make it difficult for the company to make strategic moves on behalf of its own software portfolio. “This amount of legal wrangling is bound to distract a company from its mission,” Weiss said.

Mixed Results

The latest maneuvers come as SCO closes the books on 2003 and prepares to ramp up its legal and business efforts in 2004. The company said Monday that it narrowed its financial losses in the fourth quarter and expects to post higher revenues next year, in part because of its aggressive license-collection efforts.

Lindon, Utah-based SCO said it trimmed its loss to $1.6 million, compared with $2.7 million a year ago. The company noted that it would have logged a healthy profit if not for a $9 million charge it took to secure legal representation for its copyright fights.

Revenue was up sharply, rising to $24.3 million from $15.5 million last year, helped by large-scale licensing agreements with Microsoft and Sun Microsystems, who together paid SCO some $10 million in the quarter.

Since launching its legal campaign, SCO has become the subject of controversy and, reportedly, a number of denial-of-service attacks that have taken down the company’s corporate Web site for days at a time.