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SCO's case gets clearer
SGI's code-comparison tactic sheds some light on SCO's case against Linux vendors.
October 9, 2003: 1:56 PM EDT
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - Say what you will about the man, but Darl McBride, CEO of SCO Group, has made a lot of people happy. Specifically, he's made a lot of investors in his Lindon, Utah, software company very happy. SCO stock has been on a tear (shooting from a 52-week low of 78 cents to a recent high of $20.85), trading these days around $16.40.

Most of the run-up can be attributed to McBride's highly controversial decision in March to sue IBM (IBM: Research, Estimates) and other companies for intellectual property violations involving SCO's (SCOX: Research, Estimates) ownership of Unix.

The specter of this relatively small ($215 million market cap) company wielding lawsuits in the murky area of IP has instilled confidence in investors that frequent some of the riskier sectors of Wall Street.

McBride has also made a lot of his fellow SCO executives very happy. In fact, since March, when the first round of lawsuits was announced, SCO executives have sold not insignificant amounts of stock.

Senior vice president Reginald Broughton has led the pack, offloading 70,000 shares since June for an estimated gain of $937,700. Broughton now owns only 95,000 shares in the company.

When I reached McBride on Tuesday at his office in Utah, he defended the executive sales as a simple case of executives finally being able to sell shares that were underwater until the recent run-up. And he argued that the amount sold is "very small" compared with the total number of insider shares owned.

Others, however, aren't so sure.

"I'm not going to cast moral judgment," says George Weiss, an analyst and vice president at Gartner Research. "But there is a sense one gets that the whole lawsuit is a means to generate revenue and quick acceleration in stock price in hopes that a buyout would occur from a deep-pocketed company such as IBM. [The selling] doesn't surprise me."

SCO at a crossroads

SCO investors now find themselves at a crossroads. More information is starting to appear with regard to SCO's make-or-break round of lawsuits. Last week, SGI (SGI: Research, Estimates) -- another company in SCO's legal crosshairs -- conducted its own tests of its product vs. the Unix code owned by SCO, and found "no more than 200 lines" of infringing code out of several million total lines. SGI quickly changed the infringing lines and wrote an open letter to the Linux community explaining its efforts.

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SGI's code comparison gave observers their first glimpse of how much infringement there actually is. Granted, SGI's tests don't carry the same weight that a neutral party's might (SGI is due to lose its SCO Unix license on Oct. 14 unless the companies can reach an agreement), but the 200 lines of infringing code SGI found is a far cry from SCO's claim of 119,130 infringing lines. In SCO's suit against IBM, it claims "over a million" lines of infringing code.

The user community is now taking a three-pronged approach to the SCO effort. First, there's the SGI strategy: Examine the code closely, admit some wrongdoing, and quickly fix it. Second, Hewlett-Packard is offering to indemnify its customers against SCO's claims. Third, there's the tactic IBM and Red Hat are using: Admit no wrongdoing and countersue SCO.

SCO investors need to realize that, in many ways, they're betting on the outcomes of these lawsuits. SCO has engendered so much ill will in the open-source community, it's hard to imagine the company building a sustainable business around its products if it loses these cases.

SCO Group
Tech Biz
By Eric Hellweg

It all comes down to the court decisions, which some observers believe won't be handed down until 2005. If more companies opt to take the SGI route and conduct a code-by-code comparison, investors will get a ballpark sense of the strength of SCO's claims.

But unless a company such as IBM decides to purchase SCO -- something that could happen if IBM's internal review shows a significant amount of infringing code -- these individual vendor code comparisons will just serve as canaries for investors trying to gauge the safety of entering the deep, dark SCO coal mine.

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