The Perils Of Prosecuting The Penguin Lawsuits against Linux users have made SCO tons of enemies. What they haven't made SCO is any money--nor are they likely to.
By Seth Jayson

(Business 2.0) – As a business model, it's either incredibly daring or thoroughly despicable, depending on your point of view. First, acquire rights to software you didn't write, some lines of which may or may not be embedded in a competing and more popular program. Then demand a licensing fee from anyone using the rival software.

That, as the entire tech world knows, is how a onetime Linux vendor now known as the SCO Group plans to make its fortune. If it works, SCO, which claims ownership of the rights to the Unix computer operating system, could extract payments from just about every corporation, government, university, and lonely hacker that boots up a system with the Linux platform. In the process, the $79 million Lindon, Utah, software maker and tech-services outfit could transform itself into a Fortune 500 power practically overnight.

Except that it almost certainly won't happen. True, SCO's strategy has had some apparent success. The company hired David Boies, the superstar lawyer who won the U.S. government's suit against Microsoft, to spearhead its legal offensive. In March the company brought suits against DaimlerChrysler and AutoZone, its first against Linux users, though it had already filed against Linux vendors IBM and Novell. AutoZone declined comment, but all the other defendants dispute SCO's charges. Nonetheless, the suits have had a chilling effect: In a recent Gartner survey of IT directors, some 27 percent of respondents said they are slowing deployment of Linux systems for fear of being sued. Most alarming to SCO's opponents, Computer Associates said it signed an SCO license, making it the only large company to do so besides Sun Microsystems, which was protecting its Unix-based Solaris OS, and Microsoft, a noted Linux hater. SCO refused to comment on any part of its litigation strategy.

A Slim Chance

These victories, however, are more symbolic than real. CA says it agreed to the license only to settle a third-party lawsuit, not out of respect for SCO's claims on Linux, which CA executive Sam Greenblatt dismisses as "grasping at straws." Tom Carey, a partner at Boston intellectual-property law firm Bromberg & Sunstein, gives SCO just a 10 percent chance of success. "Anything except literally copying the exact code," Carey says, "would have been within IBM's rights." Even then, if the court follows a precedent set in a 1995 battle between Lotus and Borland, SCO has to prove not only that Linux uses code owned by SCO, but also that the code doesn't use common conventions. For what it's worth, Linus Torvalds has said he didn't copy Unix when he wrote the original Linux.

Regardless of their legal merits, there's the question of whether SCO can actually see these lawsuits through. By suing giants like Daimler and AutoZone, SCO acquired opponents that can afford protracted court battles. Should SCO try to pick on a company its own size, the defendants can dip into a defense fund backed by deep-pocketed Linux supporters like Cisco, Dell, Hewlett-Packard, IBM, Intel, and others.

Five-Digit Returns

SCO's biggest problem is that it simply might not have the money for a slugging match with that crowd. According to the company's most recent financials, its licensing jihad burned through $3.4 million in the quarter that ended Jan. 31, a sum equal to a third of its total revenue. The return on that investment--that is, licensing fees extracted from the handful of companies that would rather pay off SCO than fight it in court--added up to some $20,000, about what an ambitious house painter could make during the same period. Overall, SCO reported a loss of about $1.5 million, twice its per-share loss for the same quarter last year. SCO says it expects licensing revenues to increase while legal fees remain constant.

At the current burn rate, SCO could keep suing through 2005 if it wants to; it's sitting on $57.9 million in cash. But it's spending $12 million of that on a stock buyback. The lawyers still have to be paid, and they also get 20 percent of future settlements, 400,000 shares of SCO stock, and, if the company is sold, 20 percent of the proceeds. "It is a pretty dangerous game," says Dion Cornett, a tech-sector analyst at Chicago-based stock-research firm Decatur Jones Equity Partners. "This is a company with deteriorating financials."

Of course, judges and juries don't always do what experts predict, and neither Boies nor SCO chief Darl McBride is a stupid man. A courtroom victory over AutoZone or Daimler might change SCO's outlook and bring in new funding. But even then, Carey says, the court would be unlikely to grant SCO the right to a license fee from all Linux users. More likely, it would order Linux providers to rewrite the allegedly stolen code. "And let's face it," Carey says. "The Linux community would get that done in a heartbeat." --SETH JAYSON