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A Cynical Eye on SCO, MS, and Indemnification
Monday, November 17 2003 @ 10:44 AM EST

Harvard's Berkman Center for Internet & Society is beginning a new feature, which they are calling "Case in Point". They are going follow a case specifically and discuss it online, and they are starting with SCO v. IBM. They describe Groklaw as a discussion group on the subject and list it as a resource, and while that isn't all that we do, I take it as another confirmation of the value of the comments on Groklaw.

Here is the announcement from their newsletter, The Filter:

Case in Point is a new feature that will focus on a particular case of significance, track its progress, and ask Filter readers for their input on some of the important issues it raises. The first Case in Point is Caldera v. IBM, also called the case against open-source. Caldera Systems (SCO) sued IBM in a Utah state court.  The complaint alleges that the open-source operating system, LINUX, contains portions of UNIX proprietary code to which SCO has taken title.  SCO claims that IBM:
  • misappropriated SCO trade secrets that were contained in OpenServer and UnixWare and used them to promote sales for LINUX,

  • engaged in unfair trade practices by using this information to damage the market for UNIX,

  • used deceptive practices by misleading SCO as to IBM’s true intention to abandon a joint UNIX software development project,

  • interfered with the contracts that SCO had with its UNIX clients by inducing them to switch to LINUX, and

  • breached obligations of confidentiality by distributing copies of UNIX to the public under an open-source licensing scheme.  
As evidence of these claims, SCO alleges that it would have been far too time-consuming and expensive to independently develop an Intel-based UNIX flavor as quickly as LINUX appeared on the market.   See the complaint and attachments at

Some press coverage of the case is at

Some discussion forums looking at the case are

Before we look at IBM’s response, let’s consider the complaint.  It doesn’t refer to any copyright at all.  All of the claims are based on breach of contract and unfair trade practices.   Discussion Question:  If you are distributing software world wide and losing sales to a competing product that you believe incorporates your technology, what are the advantages of abandoning/postponing copyright claims in favor of breach of contract/unfair trade practices?  Does the answer differ depending on your jurisdiction?

If you are interested in commenting on this question, please go to H2O and register for the SCO-IBM project. The discussion will begin in one week.  Results will be reported in the next Filter issue.

The Filter is a monthly newsletter, so the report will be on December 14, after which I gather there will be another question for consideration. The director of the Berkman Center, John Palfrey, also Lecturer on Law, Harvard Law School, is going to be a participant in the SCO discussions. The first session will likely include noticing that the case isn't called Caldera v. IBM any more. Only kidding. The newsletter has it wrong, but the web site got it right. There isn't much Harvard doesn't get right, in my experience, when it comes to gathering valuable legal information.

I have taken online classes offered by the Berkman Center in the past, in what they now call their BOLD series, and it was a wonderful experience, as you will discern from looking at the materials they still have online from the course. It caused me to change my area of specialty, actually. Here is a page of just some of their offerings, and if you once start clicking on the links, I guarantee it'll be hard to stop. They are also working on a book about internet law, which will have "an online component".

This isn't a class about SCO, just a discussion, but that doesn't mean it won't be of value. My experience with Berkman was a while ago, so I don't know the new people there, and participating in things like this may have privacy issues, so it's up to you individually to investigate matters like that and make your own decisions as to whether to participate or not. You don't have to register to read the discussion, just to participate. I will let you know their results from the Filter in any case.

While it is a cynical question they pose as the first question for discussion in the series, the answer should be of interest to us addicts.

Speaking of cynical, here is an article in last Sunday's San Francisco Chronicle about short selling. It is about a real case where short sellers did everything they could, according to the judge now sitting on the case, to send a company's stock down, including sending info to journalists badmouthing the stock. Then, they brought a shareholders' suit. Honestly, the more I read about Wall Street, the less I want to participate. Anyway, I've warned you that it's like picking up a rock. It did, however, make it possible for me to understand what short selling is, and maybe it will do the same for you, those of you who are not financial wizards already.

The Inquirer has an article today, in which they do some math on profit margins for various Microsoft offerings:

The grand-daddy of them all was the unit responsible for Windows. It had costs of just $545 million but generated a profit of $2264 million, a staggering 415.4% profit on the money they put into it.

Let's put this in context. Dell's recent quarterly statement shows its margin at about 9%, which is a lower margin than even the least productive of Microsoft's profit-making groups. IBM's margin is similar to Dell's but HP's is about 6% in total, thanks mainly to printers, and Sun Microsystems is even lower.
I see something else when I go to read the SEC filing itself. The story I see is that profits for Windows are flat. No wonder GNU/Linux is on Microsoft's radar and no wonder they are hyping Longhorn for all they are worth. Here is how they describe it in the 10Q just filed, and they use the word "Client" here to mean "Windows XP Professional and Home, Windows 2000 Professional, and other standard Windows operating systems":
Client revenue in the first quarter was flat compared to the first quarter of fiscal year 2003 at $2.81 billion driven by a flat reported license growth and no year over year change in product mix. In the first quarter of fiscal 2003, the Company completed its transition to new licensing terms under which OEMs are billed for products when Certificates of Authenticity (COAs) are acquired, rather than upon PC shipment, resulting in an increase in reported licenses related to inventory accumulation. PC shipments growth in the first quarter of fiscal year 2004, driven primarily by strength in the consumer and small business market segments, enabled Client to offset the inventory accumulation impact in the first quarter of fiscal 2003. Client operating income for the first quarter of fiscal year 2004 was flat compared to the first quarter of the prior year primarily as a result of flat revenue and a 1% growth in operating expenses.
For the three months ended Sept. 30, in millions, Client revenue for 2002 was $2,807; for 2003 , it was $2,809.  Operating Income for 2002  was $2,270; for 2003, it was $2,264.

Here is another part. Microsoft has a paragraph in their 10Q about the new indemnification they are offering:

We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products. We evaluate estimated losses for such indemnifications under SFAS 5 as interpreted by FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such indemnifications in our financial statements.
So the indemnnification hasn't yet cost them a thing, which is apparently pretty much what they were expecting. Once again, indemnification proves to be a red herring. This despite the fact that, according to the 10Q, Microsoft is now "the defendant in more than 30 patent infringement cases."


A Cynical Eye on SCO, MS, and Indemnification | 136 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Rob Enderle again
Authored by: Anonymous on Monday, November 17 2003 @ 11:16 AM EST
Paraphrasing: Open source will destroy civilization as we know it, and IBM are panicking in the face of SCO's legal sction. http://www.linuxinsider .com/perl/story/32154.html

[ Reply to This | # ]

A Cynical Eye on SCO, MS, and Indemnification
Authored by: Anonymous on Monday, November 17 2003 @ 11:16 AM EST
Its very likely that MS sees the market trend to Linux more clearly than any
analyst group and the are much more frightened than anyone can imagine (real
fear not paranoia). They know Linux is unstoppable and that there is nothing
that they can do to prevent their fear from becoming reality. Businesses are
finally starting to realize the choice is not between Linux and MS but between
lock-in and freedom.

[ Reply to This | # ]

In other news...
Authored by: Anonymous on Monday, November 17 2003 @ 11:35 AM EST
Today is not a good day to own SCO stocks.

Right now down in 13,61 (down 8,79%).

Lets hope it stays down.

[ Reply to This | # ]

A Cynical Eye on SCO, MS, and Indemnification
Authored by: Anonymous on Monday, November 17 2003 @ 11:36 AM EST
Last year many articles reported that Microsoft had
a $1 billion profit per month, and a $40 billion
cash pile. Does anyone know how this relates to the
"flat, $2 billion" earnings they subsequently report?

[ Reply to This | # ]

Microsoft's flat profits
Authored by: sjohnson on Monday, November 17 2003 @ 12:00 PM EST
The relationship is easy to explain. For years, MS's profits kept increase quarter after quarter. MS's profits for the past few quarters have been "flat". With "flat" meaning they haven't been increasing.

As to why? Numerous factors. Everyone probably has their own opinion. Mine are Microsoft's past and current corporate behaviours, nasty Licensing practices, their new Licensing scheme which forces people to upgrade on MS's schedule rather then their own schedule, foreign distrust of MS (the old NSAKEY incident), Microsoft's past (and apparent current) lax security in their products. And Linux becoming a viable alternative and with people and organizations migrating to Linux in whole or in part.

[ Reply to This | # ]

Short seller suit
Authored by: Anonymous on Monday, November 17 2003 @ 12:13 PM EST
<< It is about a real case where short sellers did everything they could,
according to the judge now sitting on the case, to send a company's stock down,
including sending info to journalists badmouthing the stock. Then, when the
stock went down, they brought a shareholders' suit. Honestly, the more I read
about Wall Street, the less I want to participate. >>

You make it sound like they tried to make the price go down and then complained
that the price went down. That's incorrect.

They tried to make the price go down and then complained about the period in
which the price was allegedly improperly inflated. The reason they waited for
the price to drop before filing suit is that it's much easier to get people to
believe that $100 was an improperly inflated price for something if it currently
trades for $10 than if there are still people paying $100 for it.

[ Reply to This | # ]

A Cynical Eye on SCO, MS, and Indemnification
Authored by: Anonymous on Monday, November 17 2003 @ 12:37 PM EST
...Microsoft is now "the defendant in more than 30 patent infringement cases."
How could that be? What happens to we highly respect others IP and all?

[ Reply to This | # ]

A Cynical Eye on SCO, MS, and Indemnification
Authored by: Anonymous on Monday, November 17 2003 @ 12:42 PM EST
Discussion Question: If you are distributing software world wide and losing sales to a competing product that you believe incorporates your technology, what are the advantages of abandoning/postponing copyright claims in favor of breach of contract/unfair trade practices?

I don't expect a meaningful discussion as the premise is already incorrect. It should be ...losing sales to competitors selling the same product.... Caldera/SCO hasn't been very successful in the Linux business so why expect them to be successful distributing any other operating system.

Especially if that system is outdated. Only now are they starting to talk about things like USB drivers, large file support, etc. They have also been actively participating in pushing Linux's development forward. Alan Cox might not even have started on SMP support if it weren't for their hardware contributions.

Cynical question indeed.

[ Reply to This | # ]

Don't bother
Authored by: Anonymous on Monday, November 17 2003 @ 01:05 PM EST
The IBM subpoenas are obviously potentially relevant to IBM's counterclaims
(IBM says SCO is lying, Lanham Act, etc.) and to the discovery issues (IBM says
SCO's public presentations differ from what IBM presented in the case). This
has been discussed at some length before.

I find it odd that he chooses to characterize IBM's subpoenas as
"Punitive", yet also says, if you do open source, watch out, you
might get a SCO subpoena.

Also: only 6 subpoenas and thousands working on Linux, and millions in open
source. It's not like the odds of getting a SCO subpoena are too high.

He also needs to understand the SCO law firm's compensation better, as I don't
believe he described in accurately in his article.

I suspect that he probably knows also this, but either doesn't want to hear, or
prefers to be provocative.

I won't even bother commenting on his predictions for the future. When the
background facts are built on such a shakey-foundation, what's the point.

Ignore him. He doesn't want to know, and if you correct him, it's more grist
to the mill for him. If you feel compelled to write to anybody, I'd suggest
that you politely write to his editor, pointing out all his mistakes in all his

What a sorry piece of journalism.


[ Reply to This | # ]

A Cynical Eye on SCO, MS, and Indemnification
Authored by: Anonymous on Monday, November 17 2003 @ 01:35 PM EST
Maybe I should file a patent application on SCO's make money through
copyright/breach-of-contract litigation FUD idea. Sometimes our legal
system is sickening.

[ Reply to This | # ]

SCO extends license offer, again, and maybe again
Authored by: Anonymous on Monday, November 17 2003 @ 01:47 PM EST
SCO extends license offer to end of year, and maybe will extend it again:

So, Skiba, when they gonna start suing users? Did it just get pushed back again? Will this affect Skiba's guidance?


[ Reply to This | # ]

Just in: MSN shuts down SCOX discussion board
Authored by: Anonymous on Monday, November 17 2003 @ 01:48 PM EST

If you want proof that MSOFT is SCOX's best buddy take note that MSN just shut down the SCOX discussion board, as it was rapidly descending into discussion on how best to short-sell SCO's stock.

Without the negative comments to disuade casual investors, MSN's users are more likely to buy into 'independant' analysts reports and buy stock, forcing the price up again.

The more I look at this, the more I see how important it is to reach out to the non-corporate investor. Perhaps it is time we get started on another open letter - this time as a warning to non-institutional traders.

[ Reply to This | # ]

And Cut-Rate Licensing too!!!
Authored by: Tsu Dho Nimh on Monday, November 17 2003 @ 02:32 PM EST

The UnixWare licensing scheme, announced at the beginning of August, set the
price at $1,399 (£828) per server for Fortune 1000 companies, but offered a
special price of $699 for those who signed up before 15 October.

In October, SCO extended its reduced price offer for two weeks to the end of the
month. Take-up is thought to have been poor so far, but the company refuses to
issue the exact number.

Blake Stowell, SCO's director of public relations, told "The
company has made the decision to extend the $699 US pricing to the Fortune 1000
[companies] through to the end of 2003."

[ Reply to This | # ]

[OT] SCO Extends Linux License Discount Again
Authored by: sjohnson on Monday, November 17 2003 @ 02:36 PM EST
I just read this on the NewForge NewVacc. SCO is extending their discount on their Linux License through the end of the year.

And a quote from Blake Stowell about the IBM lawsuit. Get this:

"From a legal standpoint there is a time by which either side can issue subpoenas, and I believe this is why both sides in this case issued their subpoenas at about the same time."
Yeah, right...

Link to the Newforge story. Bound to be a few comments on the story eventually.
And the actual story.

[ Reply to This | # ]

Not in State Court
Authored by: Steve on Monday, November 17 2003 @ 03:05 PM EST
SCO filed in federal court, not state court.

That's just sloppy.


[ Reply to This | # ]

Another interresting story out
Authored by: Anonymous on Monday, November 17 2003 @ 03:23 PM EST

Manulife Financial has purchased SCO Group stock, along with Bjurman, Barry and Associates. These recent acquirers were only noticed at the Money Central website at MSN, but that could explain a lot of the investment dealings of BayStar Capital and RBC Dominion Securities. It is surmised that there have been monies being floated from Canadian investors to avoid the scutinry of the United States SEC and the U.S. media.

[ Reply to This | # ]

  • Why fear SEC? - Authored by: Anonymous on Monday, November 17 2003 @ 05:58 PM EST
A signal of the MS patent strategy
Authored by: tcranbrook on Monday, November 17 2003 @ 03:48 PM EST

There has been speculation lately as to how MS will provide some responce to the demand for open format in their file documents.

MS has been talking about how using XML will for Word documents will free customers of the lock-in problem, their responce to the call for "Open Formats". The specifications for the WordprocessingML schemas have been "made public" at the Danish Government Infostructurebase. The hook is in the the license, a patent comes attached. "There is a separate patent license available to parties interested in implementing software programs that can read and write files that conform to the Specification. This patent license is available at this location:" Essentially, it seems they have patented a XML definition.

[ Reply to This | # ]

Novell on the attack!!!
Authored by: brenda banks on Monday, November 17 2003 @ 03:51 PM EST

enjoy br3n


[ Reply to This | # ]

More on IBM's Novell gambit
Authored by: tcranbrook on Monday, November 17 2003 @ 04:05 PM EST
The joining of IBM, Novell and SuSe has raised the interest of many of us following the SCO saga. Now Gat eway has joined the group as well, providing SuSe on their entire server line. It makes you wonder how far away the desktop is not that the big boys are starting to talk seriously about it.

[ Reply to This | # ]

Ha, ha, ha, har de har har, ho, ho, ho, he, he, he!!!
Authored by: CyberCFO on Monday, November 17 2003 @ 05:13 PM EST
They've extended again. So many people have inquired about the license, they need to extend the deadline to let everybody take advantage of it. Hurry up and buy your license before the offer gets extended again.


[ Reply to This | # ]

Biggest news of the day
Authored by: Anonymous on Monday, November 17 2003 @ 07:01 PM EST
Biggest news of the day, a new S-3. Nobody's mentioned it yet.

Some points I spotted:

- 3.85 million shares being sold. Wow.

- lawyers firm deal, note: the charge to earnings in 4th quarter. Wow.

- some differences in how they describe Australia situation

- I haven't figured out the conversion benefit doo-hickey (the new shares
coming from Series A convertable). Maybe somebody knowledge can explain that

[ Reply to This | # ]

Authored by: thrakos on Monday, November 17 2003 @ 08:29 PM EST
long time reader, first time poster.

Last time I read a Microsoft license, and I've read many, We the consumer do
not 'Own' the software. We merely license it for use from Microsoft; Who have
any and all rights and ownership over such software.

If this is so, then how can We, the consumer, be responsible for the
"claims of intellectual property infringement made by third parties
arising from the use of our products".

It aint our fault the bad code is in there, it's Theirs!



[ Reply to This | # ]

Open Source or Free
Authored by: tazer on Tuesday, November 18 2003 @ 01:31 AM EST
Rob Enderle:
"In that world, which I profiled around the 2010 timeframe, revenues and jobs had long ago left North America and much of Western Europe. Software jobs and positions largely had moved to the Third World because of lower labor rates in emerging nations."

"What this exercise creates is the assumption that open-source software kills software innovation because it effectively, over time, kills the funding for it."

I would argue that Mr. Enderle is confusing Open Source Software with free software. Meaning, if it's free, it must kill innovation, because noone will want to fund a project, when a competitor will give something similar away for free. That is what I understand his point to be.

If this is in fact his point, then Microsoft may be one of the biggest innovation killers out there (anyone remember Netscape?). Furthermore, here is a short-list of software Microsoft provides for 'free' with Windows XP and some competing products:

Notepad - TextPad
Synchronize - 1-2-3 Synchronize & Backup
Remote Desktop Connection - pcAnywhere
Remote Desktop Connection - Radmin
Calculator - Beautiful Calculator 3
Windows Media Player - Ace Media Player
Windows Movie Maker - Muvee3
Windows Messanger - Vypress Messenger
Internet Explorer - Opera

So, if Microsoft is giving away all of these for free (subsidized?), then how is 'free-software' going to make things worse? Why would I use any of these products, when Microsoft provides them to me for 'free'. Better yet, why would I use a Microsoft product when I can use GNU/Linux for 'free'...

[ Reply to This | # ]

A Cynical Eye on SCO, MS, and Indemnification
Authored by: Anonymous on Tuesday, November 18 2003 @ 07:06 PM EST

I beg to differ. It is okay when Dvorak does it because he's a columnist by trade. Enderle is an analyst by trade. I guess he had to start up this new eponymous "group" because his last one has worn out its welcome nearly everywhere.

Time to find a new batch of journalists to dupe into quoting him!

[ Reply to This | # ]

Shorting, margin, squeezes and availability
Authored by: Anonymous on Tuesday, November 18 2003 @ 10:22 PM EST
Short and margin works like this, at least at my broker (Ameritrade):

I sell xxx shares of SCOX (that are borrowed from a long holder).

This loan is automatic (no specific permission from lender), Ameritrade must make sure that I can pay it back. For this purpose they set aside money from my account. This money is re-adjusted daily. If I don't have enough cash in the account and it goes into the red, I pay interest on the balance.

Every stock has a "margin maintenance" rating, typically 30% of their current quoted price (there are many exceptions that may raise this percentage, for example SCOX currently trades below $13.86 and at this point there is a min maintenance of $5 that makes it rating 36%). Ameritrade provides a margin handbook and a list of "riskier" stocks with higher requirements that describes all the exceptions in detail.

Ameritrade adds up all the margin maintenance for long and short positions and compares that to the equity in the account: Equity = (add the market value of all long positions) - (add all the value of short positions) + value of cash (or cash equivalents) in the account.

When the maintenance drops below the equity I get a "house maintenance" margin call: my account is getting close to being unable to repay loans (relatively speaking, the market has to move very fast for this to be actually true). At this point Ameritrade has the right to liquidate positions but usually they give me a chance to fix the situation promptly, e.g., overnight some money or or voluntarily liquidating the positions of my choosing (being on "house maintenance" is like a bank or credit card allowing temporary spending over the credit limit and giving a short time to send the money before actually bouncing the payments).

Shorting a stock creates short-term downwards pressure (because it is a sale) but long-term upwards pressure (because the loan must be paid back and a buy is necessary). Situations where shorts are forced to close their positions do create upwards pressure. This is called a short squeeze and it is very dangerous because it "feeds on itself":

  • Margin call squeeze: The stock starts going up significantly (e.g., on good news). People holding shorts and having weaker finances may see their maintenance go higher than the equity and be forced to buy, in turn, this drives the price up and more people get margin calls (up to the point where all the short holders with weaker finances have been eliminated from the game).

  • Availability squeeze: The supply of shares available for shorting runs out. This is a rare situation, let me explain with a speculative example: what would happen if Baystar could start gobbling up most of the shares that became available for shorting. Some long holder sells, the corresponding short holder has to return the stock to the lender, whoever buys from the long holder lends it to Baystar. The short holder gets a recall notice and is expected to repay the loan within a 3-day deadline by buying the amount that was shorted. This buying makes the price go up, encouraging more long holders to sell, it goes on and on until retail brokers manage to find shares for their customers instead of Baystar gobbling them up.

Some institutional investors "play" the short squeeze, that is, they force price movements or use other tactics that trigger short squeezes (e.g., it is possible to buy shares and make them unavailable for borrowing) and then profit from this manipulation. I'm not quite sure how legal or illegal it is to manipulate availability (and the situation with SCOX indicates that availability is considerably lower than normal, less than 1M shares short and more than 6M shares outstanding doesn't look anything like lack of availability).

I got a house maintenance call at the beginning because I didn't quite understand the rules (I could fix it without liquidating) and 2 recall notices (luckily Ameritrade managed to find a supply and I didn't have to liquidate either). Disclosure: I'm still short SCOX. "Thanks" to them I'm learning more about short squeezes than I ever wanted to know.


[ Reply to This | # ]

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