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Something Seems Off in SCO's Claims
Monday, July 07 2003 @ 12:56 AM EDT

I have been pouring over 10Ks and 10Qs and every other SEC filing I can get my hands on, and one thing is very odd about SCO's claim in its complaint, that IBM's support for Linux is killing UNIX. I checked some other companies that sell UNIX, and while all companies are struggling with the economic downturn, including even IBM, both HP and IBM say that their high-end servers are selling well. Surely, if IBM's contributions were destroying the UNIX market, HP would be feeling it too, not just SCO? Or is that logic too simple?

Here's a snip from IBM's 10Q for 5/14/03:

"Revenue from pSeries UNIX servers decreased in 2002 versus 2001 although high-end pSeries server revenue increased in 2002 versus 2001."

They aren't having any trouble making money from operating systems software either, according to the 10Q for this past March:

"Operating-systems software revenue increased 8 percent to $568 million (2 percent at constant currency) in the first quarter of 2003 when compared with the year-ago period. The increase in the first quarter revenue was primarily driven by higher revenue across all of the eServer software products. Software gross profit dollars increased 12.7 percent and the gross profit margin improved 3.5 points versus the first quarter of 2002. Lower support and services costs contributed to the increases in 2003 versus 2002."

So in what way is Linux destroying business? Here's what IBM says about its support of Linux (not much):

"Technology Innovations[~]IBM has been moving away from commoditized segments of the IT industry and into areas in which it can differentiate itself through innovation, and by leveraging its investments in research and development (R&D). Examples include IBM's leadership position in the design and fabrication of Application Specific Integrated Circuits; work on designing smaller, faster and lower-power-consuming semiconductor devices (using such innovations as copper technology, silicon on insulator, silicon germanium and low-K dielectric); work to design "autonomic"or self-managing computing systems and build the "grid" computing networks that allow computers to go beyond sharing communications and actually combine processing power; and the company's efforts to advance open technology standards such as Linux."

What it says about open standards is a bit more eloquent:

"Open Technology Standards[~]'Open standards' is not a complex high technology catch phrase. The way we use electricity is a good example of an open standard. The outlets in each house and business universally accept any electrical appliance. An example of closed standards would be if every television maker required people to buy a certain type of electricity, perhaps from the television maker itself. So if you wanted to switch television brands, you would also need to rewire your house's electricity. In many ways, this is how the technology industry is today. Many different software products do not run on certain hardware or are not compatible with other software. Certain hardware does not communicate with other hardware. Open standards will solve this situation.

"The broad adoption of open standards is essential to the computing model for e-business on demand. Without the open standards that enable all manner of computing platforms to communicate and work with one another, the integration of any customer's internal systems, applications and processes remains a monumental and expensive task. The broad-based acceptance of open standards[~]rather than closed, proprietary architectures[~]also allows the computing infrastructure to more easily absorb new technical innovations. IBM is committed to fostering open standards because they benefit customers, because they are vital to the on demand computing model, and because their acceptance will expand growth opportunities across the entire IT industry."

So that's why they are doing what they are doing, according to this exhibit attached to their 10K for 2003. All the IBM SEC filings are here.

Hewlett Packard also was not singing the blues about high end offerings, according to this January 31, 2003 quarterly report:

"The combined company revenue decline across business critical server products in the first quarter of fiscal 2003 reflected the ongoing decline in enterprise capital spending as customers continued to delay purchases, coupled with competitive pricing. UNIX® server revenue declined in all business units excluding the high-end, and in all regions excluding Asia Pacific. Revenue declines in low-end and mid-range products were moderated by revenue growth in high-end UNIX® servers which reflected continued strength in Superdome products. The increase in UNIX® server revenue in Asia Pacific was due to a mix shift toward mid-range and high-end servers. NonStop servers continued to be impacted unfavorably by weak spending in the telecommunications and financial services industries.

"The revenue decrease in industry standard servers for the first quarter of fiscal 2003 was attributable primarily to declining average selling prices as price reductions were taken in all regions due to the competitive environment, as well as a continued mix shift toward low-end products. . . .

"The improvement in gross margin was driven by gross margin improvements in software and business critical servers. The software gross margin improved due to a mix shift toward higher-margin OpenView products and services. The gross margin improvement in business critical servers reflected a mix shift toward high-end UNIX® servers, lower product costs reflecting favorable pricing on components and lower warranty expense from continued high quality on UNIX® servers, offset in part by competitive pricing across all business critical servers."

So, could it be that SCO just isn't doing something right? Both IBM and HP offer both UNIX and Linux, and they aren't experiencing what SCO says it is experiencing.

Oh, and by the way, SCO VP Broughton sold another 5,000 shares on June 30.

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