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Visions of Ka-ching Dance in Their Heads
Tuesday, September 23 2003 @ 09:18 PM EDT

When SCO CEO Darl McBride wrote his open letter last week, he seemed to indicate a hope there could be a viable future partnership between his company and Linux. There is more than a hint as to what that partnership might be like in two research papers prepared back in March and April by Renaissance Ventures, a VC firm that invested in SCO.

The first document is an explanation of Renaissance's reasons for thinking SCO was a good investment. I know you've been wondering what in the world those folks in the stock market have been thinking. The second is an analysis of the SCO v. IBM lawsuit. They are both so blazingly wrong in both facts and conclusions that I fully grasp for the first time how some people may have invested in SCO, based on such misinformation.

First, the investment document. It is based on SCO's telephone conference call in February of 2003. You can listen to it yourself on mp3 here. Renaissance thought it sounded like SCO's bottom line was about to get "prettier" because they believed what SCO reportedly told them in that phone call, namely that most companies were reacting to the new SCOsource licensing program in a positive way.

Renaissance also bought the story -- hook, line and sinker -- that SCO owned the UNIX tree trunk, so to speak, and that all other versions of Unix were branches, or derivatives, off of their tree, including, so they imagined, Linux. (I'm using their language, by the way. They actually mean GNU/Linux, the kernel plus the applications, not Linux the kernel.) They planned on hijacking the GNU/Linux applications and if that meant the death of Linux, so what?

That's their business proposition? And GNU/Linux gets what out of this, other than ripped off and ruined?

Their original strategy was based on the fantasy that the world was clamoring for the ability to stay with UNIX and yet run GNU/Linux applications, and there they'd be, like a troll hiding under the bridge, ready to exact a toll on all those wanting to cross.

SCO, in their daydream, thought they could be the gatekeeper making it possible for companies already on UNIX to sort of transition to Linux, which they knew everyone wanted to do, without leaving their UNIX environment behind. Next step? Backcharge for UNIX shared libraries they believed had been used inappropriately and start scooping the money up in royalties for UNIX code.

Why they imagined companies would rather follow that convoluted, expensive route instead of just running Linux itself is one of those mysteries the tech community can never solve, because it's not based on technical realities but on financial yearning. The tech makes no sense at all. But the ka-ching started ringing in Renaissance's ears, and you know how compelling that can be, like when your telephone starts ringing and you think you have to answer it. But the whole structure is based on a lack of technical knowledge and not enough true facts and a grievous miscalculation about the market. If ever there was a situation illustrating the importance of CEOs and financial analysts comprehending tech, this story is it. Money got invested in a dream that isn't coming true.

Let me let you read it for yourselves, because it's beyond my descriptive abilities to capture all the repulsive nuances, not that this is a subtle document. They begin by describing the conference call and then explain the math potential as they see it:

"We believe management's forecasted $10 million of SCOsource revenue in 2Q represents near-term settlement of possible license violations in arrears (related to heretofore unlicensed use of the SCOsource shared libraries) from one or more large vendors of Linux solutions, but we are unable to glean more specifics at this time. . . . SCO management also stated . . . that the vast majority of interactions with customers and other software vendors with respect to the SCOsource initiative were positive. Our view is that lumpy, and possibly large, bookings of SCOsource license fees will continue for several quarters while these negotiated settlements of prior license violations in arrears work their way through the pipeline. SCO's resulting balance sheet should soon look a lot prettier, though we doubt the market will value such lumpy SCOsource fees as part of a consistent and predictable earnings stream -- until all or most SCOsource arrearages are cleared and these license fees become part of normalized product revenue.. . . We currently estimate the net present value of SCOsource 'Extraordinary Items' (arrearages settlements related to prior license violations . . . to be $35.8 million or $3.18 per share, exclusive of the company's current cash generating status and its earnings power based on current and new products."

So much for experts. How much of that came true? But prior violations? What could that mean in the Sun/MS licensing picture? Or maybe the Renaissance pundits missed the boat on that guess too.

The vast majority reacted positively? Was that truthful? Were investments made based on that information? Well, for sure Renaissance bought in for that reason, at least in part, and we know that because they say so in this paper. The report also mentions that "SCO effectively owns the root of the UNIX tree that has branched -- through license agreements with SCO and its predececessors -- into various flavors of UNIX, including IBM's UNIX ('AIX'), Hewlett-Packard's UNIX, Sun Microsystems's UNIX, Silicon Graphics' UNIX and Linux; and Linux is derived from UNIX."

That isn't accurate either. Linux is not a branch off of the UNIX root. If people invested based on a belief that Linux is a derivative of UNIX, I think they got snookered.

It gets more misguided as the report continues. They say they think a "large and growing number of business enterprise customers desire to marry their existing UNIX applications and environments to Linux products, and because of the legal need to license the UNIX shared libraries from SCO, it will drive many customers to SCO's products (that include the shared libraries) in preference to the products of other Linux vendors."

Says who? Dream on, fellows, dream on.

They do. They say that because Caldera has spent years "marrying" Linux and UNIX, it can now "deliver its legacy UNIX customers a migration path to robust, new Linux-based business software applications and server products." Because they believed that all such Linux/UNIX integration projects "require the UNIX shared libraries to port UNIX applications to Linux" and that many systems integrators "have made unlicensed copies of these shared libaries from other non-SCO sources," the licensing program would be a money maker for SCO. They note a January study by Goldman, Sachs that said Linux would emerge as the dominant operating system in corporate data centers, so in Renaissance's mind, this meant dollars and more dollars as far as the eye could see for SCO, the gatekeeper.

They imagined a market for the offspring of this unholy marriage Caldera had brokered, the hybrid UNIX/Linux monster, and so they decided to hog that area of the enterprise market. The problem with the plan is, there doesn't seem to be a huge market for what they are offering.

So there you have it, ladies and gentlemen. What Sco Wanted and why some invested in what they thought would be a sure thing. SCO would spiff up its legacy code with the new and robust Linux applications and products and make money -- from the hard work of thousands of good-hearted and creative programmers who volunteered to give free software to the world and were beating proprietary UNIX in the market. They thought Linux needed its UNIX shared libraries to go forward, so that, in their mind's eyes, equaled "Profit". They now have done an about-face and are offering the Linux Kernel Personality so customers can "escape" from Linux back to UNIX, but that's another sad story.

And the killing off of Linux? If it led to profit, so be it, according to the Renaissance analysis:

"One possible outcome of the IBM lawsuit is the death of Linux, in which case, we believe, SCO owns the bulk of the intellectual property -- the 'root of the UNIX tree' -- for the world's dominant, hardened enterprise operating system. Certainly software markets would be in disarray, but given the practical alternative to unplugging the lights, we believe a worst-case scenario of the world abandoning Linux and flocking back to UNIX would not be so bad for SCO. SCO once held the dominant UNIX market share, and we believe SCO's current management team is capable of delivering that again if it needs to do so."

Hmm. This is a stickup, as business model. So, this entire legal scheme was built on mistaken facts, not enough tech comprehension, and a moral vacuum. All Renaissance needed to do was ask one of their sys admins and he could have explained in less than 5 minutes that they were barking up the wrong tree. Linux isn't a derivative of UNIX, it doesn't need UNIX shared libraries and it can live without everything SCO "owns", which isn't, by the way, all of Unix, merely one flavor, if that.

I think computer science 101 needs to be taught in business school. Maybe a refresher course in ethics would be good too.

The world can't afford to let boneheads make decisions that affect all of us. Do we want tech idiots with their finger on the button, so to speak? Software runs the world now. The economy, the world's security, business, the military, education, governments, even the entertainment world, which represents the US' largest export (at least that's what they told us when they passed the DMCA), all depend to one degree or another on software, and GNU/Linux software is playing a significant role in all these fields. I think you could make a reasonable argument that GNU/Linux is too valuable a resource to allow a group of greedy, small-minded idiots to disrupt its progress. Not that I'm calling anyone in particular an idiot, mind you. The business model SCO proposes is to kill off the golden goose, GNU/Linux, for short-term financial benefit to themselves. A world that would let that happen would be foolish indeed.

What makes GNU/Linux software work is the open source model, the ability to share ideas and work together freely. It's not communism. It's the scientific method, which works well for physicists, doctors, and researchers. It's ideal for software creation too.

If they are allowed to achieve their dream, SCO would close off the software, block the sharing, and the ideas would dry up. They are too shortsighted to care. But somebody needs to.

What about the Renaissance paper on the lawsuit? It's equally illuminating, particularly with regard to whether or not SCO had any thought of suing Red Hat prior to Red Hat filing suit against The SCO Group. There is an entire section on Red Hat, written by those Renaissance scholars. Your first guffaw will occur when you read that United Linux is causing Red Hat to have to play catch-up in "the enterprise space":

"We believe SCO is the top of the food chain in a Red Hat/SCO Group universe".

Ah, yes. If wishes were fishes. Why do these financial wizards reach such a fascinatingly wrong conclusion? Because SCO follows a business model they have seen before and recognize; it gets 80% of its revenue from software sales and subscriptions (back then) and Red Hat gets about half its revenues from services, not from sale of software "which carries higher profit margins", the report says. So, they thought SCO would end up top dog because it is following an old-fashioned business model they understand, because they've seen it before. Were they right about United Linux and Red Hat?

The undeniable fact that software is becoming a commodity is not on their radar at all, so they don't see that there is little future in that quaint business model SCO clings to for dear life. It's impossible to resist sharing one last little snip of their wisdom, their prediction in April that IBM was sure to settle the lawsuit:

". . .SCO refers customer inquiries related to resolving any unpaid licenses back to IBM, hence . . . resolution of IBM’s customers concerns has become a core business issue for IBM more than an intellectual property dispute, with meaningful impact upon its reputation and relationship with its customers.

"We believe SCO's claims against IBM are well founded and that SCO has additional credible claims it can make against other vendors of Linux products. Please refer to our base report on SCO dated March 6, 2003 for a discussion of the deep intrinsic value of SCO’s intellectual property ownership.

"At the end of SCO's 100-day fuse on SCO’s contractual cure, on June 13, 2003, SCO has the specific authority per the license agreement to revoke IBM’s AIX/UNIX licenses and require IBM to return or destroy all copies of its software products subject to the license. We believe the aforementioned contractual cure would be upheld by the court and mandated upon IBM, and would then wreak havoc on IBM's large corporate customers bringing serious injury to IBM's business reputation and customer relationships, unless the matter is settled prior to trial. We believe the business risk to IBM is too high. Therefore, we believe IBM will settle the case prior to trial."

Now, there's a business model. Destroy your competitor's reputation so they feel they have to pay you to shut you up. Last I looked, they have some legal names for that, which you'll find in IBM's counterclaims. And who do you think they mean in the report when they say that SCO "has additional credible claims it can make against other vendors of Linux products"? Red Hat, maybe? You think? No, we all know that SCO has crossed its heart and hoped to die it never dreamed of suing Red Hat, and since they told that to the court, it must be true.

Finally, here is how Renaissance Ventures describes itself on its homepage and its About Us page:

"Renaissance Ventures, LLC and its affiliates invest in special situations across multiple asset classes including mis-priced equity and debt securities and buyout situations in both public and private markets. Renaissance generally looks for businesses generating positive free cash flow in stable or growing industry sectors where it can apply its operational, strategic and cost savings expertise."

"Renaissance subscribes to contrarian theory and believes the best opportunities now exist in microcap public companies that are orphaned from Wall Street with no institutional sponsorship. We will invest in mis-priced public securities and take an activist role in enhancing returns or sponsor management buyouts of undervalued public companies with high intrinsic value."

So now you know. The world of finance. Feeling like the little boy in the Emperor's New Clothes, huh? Or is it closer to the feeling you get when you pick up a rock?


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