The New SCO: Lessons for Linux in Business

It turns out that SCO was bigger than Caldera after all. What can we learn from a former "Linux company" whose UNIX business is 90+% non-Linux?

On Monday, August 26th, Caldera, now SCO Group, rolled out its new (actually, old) name at the company's GEOForum show in Las Vegas, Nevada. (Jeff Gerhardt gave us two reports from the show itself. This is kind of a sidebar to those reports.) Like SCO itself, GEOForum goes back a long way. (Until recently it was SCOForum and was held in Santa Cruz, California.) When CEO Darl McBride asked how many people had been coming X number of years, the percentage of longtime veterans was huge. He stopped when the field narrowed down one guy who had been coming for sixteen years straight.

The message: SCO is older than Linux by a long shot (the company was founded in 1979), and UNIX is senior to both. UNIX businesses have been around for eras in Linux and Internet prehistory. Some of those businesses involve extremely deep and abiding relationships between vendors and customers. The dependencies are often extreme to the degree that the customers can't live without them. SCO had a bunch of those relationships, long before Linux came along, and many of those relationships are still alive and well. In fact, they're saving the former "Linux company's" butt. What's more, those relationships give SCO a big advantage over Red Hat, SuSE and other Linux companies that still have nothing comparable to offer SCO's traditional kinds of customers--for now.

The pure Linux companies probably will catch up eventually. Meanwhile, SCO can't lead with Linux. They have to sell a UNIX family that includes Linux as one of three platforms: United Linux, SCO UNIX and UnixWare (the original AT&T UNIX, which SCO bought from Novell for a small fraction of what Novell paid to buy it from AT&T).

Like many of us in the Linux world, I never took an optimistic view of SCO. It seemed to me that Linux was doing much more market damage to the old mainstream UNIX vendors than to Microsoft. SCO was among the smallest of those UNIX vendors and had no hardware business to sustain it. That meant SCO was the UNIX company likely to get hurt the most by the Linux onslaught.

And, maybe SCO did get hurt to some degree. It certainly got devalued to the point where it could be bought by Caldera. But it also maintained a core base of customers, including Eckerd Drugs, McDonald's, NASDAQ and Egghead, and it had a sales channel with 16,000 partners. Since Caldera also had a strong channel focus, the merger of the two companies made sense to me. While others knocked the sale, I remained cautiously optimistic.

That's why I thought it was a terrific idea when I heard the company was going to change its name from Caldera to SCO. Let's face it, SCO had a lot more business than Caldera ever did and a better brand, too.

SCO might not be IBM or HP, but it's a very serious business that is certainly competitive with Red Hat. Revenues through the last four quarters are past $40 million. In his presentation on Monday, SCO Group CEO Darl McBride projected revenues at more than $60 million. Meanwhile, Red Hat's current revenues are just over $70 million. SCO Group has 545 employees, compared to Red Hat's 634. SCO Group's gross profit margins are nearly identical to Red Hat's, at 73.17%. And, SCO is ahead of Red Hat on turnover of inventory, assets and net receivables flow. It also has no debt. (Most of these numbers are from Hoovers).

SCO Group's 12-month revenue growth is also very positive at 1,324%, while Red Hat's is down 35.6%--in a market (8,000 public companies) that's only growing at 0.5%. (To be fair, Red Hat's 36-month revenue growth is 71.4%.)

Other reports (e.g., Maureen O'Gara in LinuxBusinessWeek.com) say Caldera's revenues in the past year were $71 million, compared to Red Hat's $77 million, and that 90% of the company's revenues had been coming from the old SCO side of the business. ZDNet and Infoworld both cite IDC, which puts the figure at 95%. In other words, SCO's UNIXes were doing a lot more for Caldera than Caldera's Linux.

The name change does much to remove those distinctions, though it remains to be seen how much the Linux and UNIX sides of SCO can leverage their apparent synergies. In this respect, SCO is now in the same boat as Sun, HP and IBM, but without a hardware business to support it. But I think they have a good chance of making it--very good, in fact. If big customers have stuck it out this long, why not longer? Those are significant birds in hand. Many of the Linux equivalents are still in the bush.

Again, nobody doubts that the number of new enterprise applications running on Linux will increase, and that the Linux share of UNIX vendor businesses will go up, but that's not the issue. The issue is whether or not those increases will be in compliance with the prevailing beliefs of the traditional Free Software and Open Source communities.

That's what stood out for me when I looked at Slashdot and Linux Today for reactions to Monday's news. There were maybe three or four positive responses out of the hundreds posted. To varying degrees, both SCO and Caldera were despised: "Caldera sucked", "Worst distribution I've ever seen", "good riddance", "unpleasant", "dead horse" and so on.

But the setup question comes from vluther of LinuxPowered.com under his post "The business plan smells fishy":

...can anyone tell me what the benefits of SCO are in today's world ? What does SCO provide that Linux already doesn't...or is not in the works? just curious...

It's a good question that's best answered by SCO's customers. They're paying millions of dollars for something, and 90+% of it isn't Linux.

Should the Linux community write SCO off because too much of what it's about is non-Linux? No. It means we need to learn from the continued success of what isn't Linux but is still in the same UNIX family. That includes Solaris, AIX, HP-UX, SCO, BSD and Darwin.

Linux is the leading member of the UNIX family in countless ways. By many measures, World Domination has been achieved. But it's a different kind of domination than the sort the software world is used to. Linux is a dominant choice, but its not the only choice. And that's not a bad thing.

Doc Searls is senior editor of Linux Journal.

email: doc@ssc.com

______________________

Doc Searls is Senior Editor of Linux Journal

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Re: The New SCO: Lessons for Linux in Business

Anonymous's picture

My company spent over a decade selling SCO based solutions. Originally SCO Xenix and later Unix and Open Server. For us it was always a turnkey OS. When Linux came along we ported the application to that because we liked Linux and used a variety of distros, both in house and on our home systems. Prospects started asking if we could deliver our application on Linux and we said sure, and it'll cost you UKP1000 less because we can sell you a copy of RedHat Linux rather than SCO Open Server. We didn't mind either way: we made our money from the application, not the operating system it sat on.

It was in that background that Caldera came along. My feeling from the start was that Caldera thought that by picking up SCO they would automatically pick up the dealer base. So we would all start selling Caldera Linux rather than SCO Unix and they would grab a big chunk of the enterprise end of the Linux market. The bit they missed was that although our prospects did know the name SCO they didn't know the name Caldera. To them Linux == RedHat.

But what incentive did we have to sell Caldera over RedHat? None. If they asked for Linux and didn't express a preference on distro we sold them RedHat.

Rather late in the day Caldera seem to have realised what people like us were saying right from the start (and publicly too, that's me he's quoting): that Caldera had no brand recognition compared to SCO, not on this side of the pond at least.

Bit late in the day though.

Re: The New SCO: Lessons for Linux in Business

Anonymous's picture

Yeah, the Installed Base is a *****, isn't it?

I've been working on SCO boxen for close to 20 years now, starting around the Xenix 2.2.3 timeframe. I was really happy with Xenix 2.3.4, and the earlier versions of "OS5" (their System III based distro that pretended -- fairly effectively -- to be SysV based)... and the longer that distro stayed around, the less I liked it.

I'm not sure which release engineer came up with that "forest of symlinks" approach to a distribution... but he should be hung, boiled in oil, shot, drawn and quartered, and the pieces arrested.

*Especially* since the printed documentation doesn't bother to tell us why they did it.

But then, I've never been especially find of Caldera, as a distribution, either. As an administrator, and someone who often has to customize distributions to do what clients want them to, I've found RedHat much more malleable... and much better documented, though you do have to go hunt that documentation down.

Which parts of which distributions United Linux picks up--and which items of the "System Administration and Customization API" (:-) the LSB imposes on will also be interesting to see. (I know that's already defined, I just haven't looked yet.)

Cheers,

-- jra

jra@baylink.com

http://baylink.pitas.com

Re: The New SCO: Lessons for Linux in Business

Anonymous's picture

I think the reason they did it, was to make it so hard to follow that you'd have to hire an SCO certified engineer to work on it. The first time I worked on one after working on Linux, BSD and AIX, I was totally floored by what I found. Besides, Linux runs Sys5 programs unmodified. One benchmark I saw had Oracle 8i running better on Linux in Sys5 emulation mode that it did on SCO on the same hardware. Why bother with SCO? Linux is so much more cost effective and flexible. Support for it is much better, bugs get squashed faster, and security problems are patched much faster.

SCO is dying and is nearing the end of life. Caldera only bought itself some time.

Curtis Maurand

Maine Line Systems

The old Unix business model, profitable but stagnant

Anonymous's picture

As someone old enough to remember the decline the Unix share of
the market in the 80s and it's shift into the dusty corners of
server rooms in the 90s, I have to wonder whether the SCO crew are
at all forward looking or just lost in nostalgia driven halcyon
dreams of past business models which resulted in their sale to
Caldera in the first place.
SCO in the past did excel at what they did best, charging lots of
money to provide businesses and professionals highly stable, low
maintenance, but sadly not very flexable, enterprise
infrastructure. However this highly profitable, per customer
business model led SCO and most of the other smaller Unix vendors
to entirely abandon the business desktop market, at which I can
still remember vividly their sneers of "Thats not a REAL
computer", which left them to fight over an ever decreasing
market of small businesses, now hooked on Microsoft's most recent
drug of choice.
Without co-operation, the Unix compatibility dream
now rested with installing the third party, at that time
somewhat buggy, GNU GCC toolkit and libraries.
The Unix market retreated onto specialized hardware which found it
self ever more pushed to the back of the computer rooms, the data
centers and the technical graphics market. That alone might sound
profitable, but in reality has a very low turnover in equipment,
software and services. That is, until Linux and BSD came along.
It is no wonder that I shuddered when I listened to Opinder Bawa,
the new Senoir VP of technology at SCO, being interviewed on The Linux Show, extol the
virtues of the small professional customized "Doctors Office"
market. For once they capture a small but profitable section of
the market, it would be too easy, using tactics of the past,
falling into the same old trap. To distinguish themselfs from
other vendors in the market, instead of providing a better service,
they return to the non-standard proprietary tactics, platforms,
applications and protocols that greatly contributed to the failure
of the Unix market in the first place. That way lies madness.
David Mohring

Re: The New SCO: Lessons for Linux in Business

Anonymous's picture

It would seem that you do not take into account the fact that SCO has a proprietary operating system that requires significantly higher in-house engineering than does RedHat, requiring higher gross margins.

Also, SCO's revenues are down from a few years ago when they had $53 million in licensing revenues in the 4th Q of 1999 alone. It is not reasonable to compare current SCO revenues with those of Caldera immediately prior to closing the acquisition in which it came into possession of the source of 95% of its revenues. This is comparing apples and oranges.

The reality is that Caldera failed in the Linux business and, therefore, acquired a proprietary operating system business. The question is whether or not they can make a profitable business of it.

Re: The New SCO: Lessons for Linux in Business

Anonymous's picture

Caldera needs to make money, and SCO makes money. It would be negligent of Caldera to ignore its installed base. The openness of software is changing irrevocably, but from the support providers' perspectives, it has to be based on solid cash, and if this is one way to do it, so be it. In the long run, it is likely that the lower costs of Linux will mean that a lot of SCO cusomters will move, simply because it will be in their best interests, and also in Caldera's. But for the moment, they want the safety of what they know in SCO. And Caldera must provide it, because anything else would be foolish.

Re: The New SCO: Lessons for Linux in Business

Anonymous's picture

I agree with your analysis. The reality is that Caldera/SCO has never figured out how to make money at Linux. My earlier comments were directed at the following paragraphs:

SCO might not be IBM or HP, but it's a very serious business that is certainly competitive with Red Hat.

Revenues through the last four quarters are past $40 million. In his presentation on Monday, SCO Group CEO

Darl McBride projected revenues at more than $60 million. Meanwhile, Red Hat's current revenues are just over

$70 million. SCO Group has 545 employees, compared to Red Hat's 634. SCO Group's gross profit margins are

nearly identical to Red Hat's, at 73.17%. And, SCO is ahead of Red Hat on turnover of inventory, assets and net

receivables flow. It also has no debt. (Most of these numbers are from Hoovers).

SCO Group's 12-month revenue growth is also very positive at 1,324%, while Red Hat's is down 35.6%--in a

market (8,000 public companies) that's only growing at 0.5%. (To be fair, Red Hat's 36-month revenue growth

is 71.4%.)

He fails to note that RedHat has no debt and a lot of cash. He fails to note that Caldera's 1,324% revenue increase is because they bought a cash cow and had very little revenue to start with. He fails to note that that cash cow had shrinking revenues. He does note the similarities between RedHat and SCO and he does note SCO's advantages. He does however miss SCO's weaknesses and RedHat's advantages. I just felt the article lacked balance and was even misleading.

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