| Experts: SCO is going down for the count |
Sep. 17, 2007
Predicting SCO's demise is a popular hobby in open-source circles. Now, however, with SCO recent filing for Chapter 11 bankruptcy, the experts believe that SCO's end is near.
After getting knocked about in the last few weeks in the U.S. District Court by Novell, SCO decided to file for Chapter 11 bankruptcy. The riches the company had sought from its anti-Linux lawsuits were clearly not going to be appearing, and the judge in the Novell Unix case was quickly moving to a decision that seemed unlikely to be in SCO's favor.
Chapter 11 is not a corporate suicide note. SCO may yet emerge from bankruptcy to continue its lawsuits. That, however, is not how most experts see it working out.
Eben Moglen, chairman of the SFLC (Software Freedom Law Center) and co-author of the GPLv3
open-source license, reflected that, "If instead of fighting the free software wave, Darl McBride and SCO had joined it, they would now have a very prosperous service company with a built-in customer base they would be profitably assisting to convert from proprietary Unix to free software operating systems. Instead, they bet the company on increasingly tendentious and transparently-unfounded accusations against the community of programmers who make the Linux kernel as well as IBM, which had the money to resist on principle rather than settling and paying tribute to a holdup artist. Now they have nothing, and their talented engineers will go to work for other vendors who will pay them to strengthen free software's technical superiority."
Moglen added that "the community has gotten stronger in many crucial ways as a result of SCO's unjustified and unsuccessful aggression. Even Microsoft—which invested heavily in SCO, hoping to achieve counter-disruption by making customers afraid to adopt free software—has failed of its objectives. Overall, thanks largely to the immense expenditures IBM was prepared to make to vindicate its own business interests, SCO has turned into an immense strategic victory for the Free World."
Moglen concluded: "May its bones rest in peace."
Dan Kusnetzky, principal analyst of the Kusnetzky Group, wasn't surprised by SCO's decision.
"This wasn't an unexpected move," he said. "The SCO executive team had bet everything on winning the case against IBM and Novell. Because of this focus, they haven't worked on overcoming the threat Windows, and to a far less extent, Linux, offer to the Intel/Unix market and have lost ground on both fronts. With massive outflows of cash a likely result of the judge's findings and only a dribble coming in [when compared to the Santa Cruz Operation era], they had little choice."
Others weren't surprised by SCO's decision to file Chapter 11, and see the end of its road ahead.
"SCO filing for Chapter 11 is certainly not surprising given recent legal developments," said Jim Zemlin, executive director of The Linux Foundation. "Frankly, any other development would have surprised me. It's disappointing to think of the wealth and opportunities lost in the pursuit of this misguided strategy. The only good one I could see coming out of this is the tightening of bonds of the Linux community and how they rallied to fight this dubious threat. Sometimes it takes a threat to make you stronger."
Speaking a word of caution, Raven Zachary, research director for open source at The 451 Group, said: "In all seriousness, bankruptcies don't always mean the end of a company. Let's see if they restructure or vanish. The end of SCO did not bring about loud celebrations, more of a 'yeah, so what?' response. I think most people expected this outcome."
One observer, however, isn't so sure that SCO is on a fast track to the bone yard. Mark Webbink, former deputy general counsel and secretary for Linux distributor Red Hat, noted on his
blog that while he's "not a bankruptcy lawyer, and I won't pretend to know all of the intricacies of Chapter 11. That said, I do know how to read a financial statement (I was a CFO before I ever went to law school)" and he finds a close reading of SCO's financial statements puzzling.
Specifically, he finds its interesting that SCO "was solvent in April but not now? Possible? Perhaps. Probable? I don't think so. If you look at the cash flow statement included in the April 10Q you will see that SCO, in fact, burned very little cash on operations during the first 6 months of their fiscal year, the period ending in April. In fact, SCO's cash actually increased by almost $2.4 million during that period! SCO would now have us believe that they burned through almost $5 million in cash since April 30 in becoming insolvent. ON WHAT?!"
Webbink said that in its Chapter 11 petition, SCO lists total assets of $14.8 million and total liabilities of $7.5 million. That is a reduction in total assets of $4.1 million and in total liabilities of $5.15 million since April 30.
"If those numbers are to be believed, SCO actually reduced its total liabilities by an amount greater than it reduced its total assets since April 30. That means shareholder equity will actually have gone up, not down, in the ensuing four and a half months. Again, that hardly paints a picture of a company that is insolvent," Webbink said.
As for why any of this matters, Webbink said that filing for Chapter 11 does not automatically qualify the petitioner for Chapter 11. The bankruptcy court must still consider the petition and the actual facts.
"I'm suggesting that SCO may have a bit of trouble actually proving they are insolvent and can't meet their obligations. Would that still be the case a week from now if the trial with Novell were not stayed? There was certainly the possibility the Utah court would find that the licensing revenues SCO received from Microsoft and Sun were subject to the SVRx licensing arrangement and that the bulk of the license fees from those transactions were due Novell [perhaps as much as $25 million]. If that were to happen, it would certainly have been within the realm of possibility that Novell could put SCO in Chapter 7 bankruptcy [liquidation]. So by this fast and loose move SCO has: Stayed the Novell trial; stayed the IBM trial; and avoided possible, and perhaps likely, involuntary liquidation."
Will SCO delaying its day in court help the Unix company in the long run? Webbink can't see it. "In the end, the SCO Group will have to account for its actions. It's just that the accounting will now come a little later, assuming the bankruptcy court grants their petition. In the end, I believe the result will be the same: no SCO."
The last word on SCO's Chapter 11 comes from Eric S. Raymond, co-founder of the OSI (Open Source Initiative). Raymond, doubtlessly speaking for many Linux users, said, "couldn't happen to a nicer gang of scum-sucking leeches."
—Steven J. Vaughan Nichols
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