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Online Extra: Why SCO's McBride Declared War


You have to give SCO Group (SCOX) CEO Darl McBride credit for one thing: He's got moxie. Since moving into the corner office at the tiny Utah software company in June, 2002, McBride has taken on the software world. In March, 2003, he sued IBM (IBM) for $3 billion, claiming Big Blue handed over SCO-owned intellectual property to software programmers who developed the increasingly popular Linux software. Now he's threatening to sue a major company that uses Linux to run its computers, and may be just days away from doing so.

BusinessWeek Correspondent Jim Kerstetter recently spoke with McBride in SCO's offices beneath the snow-capped Wasatch Mountains. Here are edited excerpts of that interview:

Q: How does it feel to be demonized?

A: Hah! When we went into the process of saying we were going to enforce our rights, one of the issues that came up very early on was if you go down this path, you're going to be vilified by the open-source community. They're going to attack you. You're going to be sorry you ever did this. From our standpoint, it becomes a question of whether you're going to protect your rights or back down from a set of folks you believe are going to come after you with pitchforks.

Q: When did you decide to go down that path?

A: It was more of a gradual process. When I joined the company, we did a 30-day analysis and review. I interviewed the top managers inside the company and a handful of people outside and asked, "Where do we go with this thing?" [SCO] had come down from being $1 billion in value down to about $5 million, it was a few quarters from being out of cash, and what became very clear to me early on was that there was a lot of value in the Unix intellectual property that wasn't being optimized.

So what happened was, 30 days into my tenure, we sent a letter out to shareholders and said, "Look, we have a significant asset base here around Unix, around the SCO brand, around our 11,000 resellers, around all these licenses we have. We're going to go out and shine this company up."

This was like beachfront property that had the windows knocked out, weeds growing. It was a mess. But it was still on the beach. And I could see a vision where we could restore the value.

I said my goal was to get a return on the initial Caldera IPO, when it was trading at $56 per share.... It could be very valuable if we took the right steps. So over a period of months, it wasn't like a binary switch. It wasn't like we said, "Oh, let's go find people and sue them." It was a gradual enforcement of our rights, stepping up, and then we finally got to a point of impasse with IBM where either we were going to back down, or we're going to continue to go after them. And the only way to continue to go after them was to file a lawsuit.

Q: So when did you first contact IBM?

A: The first time I had a discussion with IBM was shortly after I sent out the shareholder's letter. In August [2002], we went to LinuxWorld in San Francisco, and I met with their senior Linux executive at the time. It was just sort of a get-to-know-you session.... I laid out to him that we've got all this intellectual property, and you guys have done well with your IP rights. He said, "Oh yeah. We do over a billion dollars in business with that. Protecting your IP is a great idea."

In concept it was great, it wasn't until December when we came out and said here's where the problems are with Linux, and we have a program where you can deal with that.

Q: What was the reception to that?

A: It seemed everyone in the industry was either positive or neutral to that, except for IBM. IBM had a violent reaction to it, even though it wasn't targeted directly at them. Their whole issue was, "We don't want you out there implicating there are IP issues involved." We were going to make an announcement last Dec. 11 [2002], and then we grounded that. We spent two weeks talking to IBM about how we could work together, and that didn't get anywhere. Then we started looking into the contractual issues we had with IBM, and then we started to see that there were some potential problems there.

At the very moment we're having problems we're trying to resolve, we go to LinuxWorld in January of 2003, and we went ahead and announced our libraries program [design to license SCO technology to Linux customers]. We announced that David Boies was coming on board to help us enforce our IP. IBM blew a gasket.

[An IBM spokesman said in a written statement that IBM will not debate through the media a matter that's in litigation. He added that as IBM said in its answer to SCO's amended complaint, SCO's claims are without merit, and SCO did not give IBM any notice or warning of them prior to filing its lawsuit.]

Q: At what point did you decide to sue?

A: When I returned home, I found that IBM had withdrawn its support of our Unix business.... About 20% of our shipments go out on IBM hardware platforms. It's not a small part of our business. So that was immediately after the conference. We didn't file the suit until March.

Q: You bought the Unix business from Novell, but it took you a while to find an amendment to that contract that says you also bought the underlying intellectual property as well. Where was that amendment?

A: First of all, we weren't spending a lot of time looking for it. Our case against IBM was purely grounded in contract. It wasn't until Jack Messman [CEO of] Novell came out in an open letter to us saying, "Novell owns those copyrights, and we are going to make these all available and bless the Linux community, and there will be no problems there."

Well, that was the first day we started looking for the amendment. We weren't seriously concerned about it before that. My executive secretary, to her credit, she went through a ton of files. She found this thing, it was maybe four days later. I called Messman that night and dropped the news on him.... When we had those copyrights in hand, that's what made the whole case on the Linux side much stronger.

Q: Where do you go next?

A: Where we go next is down the end user side of enforcing our copyrights. We came out last summer and put out some code that the Linux community on one hand said, preposterous, that's [Berkeley software]. On the other hand, some people in the Linux community said, hold on, you may have some copyright issues there.... There are 2.5 million servers out there today that have this code in it. When are Linux customers going to clean that stuff up? So that's one issue, Linux is tainted, even by their own admission.

Q: Have you had direct talks with customers yet?

A: Very carefully over the last quarter, instead of sending out mass invoices, we stepped very carefully and really had a lot of direct one-on-one meetings with 15 or so companies. In the process of doing that, we learned a lot. We listened. We talked. And we went back and forth. About 20% of those companies signed licenses with us.

Q: Can you name any of them?

A: We have taken the stance not to, partly because they don't want their names out there, partly because we are willing to protect them. As soon as they get their names published, they are going to get attacked by the open-source community, like everybody else it seems who is associated with us. But they are, in that case, Fortune 500 companies.

There's a chunk of companies who said, "We're not going to use Linux. So move on." And there's a large chunk that said, "Before we pay for a license agreement, we want to see a settlement or a court decision out of the IBM case. Or if you have some other settlement or court decision out there that we can rely on, we'll consider doing that."

Q: Then who are you going to sue?

A: The honest answer is we don't know. Conceivably, if everyone steps up and buys a license, we don't need to.

Q: There has been a rumor in Silicon Valley that you're going to sue Google.

A: Yeah, Google gets brought up a lot. They're high-profile, and they're one of the largest users of Linux. They have nearly 10,000 boxes, from what we can tell. They're a poster child. I think what's interesting about them is they have been able to develop a low-cost operating model because of Linux. If your model is going to hold up, you better make sure you don't have any infringing code in there. Otherwise, you need to adjust your financials based on how much you pay for your servers.

Q: Have you talked with Google?

A: Some discussions have been initiated there.

Q: Which would mean?

A: We don't know where that goes yet. It's very premature to say what's going to happen there.

Q: So your lawyers are talking to their lawyers?

A: We've got a team that's engaged in going back and forth. We do have legal counsel on our side. We have marketplace experts that we've kind of trained.... We're not targeting just Google per se. But anybody who is using 10,000 boxes, that's an elephant on a table. There's a lot of reasons you wouldn't [go after Google]. But to say we're going to ignore them doesn't make any sense either. I think it's going to be a function of what happens over the next few weeks.

[A Google spokesman says the search giant has not discussed with SCO its demands.]

Q: When you decided to take legal action, were you prepared for the reaction you would get?

A: I wasn't prepared for the level that it hit. I was prepared for some sort of battle, but I didn't realize that it was going to be on a world war stage.... What's odd to people is you have SCO against the world on one level. On another level, you have intellectual-property people who think operating systems shouldn't be free in our camp, and you have people over there who think operating systems should be free in IBM's camp. It balances out a little bit when you realize there are people who support us.

Q: You're in an odd situation. How often does a little tech company end up looking like the bad guy because it's suing the largest tech company in the world?

A: It is an odd situation, I think, if you look at this open-source community. I asked the previous CEO, "Have you thought about enforcing your Unix IP rights?" He said, "Yeah, but if you do, the Linux community is going to get really mad." That's what was governing his thinking. In the meantime, the market cap was below $6 million.

So it comes down to a question of: You have these property rights.... and if you go down this path, you are absolutely going to draw the ire of thousands of people around the world. But in the end, there wasn't a second thought in my mind of whether you do it or not. Did we know it was going to be this big? No, I didn't have an inkling.

Q: You've received bomb threats, death threats and plenty of hate mail because of what you're doing. Have you ever wanted to say to your detractors, "Hey folks, this is just software here?"

A: They say if you want to get into an argument at the dinner table, start a conversation about religion or politics. I would argue that Linux is a cross between religion and politics.


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