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4/8/2005
05:54 PM
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The $40 Million Question

I heard last night from Steve Puluka, the guy who authored the SCO cash flow analysis I mentioned earlier this week. "The real shame," he said, "is [SCO] built up a huge cash reserve in 2003 that is being blown on these lawsuits. What might have happened if that 40 million was invested in the Unix and Linux business instead?"

I heard last night from Steve Puluka, the guy who authored the SCO cash flow analysis I mentioned earlier this week. "The real shame," he said, "is [SCO] built up a huge cash reserve in 2003 that is being blown on these lawsuits. What might have happened if that 40 million was invested in the Unix and Linux business instead?"

That is really the most poignant question one can ask about all of this, given the fact that SCO is a dying company, having bet its life not on promoting innovation but on destroying it.

As far as I'm concerned, SCO's executives have behaved like a bunch of intestinal parasites instead of the entrepreneurs they claim to be. The company wasn't forced down this path: SCO could have decided that whatever the outcome, litigation wouldn't leave it with a sustainable business model. SCO could have supported and encouraged the shift towards Linux, rather than staking everything on a long-shot extortion attempt.

Other companies proved the open-source road isn't a financial dead end. Red Hat's most recent quarterly report proves that a company can prosper selling open-source products and services to enterprise customers. IBM takes a different but equally valid approach, supporting Open Source to complement a proprietary software stack.

Novell provides the best example of what could have been for SCO. Faced with a potentially lethal competitive threat from Linux, Novell didn't raise an army of lawyers to roll back the clock. It embarked upon a gutsy, brilliantly executed strategic turn away from its NetWare legacy and towards a future based on Linux and other open-source software. Novell's shift may be even more dramatic than Microsoft's bet-the-farm embrace of the Internet in the late 1990s; compared to SCO's swan dive into the gutter, it shows how much a company's fate depends upon the character and integrity of its leadership.

Steve Puluka also passed along some extra nuggets from SCO's regulatory filings. I think they're worth sharing, since they illustrate the company's current financial situation.

First, an excerpt from SCO's agreement with its outside legal counsel, filed last year:

In furtherance of this obligation, SCO shall use commercially reasonable efforts to manage its on-going business in a cash-flow positive or neutral manner consistent with applicable fiduciary duties to its shareholders. The Three Original Firms shall use reasonable efforts to coordinate the incurrence of significant expenses with SCO's general counsel.

(Ed note: "Three Original Firms" sounds like the name of a really bad pizza place, doesn't it?)

This reiterates what most of us assumed: SCO paid its legal bills up front because its long-term cash flow looked iffy at best. As Steve Puluka's cash-flow analysis suggests, SCO may not even be able to make the last of these advance payments.

Also, Puluka sent this excerpt from SCO's audited 10K:

If we do not receive SCOsource licensing revenue in future quarters and our revenue from the sale of our UNIX products and services continues to decline, we will need to further reduce operating expenses to generate positive cash flow. We may not be able to further reduce operating expenses without damaging our ability to support our existing UNIX business. Additionally, we may not be able to achieve profitability through additional cost-cutting actions.

The main point here is SCO's warning that it may not be able to reduce its operating expenses without stiffing its existing customers. That's an inspiring notion for a company that's about to release a new version of its flagship product, isn't it?

Matt McKenzie is editor of Linux Pipeline. A permanent link to this article is available here.

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