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Can SCO Run Unix?

The Santa Cruz Operation now supplies the source code used by 90% of all Unix vendors. Is this smallish software company up for such a big role?
By John Foley
Issue date: March 25, 1996

Signs posted along the cliffs outside of Santa Cruz, Calif., where dozens of surfers have drowned, warn: "Remember: Conditions are hazardous and subject to change. Be cautious." That's not bad advice for Alok Mohan, CEO of the Santa Cruz Operation and a surfer in his spare time. Though SCO is relatively small , with revenue of just $200 million, the company has assumed the monumental role of providing source code to most of the Unix industry.

Mohan, 47, steered SCO through last fall's bold acquisition of Novell's Unix business, including the UnixWare operating system and the AT&T-developed Unix System V source code. The deal was inked in December. Now SCO-which already owns the low-cost OpenServer operating system, the Unix market leader by units shipped-is the sole licenser of the underlying code used by 90% of all Unix suppliers.

The Unix acquisition has propelled 17-year-old SCO to an enviable but pressure-filled position. "This is a new business for us," says Mohan. "In the past, we were a tactical provider of packaged products. Now we're going to be heavily involved in [enterprise] solutions, which makes it much more strategic."

Confidence Vote
Can SCO pull it off? Customers think so. "My guess is that SCO will do a very good job," says Harry Levy, CIO of the Men's Warehouse, a retail chain in Houston that bought a UnixWare license from Novell two years ago.

Evidence of SCO's growing prominence was displayed at the UniForum trade show in San Francisco last month. There, Mohan's new role was underscored by an invitation to be a keynote speaker along with three of the computer industry's most powerful figures: Lewis Platt, Louis Gerstner, and Scott McNealy, the CEOs of Hewlett-Packard, IBM, and Sun Microsystems, respectively.

SCO also keeps heady company with a client list that reads like a Who's Who of Unix suppliers: Digital Equipment, Fujitsu, HP, IBM, ICL, NCR, Stratus, Tandem, and Unisys. SCO licenses Unix products to "several hundred" companies, says Doug Michels, the company's executive VP and chief technical officer. The only big name missing is Sun, which bought the rights to use Unix System 5 Release 4 (SVR4) in a one-time deal with Novell signed in March 1994.

Ironically, two of SCO's largest sha reholders, Novell and Microsoft, also give the Unix industry its roughest competition. Novell snatched a 16.5% stake in SCO as part of the UnixWare transaction in December. Microsoft paid for its SCO shares-11.3% of the companytoday, and once as high as 19%-back in 1989. Since 1983, SCO has licensed Xenix, a Unix variant no longer marketed, from Microsoft.

While Unix vendors are willing to live with Novell's presence in SCO's boardroom, Microsoft's is another matter. Jean-Francois Heitz, Microsoft's assistant controller and an SCO board member, is asked to leave the room at SCO board meetings whenever competitive issues are to be discussed. "It's not the best of situations," Mohan admits.

SCO also works closely with computer manufacturers. Since closing the deal with Novell in December, SCO executives have met with vendors worldwide to try to earn their trust and continued business. One of the companies that has formed an alliance with what Mohan calls the "new SCO" is c omputer-maker NCR Corp.-it licenses SVR4 from SCO and resells both UnixWare and OpenServer. "It's in my benefit for SCO to be successful, and I think most of the other [Unix] companies feel the same way," says Bill Eisenman, senior VP of NCR's computer systems in Dayton, Ohio. "The industry will get a better baseline of technologies if we can make this work."

Little SCO faces a tough task. In the most recent quarter, the company earned $2.6 million on flat revenue of nearly $48 million. After factoring in a $38 million charge for the purchase of Novell's Unix business, SCO reported a quarterly loss of nearly $33 million. In fiscal '95, SCO took a $14 million charge for buying Visionware Ltd. and reported a loss for the year of $6.1 million.

But Mohan quickly points out that, excluding those troublesome one-time charges, SCO has turned a profit in every quarter since going public in 1993. He also believes revenue will grow, with increases projected in four product areas: new Unix licensing agreements, Internet products, "layered" technologies such as management and backup software, and Windows integration products. "If we can pull this off," Mohan says, "it will impact the industry and impact our financial performance."

On the technology front, SCO faces the task of managing two Unix operating systems-UnixWare and Open-Server-while simultaneously merging them into a new operating system, code-named Gemini, that's due next year.

Meanwhile, SCO announced version 2.1 of UnixWare in February, and it's pushing Unix system manufacturers to adopt the release as their platform of choice. The reasons are mostly monetary: Under terms of SCO's deal with Novell, fees from earlier Unix versions continue flowing to Novell, but SCO gets all UnixWare licensing fees. "It's pretty straightforward," says Michels. "We try really hard to convert [Unix vendors] to the newer releases."

SCO has hitched its future to a long -term agreement with Hewlett-Packard to develop a 64-bit Unix operating system targeted at Intel's next-generation Merced microprocessor. SCO's role: sell a baseline version of the operating system into the low-cost, high-volume reseller channel. HP will strive to create a "value added" implementation for its own customers and industry partners.

At UniForum, SCO and HP reported on the status of their six-month-old alliance. They've created an architectural team, staffed largely with Unix developers hired from Novell. They've also drawn up a conceptual framework called the Three Dimensional Architecture (3DA). All this work should result in a new operating system, due in 1997, that combines elements of OpenServer, UnixWare, HP's HP-UX, and Unix technologies from other companies. "Pro- gress is happening faster than we ever expected," says Richard Sevcik, VP and general manager of HP's systems technology. "We're actually talking about expanding our relationship with SCO."

But SCO's relationship with HP has raised questions ever since it was announced on Sept. 21-the same day SCO revealed plans to buy Novell's Unix business. Observers wonder if SCO can hold its own with HP, a company that, with sales of $32 billion, is 160 times its size. Bill Crawford, a senior technical staff member of Rockwell International's North American aircraft division in Seal Beach, Calif., and a long-time user of SCO Unix, fears SCO may find it difficult to arbitrate between competing Unix camps. "[SCO is] wrestling with the big guys now," he says.

McNealy of Sun believes the HP-SCO alliance "is going to backfire." He argues that cooperating with HP is not in the interests of other Unix suppliers. "HP is a feared competitor in the PC business," says McNealy. "They also have an inside track with Intel."

But that may be precisely why HP needs SCO. The thinking behind the alliance is that HP's Unix competitors can license 3DA technolog y directly from SCO. "We don't want to partner with HP," says NCR's Eisenman. "SCO has to be the key player in this proposal going forward."

Keys To Success
SCO's relationship-building skills could mean the difference between long-term success and failure. By the end of this month, SCO is expected to announce licensing agreements and technology partnerships. "The strategy is working," Mohan insists.

Yet most of the hard work still lies ahead. "The relationship with HP is still uncertain, especially from a business-model perspective," says Scott Winkler, an analyst with Gartner Group Inc., an IT advisory firm in Stamford, Conn. "How is SCO going to make money in the arrangement?" Mohan admits that SCO and HP are still working through the details. "It's very complicated," he says.

Other dangers loom, too. Value-added resellers of UnixWare recoiled at the pricing structure SCO unveiled in February with UnixWare 2.1. The problem: The cost of a UnixWare license skyrocketed for some installations. "I'm looking at a $4,000 license compared with a $1,700 license before," says Dan Busarow, owner of DPC Systems, a value-added reseller in Dana Point, Calif. He's considering UnixWare alternatives such as Sun's Solaris or Caldera's Linux operating systems-and he believes he isn't alone. "Other things are looking attractive," Busarow says.

With challenges like that, the surf's definitely up for CEO Mohan. The next few months could blow in the wildest ride in SCO's history.

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