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Editor's Note: A Few Questions for SCO From a Hypothetical Investor

Oct 17, 2003, 23:30 (19 Talkback[s])
(Other stories by Brian Proffitt)


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By Brian Proffitt
Managing Editor

So SCO got $50 million in private investment this week. Good for them, maybe not so good for the investors.

If I were a potential investor in SCOX stock, I would be asking them a fairly harsh set of questions.

For instance, why would I, as an investor, want to put my money into a company that has changed its tactics on IP enforcement at least twice that the public knows about? After all, initially, end users were not to be targeted for Linux license fees, and now the larger, commercial ones are. Until this week, when SCO President and CEO Darl McBride declared that they would not invoice commercial Linux users.

Instead, SCOSource, the SCO Group's IP enforcement division, would focus its efforts on obtaining Linux licensing fees from customers who already hold existing UNIX licenses from SCO. According to McBride at this afternoon's press conference, the theory is that pre-existing SCO UNIX customers who were also using Linux in their organizations would be easier to enforce Linux license issues.

So, as a potential investor, where is the payoff from dropping IP enforcement from a potential base of tens of thousands of commercial Linux users to a smaller base of no more than 8,000 licensed UNIX users (according to McBride). I mean, if you actually own IP that's in Linux, why shift to a group of people that you think is more easily charged for fees? I mean, c;'mon, if you owned a piece of Linux, you'd want to cash in on that for as much as you could, right?

Here's another question: SCO just extended your half-price licensing fee structure for a couple more weeks. If I'm an investor, why would I see that move as anything other than an enticement to pull in more clients? I have never seen a business extend a discount sale for any other reason than to bring more bodies into the store. Yet during the press conference SCO indicated that this extension was a positive sign; really just a chance to give potential customers until the end of the calendar month.

But what about actual customers? SCOSource is reputedly involved with many companies who are interested in the Linux licensing model. Well, it's been six months, and we've only heard about two (who shall, it appears, remain nameless). Are there more, and if there are why have we not heard about them? I could not imagine any company sitting on this kind of information, especially if this were their stock and trade.

And who's investing in SCO anyway? Certainly the recent Buy upgrade from Deutsche Bank has encouraged all the little daytraders out there to jump in and try to score on the SCO lottery. But who drops $50 million on a small cap company with no history of a commercial viable product line?

BayStar Capital II, LP is a venture capital firm that specializes in what's known as Private Investing in Public Entities, otherwise known as PIPE. There's nothing wrong with PIPE per se, it's a common way of investors to spread their money around without advertising where and when their money is going. But Pamela Jones, the ever-talented editor of Groklaw, discovered that one major PIPE investor (for any venture capital firm, not necessarily just with BayStar) has been Microsoft. Could there be a Microsoft connection now?

According to SCO and BayStar, none of the $50 million originated at Microsoft. The investment funds came from BayStar and the Royal Bank of Canada, of all places. Why the RBC is investing in SCO is beyond me. Though one wonders where Microsoft Canada deposits its petty cash.

Regardless of where the money came from, SCO's acceptance of this money represents yet another about-face, since last May SCO stated that they were generating enough revenue from licensing that they did not need such a major investment then. Besides, McBride explained, $50 million in May would have been far less diluted of an investment five months ago, when SCOX was priced in the "sub $10s."

Then's there's this whole backing away from SGI. You have a company that publicly admitted that there was inadvertant IP violations in the Linux source, while at the same time detailing how they corrected the problem. You can certainly charge them, right? Yet now you're backing away from royalty enforcement. Hello? As a potential investor, shouldn't I expect the company to do as much as it can to make money?

Of course, I would have preferred to ask these questions to McBride, but for the second SCO press conference in a row, I did not get my place in the question queue in time, despite punching the code two seconds after the call for questions. I'm sure that's just a technical thing--I never could dial in fast enough to win any thing from a radio show, either.

As a hypothetical potential investor, I would really question all these changes in tactics. And these are not trivial changes, adapting to changing circumstances--these are, in my opinion, outright reversals. Why would I put my money in such a company?

Oh, wait, I forgot one minor point: this whole IP thing about Linux? Not proven in any court nor by any publicly available evidence.

I'm sure that's just another one of those technical things.

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