is playing hard ball to assert its right to profit on the Linux operating system.
On Tuesday, Lindon, Utah-based SCO even threatened to sue a Linux user to make its case. It may be an idle threat, but ever since SCO sued
in March for allegedly misappropriating SCO's Unix code for Big Blue's Linux business, the company's stock has tripled and was up some 3% on Tuesday. Judging by that climb, investors seem to think SCO's lawsuit has a fighting chance against Big Blue.
High-profile attorney David Boies has agreed to represent SCO, but legal eagles say it's too early to handicap the case.
, which makes its money through its own Linux operations, has also joined the dispute, asking a judge to clear it from SCO's challenge.
To be sure, there's an obvious reason to get excited about SCO should it win its suit: The company stands to gain billions. On a conference call Tuesday, SCO estimated there are roughly 2.5 million servers using the version of Linux in question, and announced an introductory price of $699 for a one-time license for a single CPU system. Just multiplying those two numbers together yields $1.75 billion. This is admittedly a gross oversimplification because large enterprises would likely get discounts. However, SCO also said it would raise that introductory rate to $1,399 in October.
SCO said it is offering the license so that Linux users can avoid infringement on its intellectual property. If Linux users don't bite, SCO said Tuesday they might be slapped with a suit of their own.
"The legal liability for Linux truly rests withthe end user," SCO CEO Darl McBride said Tuesday on a conference call. He noted that the music industry didn't see any results from its fight against online file-sharing until it went after end users. "If we have to go down that path, again we've been pushed there. We will go down there," he said.
But the legal battle over sharing music on theInternet is far different from the Linux fight, saidDoug Isenberg, the founder, editor and publisher of GigaLaw.com. "In music file-sharing, end users who are trading are clearly breaking the law and have every reason to know they are breaking the law by committing copyright infringement," he said. "In the Linux litigation ... I think most if not all of those users are unaware they may be violating any laws in the first place."
"Right now I think the legal rights to thesoftware are unclear," Isenberg added.
One analyst whose hedge fund bought shares of SCO sees things differently. "I think there is a lot of meat on the bone here, so to speak, in terms of there being a strong case," says the analyst, who requested anonymity. Among the reasons he cites:
The company and its executives have staked their reputation and their futures on the case.
The company is showing evidence -- actual code -- making it a clear-cut case.
Parsing the Case
SCO stressed on the Tuesday call that it has the code to prove that the Linux version in question borrows from its copyrighted Unix code verbatim and said it is showing that code side-by-side to analysts and even Linux advocates.
However, a call to one analyst revealed the matter is not so cut and dry. Bill Claybrook of Aberdeen Group said SCO showed him two pieces of code side-by-side on two pieces of paper, but acknowledged he can't be sure where it came from.
"You'd like to think that SCOshould have some legitimate claims because they'regoing through a lot of trouble ... On the other hand,a lot of people are questioning whether they do havelegitimate claims."
In addition, David Boies is no guarantee of SCO'svictory. After all, Boies, whileundeniably a high-profile, articulate lawyer, alsorepresented the music-sharing company
, which a judge shut down.
"David Boies takes cases because he likes to try interesting cases," said Jeff Neuburger, an intellectual property lawyer at the New York-based firm Brown Raysman Millstein Felder & Steiner. "I don't think the fact that he's representing SCO means they have a good case or not."
And don't discount Big Blue, either. "IBM is avery careful company that understands intellectualproperty very well," Neuburger adds. "Knowing IBM, myhunch is they have a very good argument that they'vedone nothing wrong."
Neuburger is more skeptical of SCO's motives inthe case. "SCO is taking an aggressive position.They've hired a very high-profile litigator, but theyseem to be trying a lot of this case in the press asopposed to the court room," he said. "That calls intoquestion what their true motivation and objective is."
To be sure, IBM could gobble up SCO and remove theshadow now hanging over Linux in one fell swoop. Thecompany's market cap sits at only $163 million, aminuscule fraction of IBM's $138 billion. IBMhas denied the charges.
Can't Call a Winner
To further complicate the picture, short-sellershave been coming out of the woodwork, gaining a largerinterest in SCO in recent weeks. The short interest inSCO shot up 41% from June 13 to July 15, according toNasdaq.
Similarly, short interest in Linux software vendorRed Hat has jumped, but at a slower pace of 13% overthat same period.
Red Hat, among the companies that stands to losethe most if customers have to start paying a licensefee for Linux, filed a suit this week seekingdeclaratory judgments stating that it hasn't infringedon SCO's intellectual property and also charging SCOwith tortuous interference and trade libel. Thecompany also established a $1 million legal defensefund for the open source community.
"These are challenging times," Red Hat CEO MatthewSzulik said more than once Tuesday in his keynoteaddress at LinuxWorld. "I ask for your help. I ask foryour participation." He was largely preaching to thechoir as members of the audience applauded him when hetalked of the importance of being able to see softwarecode without having to worry about being arrested.
"Most people right now are ignoring it
the suitone way or another," said Erwin Frise, systems managerfor the Berkeley Drosophila Genome Project, afterhearing Szulik's speech. Even if SCO succeeds, thecode can be easily replaced, eliminating the need tobuy a license from the company, added Frise.
But in the long term, SCO's actions have thepotential to dampen Linux's growth until the issue isresolved, Soundview analyst Victor Raisys said in aresearch note Tuesday. Trial in the IBM case is setfor April 11, 2005.
Raisys has an underperform rating on Red Hatshares, which he believes are overvalued. (His firmhasn't done any banking with the company.) Indeed,despite the short interest, the ability of Red Hat'sshares to weather the SCO storm could be anotherindication that some investors are dubious of SCO'sclaims. Red Hat shares closed flat Tuesday at $6.65, more than 13% higher than when SCO filed suit, although well off a June 5 rally high of $8.70. The company is trading at a whopping 110.8times 2004 earnings.