The Sco Group Inc. Business Information, Profile, and History

Company Perspectives

As the owner of the UNIX operating system, The SCO Group (SCO) has established itself as a leading provider of innovative UNIX solutions. Millions of customers in more than 82 countries depend on SCO for the Power of UNIX.

History of The Sco Group Inc.

Based in Lindon, Utah, The SCO Group Inc. owns the UNIX operating system. Operating systems are software applications that control a computer's basic operations and hardware. UNIX was originally developed in 1969 by researchers at AT&T, including Dennis Ritchie and Ken Thompson. UNIX, which allows computer systems to be accessed by more than one person at a time, played a key role in the development of the Internet.

In addition to serving as the exclusive licensor to UNIX-based system software providers, SCO also markets software for different computer systems, including those that are embedded, distributed, and network-based. The company's products include SCO OpenServer, a computing platform for small and medium-sized firms, as well as the UNIXWare operating system for large enterprise applications.

SCO's customers include thousands of resellers and developers across the globe who serve a variety of industries, ranging from manufacturing and finance to retail and healthcare. SCO provides localized support, education, and professional services through its SCO Global Services unit.

A Family Affair: 1979-89

SCO's roots stretch back to 1979 when Chicago native Larry Michels and his son, Doug, established a UNIX consulting firm called the Santa Cruz Operation. According to Nation's Business, after graduating from the University of Illinois, the elder Michels relocated to southern California during the early 1950s to work as an electrical engineer in the defense industry. Larry Michels later established a credit card verification firm, which he sold in 1969 to TRW. After a ten-year stint with TRW, Michels worked as a management consultant and moved to Santa Cruz, California, where his son was studying computer science at the University of California.

The oldest of four children, Doug Michels had found weekend employment with his father during high school. While he vowed to never work for his father again, Doug shared Larry's entrepreneurial spirit and started a computer consulting company while he was a college student. Ultimately, Larry and Doug's consulting work began to mesh. Larry, who focused on the strategic and organizational aspect of consulting projects, started to rely on Doug to provide input on technology issues. In time, they decided to merge their businesses, in order to share overhead. Larry Michels served as president and CEO of the new firm, while Doug became SCO's lead strategist and assumed the title of vice-president.

SCO achieved pioneer status in 1983 when the company unveiled its SCO XENIX System V for Intel 8086 and 8088 processor-based personal computers, giving small businesses access to an affordable "business-critical computing system." The following year, SCO developed a two-tier channel for distributing general purpose operating systems, working with application developers, computer manufacturers, distributors, and resellers across the globe.

SCO experienced difficult times during the mid-1980s, namely in the area of cash flow. Although the company remained a private enterprise, it began accepting outside investors, including rival Microsoft, which acquired a 20 percent ownership stake. This support allowed the firm to continue growing. In 1986 SCO established headquarters in Europe after acquiring a division of United Kingdom-based Logica Ltd.

The IBM PC effectively opened personal computing to the masses, as many manufacturers began to manufacture IBM-compatible computers. UNIX, which had been created to run on powerful minicomputers, had more to offer than the somewhat limited MS-DOS operating system used by IBM-compatible PCs. As PCs became more powerful, they eventually had the capacity to run UNIX operating systems. It was this development that set the stage for SCO's initial success. Under a license from AT&T, SCO began marketing UNIX-based operating systems for PCs.

Several important developments took place in 1987. That year, SCO unveiled SCO XENIX 386, which it describes as the "the first 32-bit operating system (and first UNIX System) for Intel 386 processor-based systems." A related development was SCO's "386 Summit"--a gathering of software developers and hardware manufacturers that focused on 32-bit business computing with Intel computer hardware.

By 1989 the small consulting firm that father and son had founded to share overhead had evolved into a sizable and successful enterprise, with sales of approximately $100 million and 900 employees. The company achieved great success with its niche focus on UNIX for PCs, as opposed to larger mainframe and minicomputers. Beyond the operating system itself, SCO offered support services that made UNIX palatable to new users, and attempted to make the system more user-friendly.

In the July 1989 issue of Personal Computing, David Fiedler, editor of the UNIX newsletter Unique, commented: "Anyone can go to AT&T, get a license, recompile some code, and sell a Unix product. But SCO goes way beyond that. They add the necessary connections, the telephone support, the extra value. And to a large extent, that's what people are buying, not just the disk and the manual."

SCO ended the 1980s by unveiling two new products. These included SCO UNIX System V/386. With an eye on making UNIX more appealing to business users on higher-end PC workstations, the company also introduced the first 32-bit graphical user interface for UNIX, called SCO Open Desktop.

Rapid Change: 1990-2002

The success that SCO found during the late 1990s continued into the early 1990s. Despite an economic recession, the company's sales increased 30 percent in 1991, reaching $135 million. While this was encouraging, SCO's growth presented some unique problems and challenges at the leadership level. In particular, these problems were related to the father-son element and Doug and Larry's management style. At times, investors and employees had a difficult time discerning who was in charge, and Doug was not always given the respect that was commensurate with his position.

Larry Michels provided insight on this situation in the April 1990 issue of Inc., explaining: "My son, Doug, and I built this company together, to indulge ourselves in doing what we do, dabbling in high-tech management issues. And we really do manage it together. He's the number-two person, but it's hard at times to see if he's CEO, chairman of the board, or executive vice-president. The roles shift as we move through daily business. Employees sometimes try to deal with us separately, as if we're not equals." In order to resolve these issues, SCO eventually hired James E. Braeher, an executive consultant from Monterey, California, who worked with the company's management team to improve communications.

The early 1990s were marked by a flurry of important developments at SCO. With the acquisition of a firm called HCR, the company established SCO Canada in 1990. Several product introductions followed, including a family of operating system products marketed under the SCO OpenServer name in 1992.

According to Software Magazine, in January 1993 Larry Michels stepped down as SCO's president and CEO. His resignation followed lawsuits and allegations from California state agencies that he sexually harassed several SCO employees. SCO board member Jim Harris immediately replaced Michels. Harris eventually was succeeded by Lars Turndal, an executive who had joined SCO in 1988.

SCO acquired British software company IXI Ltd. several months later. IXI maintained operations in Cambridge, United Kingdom, and functioned as SCO's development center. Finally, in tandem with its strategy to sell large, mission-critical computer systems to large corporations, SCO became a public company in 1993 and was listed on the NASDAQ.

SCO acquired another British company called Visionware in 1994, and the company formed an office in Leeds, United Kingdom. A major development took place the following year when SCO acquired Novell's UNIX business. The deal included the UNIX System V source code, which Novell had obtained from AT&T, as well as the UNIXWare 2 operating system, and made SCO the supplier of the source code used by virtually all UNIX vendors. Source code is the human-readable programming language in which a computer application is written.

In 1995 SCO reorganized into decentralized business units in order to be more responsive to customers. SCO Chairman and CEO Lars Turndal retired in July of that year. Retaining his status as chairman, he stayed with the company in a consulting capacity and was succeeded by SCO President and Chief Operating Officer Alok Mohan, who had led the company's reorganization efforts earlier in the year.

SCO's sales increased to approximately $200 million in 1996. By this time the company licensed UNIX to hundreds of technology companies. In addition to smaller firms, SCO's client base included the likes of IBM, Fujitsu, Hewlett Packard, NCR, and Digital Equipment Corp. The company proceeded to release a number of new products in 1997, including its UNIXWare 7 operating system.

In mid-1998 Novell gave up its partial ownership stake in SCO, selling the 6.1 million shares of SCO stock it had obtained in 1995 as part of the UNIXWare sale. With support from Intel, that same year IBM and SCO teamed up for Project Monterey. According to SCO, the project aimed "to develop a high-volume enterprise UNIX system," resulting in one product line for "entry-level servers to large enterprise environments." SCO ended the 1990s with cofounder Doug Michels serving as president and CEO.

By the new millennium SCO had been contending with strong competition from Linux--a free, "open-source" operating system based on UNIX. With open source software, developers and programmers are able to make changes to a program's source code as they wish; it is not controlled by any one organization. This competition came to a head in August of 2000, when Orem, Utah-based Caldera Systems Inc., a Linux vendor, announced that it planned to acquire SCO's Server Software and Professional Services Divisions, becoming Caldera International.

Established as Caldera Inc. in 1994 by Ray Noorda and Ransom Love, Caldera had just completed its initial public offering and gained a listing on the NASDAQ. The $120 million cash and stock deal, which was completed in 2001, created the largest UNIX reseller channel in the world. Although it resulted in the combination of Linux with UNIXWare and OpenServer, the result was not a completely open source product. In the August 7, 2000 issue of Inter@ctive Week, Ransom Love indicated that customers would receive restricted, and not completely open, licenses. "Business users would like someone to have ownership so someone also has responsibility for maintenance and support," he explained.

After the Caldera deal, SCO was left with Tarantella, a UNIX-based application service provider (ASP) product that allowed users to access a variety of applications remotely, via a browser. With Doug Michels at the helm, the company changed its name to Tarantella Inc. Michels stepped down as the company's CEO in December 2003, and Tarantella was eventually purchased by Sun Microsystems in 2005 for $25 million.

Caldera carried on with the technology that had been the core of SCO's business, releasing Open UNIX 8 in 2001. That year, the company established operations in Japan called Caldera K.K. with assistance from Hitachi and Fujitsu. In 2002 Caldera returned to its roots by completing a stock repurchase and changing its name to The SCO Group (SCO), with Darl McBride serving as CEO.

Intellectual Property Battles: 2003 and Beyond

In 2003 SCO became involved in a flurry of litigation. The company sued IBM over what it called "tortuous interference, unfair competition, and breach of contract," and claimed that IBM was illegally using UNIX source code in the Linux operating systems it used to run IBM servers.

SCO's lawsuit was a source of controversy within the technology industry. Some observers criticized SCO's motivations, arguing that the basis of the litigation was inaccurate. Others claimed that it would slow down the open source software movement, while some supported SCO's right to sue. In any case, IBM and Linux vendor Red Hat reacted by filing their own lawsuits against SCO. In addition, IBM alleged that SCO had violated a number of its copyrights. SCO also filed a "slander of title" suit against Novell in 2003. Amidst this activity, SCO's distribution of Linux was halted. The company began concentrating on UNIX development and formed its SCOsource Division to enforce its intellectual property rights.

In 2004 SCO announced that its once struggling UNIX division was profitable again. The company continued to face substantial legal bills, however, in the wake of additional litigation, including intellectual property suits it filed against AutoZone and DaimlerChrysler for alleged software agreement violations. According to an August 9, 2005 IDG News Service article, SCO's legal fees were expected to total nearly $40 million by January 2006. After this time, the company's legal fees would be capped as part of an agreement between SCO and its attorneys.

In the same IDG News Service article, SCO CEO Darl McBride said that most of his company's employees were focused on technology, and not the firm's legal battles. He remarked that the same held true for most of SCO's customers, explaining that they had been supportive. Other observers were critical, however, of the legal activity and its effects, labeling it as selfish and arguing that it had ruined the SCO organization.

In 2005 SCO continued to introduce new products, including its Me Inc. Mobile Services mobile computing platform. It had been a difficult year financially, however; SCO reported a loss of $10.7 million. The company's sales, which totaled $36 million, were down almost 16 percent from the previous year. In addition, its employee base had declined more than 33 percent, to 200.

As SCO moved forward into 2006, McBride was optimistic about his company's prospects, and that SCO's UNIX business was profitable again. Whatever the outcome, the company's pending lawsuits would clearly have a major impact on the next chapter of its history.

Principal Divisions

UNIX; SCOsource.

Principal Competitors

International Business Machines Corporation; Novell, Inc.; Red Hat, Inc.; DaimlerChrysler Corporation.

Chronology

• Key Dates
• 1979 Chicago native Larry Michels and his son, Doug, establish a UNIX consulting firm called the Santa Cruz Operation (SCO).
• 1993 SCO becomes a public company and is listed on the NASDAQ.
• 2000 Orem, Utah-based Caldera Systems Inc. acquires SCO's Server Software and Professional Services Divisions, becoming Caldera International.
• 2002 Caldera changes its name to The SCO Group.