The key messages to come out of the Santa Cruz Operation?s SCO Forum developers' conference this year were that Unix is not dead, and neither is the company, despite what critics may say to the contrary.
While the Unix operating system supplier would appear to have hit hard times over the past couple of years with flat revenues and four years of losses, it is now adamant that it is in the throes of reinventing itself and is in the process of implementing a strategy for growth.
Ray Anderson, senior vice president of marketing, explains: ?The core trend for our revenues is flat. The Unixware OEM business is broadly flat, the IXI/Visionware business is broadly flat, the small and medium business market is a very good one for us and is profitable, but it?s also flat. So, we?re fundamentally assuming that this business will remain as flat as it has been for the past four years.?
As a result, he continues, there are two areas that SCO is investing in heavily.
?We?ve put our profits into growing the IXI/Visionware business and we?re driving Tarantella forward. We can?t accurately predict when it will be $20 million, but it generates a couple of million dollars now. The other idea is moving into the enterprise,? he says.
The proposition is that Windows NT is a $4-8 billion market and is growing at between 50-60 per cent per year. Unix is a $40 billion market and is growing at 12 per cent a year, with Unixware generating about $5 billion of that in both hardware and operating system sales.
And, according to Doug Michels, SCO?s president and chief executive, the Unix industry is likely to keep growing over the next few years, particularly at the high end of the market, due to serveral factors.
?Unix has become more mature, stable and dependable. It maybe boring, but that?s a good thing because it?s become a reliable, ubiquitous system like the mainframe and has another 10 years of growth. Maturity is not the same as death. Unix is the dominant platform for relational databases, and 55 per cent of the Internet is based on Unix, so it?s a practicality for people needing to deliver mission critical applications,? he attested.
He claims that Unix is, and for the forseeable future will remain, at the centre of the transition to network computing, but the market may also get a boost from legacy systems because of the millennium bug.
?Every application out there is suspect and they?re all going to have to be adjusted or replaced. If people have been thinking of moving to Unix for years, now is the perfect time to do it. People were waiting for Windows NT 5.0, but that?s slipped past 2000 now, so people won?t be able to use that. Unix is lucky that Microsoft has flipped past the biggest opportunity to change the market that we?ve had,? he says.
As a result, Anderson reckons there are a couple of things SCO can do to try and cash in on the situation.
?We can try and increase the average selling price, which we are, and we can also try and get people to move to Unixware as it moves up the enterprise. We reckon that over the next five years, about 20 per cent of the market will move to NT, while about 70 per cent will stay with their existing Unixes. So, we hope that the remaining 5-10 per cent will move to Unixware,? he says.
To try to boost its presence in this enterprise space, SCO has begun targeting ?the most compelling? ISVs such as Oracle and Informix and vertical markets such as retail and telecommunications.
?We want to get people across the barrier to Unixware, but in the past we?ve not had a Unix that competed in the proprietary space, that is vendors with their own Unix hardware. It?s that that?s going to make us grow. We had no market share with Unixware a year ago, but now we have half a per cent, and we hope that will grow to two per cent in the next couple of years. As Intel penetrates the enterprise, we want to go with it,? he explains.
Michels, on the other hand, also expects users to consolidate their servers into bigger and bigger boxes for mission critical applications, something that he claims only Unix can do well.
?I expect data centre level performance from Unixware by 2000 and I believe we?re on the path to beat standard performance figures there in the next two years. We?ll also introduce enterprise clustering to offer total reliability, availability and scaleability,? he adds.
This means that ?over the next year, Unixware 7 will become very significant for our revenues. Last year, 20 per cent of revenues came from Unixware, but it?ll be a lot higher this year. Volume in the data centre is a new idea, but its?s coming. It?s inevitable that the data centre is going to buy Intel machines sold by resellers, it?s just a question of how long it takes.?
However, Anderson acknowledges that because the company has sold mainly through the channel to date, brand recognition of the SCO name in the enterprise is low, while Unixware?s is little better - a situation that must be remedied if it wishes to make significant inroads into that space. As a result, the company plans to introduce brand awareness campaigns over the next couple of months, although these will be very targeted.
?We surveyed what our partners wanted and they wanted to promote the Unixware name into the enterprise rather than the SCO name, so we?ll leverage them and increase our focus on the market via segmentation. We?ve not got a $1 billion marketing budget, so we?ll focus on where the highest market uptake will be. We?re already in the enterprise market with Unix SVR4 and such vendors as Unisys, so we can go back and target customers with particular systems via direct mail and very targeted campaigns,? he says.
The second offering on which SCO is pinning its hopes for growth, meanwhile, is its Tarantella group, which currently exists as a 'virtual business' within the organisation.
Anderson explains: ?If we grow Tarantella, we grow. It could almost double our potential, but we must execute now. We?ve spent years developing the product, so we have to produce results within the next year. As for growing the share price, we?ll have to wait and see next quarter?s results. If we don?t grow then, people will start asking questions, and if we do the share price will increase.?
Michels is even more upbeat. ?We think Tarantella?s got a really exciting future. It?s important to understand where the industry is going in its continued evolution to network computing. People are becoming more disenchanted with the fat client nightmare and want to use browsers and tools to end that. Tarantella is a solution,? he says.
He continues: ?I think Tarantella has the makings of a great company. It focusses on the enterprise and gluing enterprise systems together. It will come to bloom over the next 12 months and will start to have a real presence in the enterprise.?
But, John Alhandra, SCO?s chief financial officer, admits that if the Tarantella business becomes as successful as the company hopes, it may consider spinning it off as a separate entity.
?If you look at the value of Internet stocks and take notice of high market capitalisations, it would seem to make sense potentially, but I?d like to see more growth out of it first. The focus is on increasing shareholder value and it makes a lot of sense. It?s easy to argue that the Tarantella valuation is more or equal to the Tarantella business as a whole because it?s a very valuable asset. But, we?re not actively doing anything and there are no current plans. We?re currently just looking at our options,? he explains.
Meanwhile, to try to back up its move into the enterprise space, SCO is also in the process of building up its professional services organisation to cater more proactively to the demands of that market.
Michels says that, although SCO already has a handful of staff working in this area, it is currently a very small piece of the business.
?If we had to deliver professional services to win a large deal, we would do it out of necessity, but we have to be a lot more willing and able to jump proactively into projects because the enterprise expects you to be there. Revenues are negligable now, but the unit already has a separate profit and loss account, and the sales force will now have a quota to sell services, whereas before it was told not to sell them. The enterprise requires you to have account handlers and it needs you to be there,? he reasons.
David McCrabb, SCO?s vice president of international sales, elaborates: ?To go into the enterprise, we felt we needed strong worldwide professional services organisation, so we?ve set up an implementation and execution unit that can deal with building IT infrastructure within an organisation. We?re going to set up practices in all major countries starting with the US and Europe, and we expect them to grow by two or three times over the next year.?
He adds that support currently generates about 10 per cent of the company?s revenues, with professional services a significant proportion of that.
However, the unit will not offer services across the board, but cater to five main areas. These comprise making Unix systems communicate with other Unix systems and making Unix talk to NT, an area where SCO already has skills because of work it does with Microsoft around Tarantella and client integration.
The organisation will also focus on clustering to get the channel up to speed on this new technology, will provide integration skills for Tarantella, and offer users Year 2000 audits on a fixed price work schedule, using a system SCO developed internally. This will be sold via the reseller channel as well and is also being viewed as a significant revenue opportunity.
But, SCO has also been working hard to identify other potential revenue streams and as a result, will move back into the embedded systems space later this year with its 'Unix on a Megabyte' initiative. The move follows the company?s decommitment from the market over the last couple of years, but this time, instead of focusing on the mature market for retail point of sales systems, it will branch out into the Web based 'appliance server' market.
Michels elaborates: ?We?ll be coming out with fixed function computers later this year, which is potentially very significant news on a royalty basis. Customers will never know it?s Unix, but they?ll be high volume, fixed cost devices. Dedicated devices such as routers and black box Web servers are an important trend in the network computing world and we think there?s a market for devices that cost under $1,000.?
SCO is currently talking to about five hardware OEMs that are interested into getting into the market, and if it takes off, Michels believes the business could evolve into a virtual unit like Tarantella, although it will initially be housed in the operating system division.
In order to prepare itself for this new business model, however, SCO has been busy reorganising its business since April - a move that was prompted by Michels assumption of the position of president and CEO at the start of the year.
He has since introduced a new executive team and rejigged the firm so that it no longer operates along product lines, each with their own marketing and sales department. SCO has now adopted a more functional approach, with marketing and sales centralised worldwide.
Global marketing sits under Anderson, although programmes will still be executed locally, while product marketing resides within the same unit and is no longer splintered across the regions. The aim is to encourage more communication with engineering in a bid to make the products more relevant to market needs. Country sales teams also no longer report into the regions, but to McCrabb as vice president of international sales.
Walker explains: ?The point of the reorganisation was to invest resource into certain horizontal and vertical markets. In the past, we built products and tried to engineer them into these sectors, but we?ve changed our way at looking at the world as the market has changed. As a result, we?re now starting to package our products in a different way for different markets, catering to horizontal ones with Editions for the Enterprise and Database market, for example, and vertical such as retail and telecomms.?
He continues: ?The aim is to make it easier for ISVs and users to take our products to market. We tried to make the regions as homogeneous as possible so we could create worldwide programmes and they could localise them. It?s really making SCO a global company rather than individual business units. The most significant change is in the way the company goes to market though, and doing it this way cuts costs and increases efficiency, which is one of the reasons we did the inventory writedown last quarter.?
In the past, McCrabb explains, SCO recognised revenue based on product sold to its distributors, which made its sales appear ?in peaks and valleys? despite the fact that quarter by quarter sales were very even. The inventory write-down of $60 million, however, which resulted in the company making losses last quarter, now enables it to book sales when licences are sold by distributors to resellers rather than when distributors take them, so ensuring that revenues will be more consistent in future.
?Distribution cost us two points of gross margin and we can eliminate half of that with electronic licensing,? he says.
But, while he acknowledges that growth rates have not been stellar, he has four organisationally driven plans of his own to boost sales further.
The salesforce, which now has 100 staff, will be upped by 50 per cent over the next year to boost direct demand creation for the channel, and staff will also be trained to sell large systems to large customers. Professional services, as already explained, is being ramped up, and a systems integration programme is being developed for SCO to work with the non-Big six to try and penetrate the small and medium business market in tandem with the ERP vendors.
?We?ve already signed Cambridge Technology and Cap Gemini and together with professional services, we can win the ERP space, which is growing at 20 per cent per annum. Unixware is between 15-20 per cent less expensive, including consultancy, than the RISC vendors Unixes and more robust than NT, which makes it an attractive proposition to the ERP suppliers,? McCrabb claims.
The final change, according to Anderson, is a consolidation of the company?s different global price lists into one.
?In the past, we had to have rules and regulations to prevent arbitrage on price, but it was such a waste of time. There was nothing really to stop someone buying in different parts of the world if it was cheaper, so one price list makes things more efficient? he explains.
Michels concludes by pointing out that SCO?s basic business is profitable and that the firm has $50 million in the bank that it may consider spending on acquisitions.
?Flat revenues are reliable, but our challenge is to get new revenues. One reason for the lack of profits is that we?ve been investing in Unixware and Tarantella. We?ve spent $100 million on research and development over the last couple of years and if that had showed on the bottom line, we?d have been very profitable. But, we?ve been investing and if we?re successful, we?ll grow dramatically,? he says.
He adds that the company is always looking out for acquisitions, and while it would not be out of the question to make an acquisition in the professional services arean, it had nothing in mind at the moment.
?There?s also a lot of technology that would complement Tarantella, but we have a lot on our plate at the moment because we?re busy trying to create a market for Tarantella and Unixware 7 in the enterprise. While we?ve heard the rumours of the Intel acquisition too, there are close to no hostile takeovers in the software industry because it?s a people business. We?ve enacted poison pill provisions so a number of very large shareholders would have to agree. A hostile takeover likelihood is very close to zero and I?m not interested in selling the business,? he says.
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