Caldera's acquisition of the Santa Cruz Operation's (SCO's) Unix business would appear to mark the latest stage in the ongoing consolidation of the Unix industry and is likely to bring about one of the most radical shake-ups in the sector to date.
SCO, which generated revenues of $223.62m for fiscal 1999, sold its Unix division and professional services group to Caldera for $7m in cash and 17.54 million shares, giving it a 28 per cent stake in Caldera.
The two claim that this values the acquisition at about $300m, but based on Caldera's stock price - which stood at $7 on 2 August, the day of the purchase - this would mean that the business is currently up for grabs at the bargain basement price of $130m. The acquisition is scheduled to be complete by early October depending on regulatory and shareholder approval.
The move follows a crash in SCO's share price from a high of around $34 at the end of last year to only around $3 now, with analysts claiming that the company has been hit by the rapid growth of the Linux open source operating system (OS) in the commercial sector. Both compete in the Unix-on-Intel space.
Peter Lemon, research manager at IDC's commercial systems group, said: "SCO has been very exposed to Linux attacks and it's been hit worse by the Linux phenomenon than anyone else. The problem is that the high end of the market is going to 64bit and the low end is going to Linux."
As a result, SCO has decided to focus on the Tarantella thin client business that sprang from its IXI/Visionware acquisition in the early 1990s. This business generated $2.5m in the third quarter of fiscal 2000 and SCO will retain approximately 220 of its existing 1100 employees to manage it, 100 of which will undertake sales. The rest of the workforce will go to Caldera, including 40 professional services staff.
Doug Michels, chief executive at SCO, explained the rationale. "We believe there are two profound trends driving the industry to a new place: the acceptance of open source and the emergence of new business models continue to impact and change the industry; and the adoption of the internet is changing the industry in very significant ways, especially in the area of business computing," he said.
"We've invested heavily in the ability to web-enable applications and thin client computing to take advantage of the new trend towards application service providers as the business model for application development. And Tarantella is dead in the centre of that trend," he added.
Michels claimed that the move will result in two "clear pure players that are more focused on their missions". To reflect its new focus, however, it seems likely that SCO will change its name in the near future.
"The legal name of the company is SCO Inc, but it's heavily associated with the product," he said. "The logo is part of what we sold, so long-term we'll need to look at what the name should be. We've incorporated Tarantella and the operating division currently runs under that name."
Further development of Tarantella will be funded by several sources, however. The Canopy Group, a venture capital company that currently holds a major stake in Caldera, has agreed to advance $18m, but SCO will also receive about 55 per cent of the net proceeds, after expenses, from revenues generated by OpenServer.
Sales of the firm's legacy Unix OS, which is now in maintenance, amounted to $11.1m in the third fiscal quarter of 2000. SCO will continue to hold the intellectual property to its baby.
But the deal also means that Caldera will now handle all sales, marketing and support not only of OpenServer, but of the NonStop Cluster technology that SCO licenses from Compaq. This comprises its UnixWare Unix OS and the SVR5 Unix source code that was originally developed by AT&T Bell Labs in the 1960s. AT&T sold Unix to Novell in the late December of 1993, but Novell sold it on to SCO in 1995.
The transaction will also result in Caldera owning all of the intellectual property and future development rights to both UnixWare and the SVR5 source code, which is licensed to system vendors such as IBM, Hewlett Packard and Sun Microsystems, and forms the basis of their Unix variants.
Although it is currently unclear what tack the original equipment manufacturers (OEMs) are likely to take in the wake of the deal, the situation would appear to raise question marks over Caldera's future as a pure open source vendor - a point that Ransom Love, Caldera's chief executive, attempted to address in a conference call earlier this week.
"We are an open company and we'll provide open access to the source code, but we'll choose which licence we use depending on the business and technology. GPL [General Public Licence under which open source products are made available] makes sense, but we'll use it with the right OS or provide an open access licence. Each product will ship with source code so partners can continue to optimise the platform," he said.
"But in some cases we'll maintain ownership. There's nothing wrong with ownership because it can protect intellectual property to ensure users get a quality, high volume, robust platform. But it's not necessarily free because we can add value to provide quality, security and safety. People are willing to pay for bottled water because they run their business on it," he added.
The aim, he explained, was to create a so-called open internet platform (OIP) that "can scale down to a thin client and up to a high-end data centre on high availability hardware".
"With UnixWare and high availability clustering, we'll put a Linux personality on top to provide a single development platform. The kernel OS beneath will enable us to scale applications across and extend the OIP to make it more affordable to the world," said Love.
"OEMs wanting to deploy special servers will now have the infrastructure to support them, while ISVs [independent software vendors] will have a single platform on which to deploy their applications. We'll provide the infrastructure and support so they can transition their applications to the platform," he added.
But Michels explained that SCO had been trying to put a Linux personality on UnixWare for some time "because we thought it would be a good way to put new applications onto it going forward".
"The Linux personality is indistinguishable from Linux, but has the value of UnixWare beneath it in terms of robustness and scalability. I believe the world is moving to Linux as the common API [application programming interface] development platform. We saw a lot of Linux applications were not being ported over to UnixWare that would benefit from UnixWare's robustness, so this will be another plus for the customer base," he said.
IDC's Lemon agreed. "The API issue is crucial because people have not been writing applications for SCO Unix. The Linux API layer on the Unix core is needed to retain the installed base. There's a lot of UnixWare out there," he said.
So it would appear that Caldera plans to take the UnixWare kernel, layer Linux services on top of it and also provide developers with a Linux API that they can write their applications to. This will be sold to the high end of the market, while Linux proper will continue to be targeted at the lower end.
Caldera's goal seems to be to unify the Unix on Intel market around the Linux API. This means that any new packages developers create should be able to run on both UnixWare and Linux, while appearing to behave, look and feel like Linux applications.
Open source shake-up
This situation could lead to a consolidation of the commercial Unix sector, and also cause a shake-up in the open source market as one of its number now seems to be embracing what is perceived as a proprietary OS. The repercussions of this move are likely to make themselves felt over the next few months.
Colin Tenwick, managing director of Caldera rival Red Hat, said: "I think the situation is very unclear. Red Hat had a good look at SCO and we were absolutely unclear how we could GPL its technology [distribute it under an open source General Public Licence]. It's unclear what technology Caldera will contribute back to the GPL and it won't be easy to do."
"Also, the amount of effort to turn around a failing business is huge and you shouldn't underestimate [it]. From a business perspective, Caldera now has multiple OS offerings and I don't know how it's going to unpick the knitting," he added.
But the situation also raises a question mark over the future of Project Monterey.
SCO and IBM started work on Monterey in October 1998 with the aim of making their respective Unixware and AIX Unix variants source code-compatible before porting the resulting OS to Intel's 64bit Itanium processor.
Love appeared to confirm his commitment to the environment during the conference call. "Monterey will continue, but we'll put Linux management and compatibility in the layers above and combine our efforts with the IA64 Linux work. We have a legal obligation to IBM with Monterey and we intend to move it forward aggressively," he said.
"We'll provide on IA64 what we'll provide with UnixWare on the 32bit platform. An API/ABI [application binary compatible] layer is very compelling for partners. Customers will have the choice of whether they want to migrate to Linux, Monterey or Unixware. The goal of combining the companies is to provide them with choice and consistency so the layers above the kernel become the same no matter what that kernel is," he added.
The development of a 64bit version of Linux is taking place under the auspices of Project Trillian, an industry group which includes IBM, Red Hat, VA Linux and Caldera in its line up of members. But the real question now is which OS will become dominant in the development effort?
Phil Payne, an independent analyst, said: "This implies that Monterey is being parked and merged into Trillian. It's another nail in the Monterey coffin. IBM will retain the AIX branding, but Monterey is perceived as a proprietary OS and the public wants Linux, which it sees as open. It's about mind share and public perception."
"Why does IBM need another fringe proprietary OS? Monterey faces the same application development problems as IBM did with OS/2 and can IBM succeed in that game? It hasn't in the past," he added.
Although IBM was unavailable for comment, this would appear to explain why the company - the obvious candidate to purchase SCO - chose not to do so. But what does Caldera have to gain from the purchase, apart from taking on its shoulders the prestigious role as the owner of Unix and gaining a new Unix revenue stream?
Love hinted at the company's motivation during the conference call. "The Linux business is not about lack of applications now, although we are addressing this with the acquisition. It's about expertise and we've got that now via SCO's professional services group," he said.
"Companies like a trusted partner to deploy systems in a more commercial, pervasive manner and that is now resolved. We'll bring an element of business vitality unparalleled in this segment. No other company can address high availability like us in this space," he added.
IDC's Lemon agreed. "This was not an obvious acquisition for Caldera to make, but it appears to be trying to bulk up its services with SCO. The whole OS thing is evolving very fast. At the high end, there's the big Risc vendors and Microsoft is now starting to get there too, while at the low end, it's a very low margin business so the only way to play it is to get into services," he said.
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