July 10, 2003 1:19 PM PDT

Sun expands Unix deal with SCO

A previously secret licensee of SCO Group's Unix intellectual property has revealed its identity: Unix leader Sun Microsystems.

SCO's Unix licensing plan got a major boost of publicity in May when Microsoft announced its decision to license Unix from SCO, but Sun actually was the first company to sign on. SCO and Sun confirmed the licensing deal on Wednesday.

The pact, signed earlier this year, expanded the rights Sun acquired in 1994 to use Unix in its Solaris operating system. But there's more to the relationship: SCO also granted Sun a warrant to buy as many as 210,000 shares of SCO stock at $1.83 per share as part of the licensing deal, according to a regulatory document filed Tuesday.

Sun, the No. 1 seller of Unix servers, declined to comment on the option to take a stake in SCO Group. Fortune on Monday published news of the expanded Sun contract.

Sun's expanded license permits Sun to use some software from Unix System V Release 4 for software components called drivers, which let computers use hard drives, network cards and other devices. Sun needed the software for its version of Solaris that runs on Intel servers, Sun spokesman Brett Smith said. A source familiar with the deal said the new contract was signed in February, but neither Sun nor SCO would comment.

SCO, which hasn't had much success selling its own Unix products and which has pulled the plug on its Linux products, is trying to generate more money from its Unix intellectual property. The highest-profile result of that effort has been an SCO lawsuit against IBM that alleges IBM misappropriated SCO trade secrets and violated its Unix contracts, for which SCO now is seeking more than $3 billion.

Sun hasn't been ashamed to try to profit from the effects of that suit. It jumped at the chance to declare itself a safe haven for spooked technology buyers: "Sun's complete line of Solaris and Linux products...are covered by Sun's portfolio of Unix licensing agreements. Solaris and Sun Linux represent safe choices for those companies that develop and deploy services based on Unix systems," Sun declared the day SCO filed suit against IBM.

"Now we know why Sun was so absolutely confident about where they stand in this whole thing that they were essentially able to turn it into some marketing and sales FUD (fear, uncertainty and doubt) of their own," Illuminata analyst Gordon Haff said.

Sun's Smith said the company is being careful to ensure that its Unix intellectual property is "very clean."

"We've always made sure we're very aboveboard," Smith said. "We've made sure the i's are dotted, the t's are crossed." Before the newest contract was signed, Sun had spent $82 million acquiring rights to use Unix, Smith said. Among Sun's privileges is the right to show Solaris' underlying source code to customers, SCO said.

One thing has changed in Sun's Linux position, though. Its first Linux products used Sun's own version of the operating system, but at the end of March, the company decided instead to form partnerships with Linux sellers such as Red Hat. Smith said Sun doesn't know yet if the legal protections of its Unix licenses extend to other companies' versions of Linux.

SCO declined to comment on terms of the license deals with Sun and Microsoft, but SCO said in May that it earned $8.3 million in revenue in the quarter ended April 30 as a result of the licenses. In the Tuesday regulatory filing, SCO said the two licenses will generate an additional $5 million in the three quarters after that, for a total of $13.3 million.

In addition, Microsoft has the option to expand its licensing rights in the future, a move that would mean additional payments to SCO, the filing said.

Although Sun has broader rights than do other Unix licensees such as IBM and Hewlett-Packard, it doesn't have the right to release Unix source code or Sun modifications to it as open-source software, SCO spokesman Blake Stowell said. That type of action is at the heart of SCO's IBM lawsuit, which claims that IBM took code it initially developed for its AIX version of Unix and then moved it to open-source Linux projects.

SCO has also complained that Unix code was directly copied into Linux, but thus far, the company hasn't made any copyright infringement claims. To do so, intellectual property attorneys say, the company must first have copyrights registered with the U.S. Copyright Office.

Novell, which sold many Unix rights to SCO Group's predecessor, initially claimed that it held the Unix copyrights but later backed down and acknowledged that SCO held at least some copyrights.

Novell is embracing Linux and open-source software in its products. It declined to say on Wednesday whether it agreed to transfer copyrights to SCO.

SCO, though, said the transfer is underway but that it will be months before SCO has the Unix copyrights registered.

"We're in the process of registering them with the Copyright Office," Stowell said. "We expect it to be completed within about six months." The reason it takes so long is that SCO must show the sequence of ownership of the copyrights.

Details of Sun's license appeared in a regulatory document that SCO filed to permit various investors to sell 305,000 SCO shares. Of those, 174,000 would be sold by SCO's biggest investor, the Canopy Group, which would see its stake in SCO drop from 41.1 percent to 39.9 percent, according to the filing.

The filing also warned of several risks to would-be buyers of the stock.

These include the possibility that its SCOsource effort to derive more revenue from Unix licenses could result in sporadic income. "SCOsource licensing revenue is unlikely to produce stable, predictable revenue for the foreseeable future," the filing said.

The company also said it's had only one profitable quarter so far and that its Unix business has declined since it acquired it from Tarantella in 2001.

 

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