November 15, 2004 4:00 AM PST

Fact and fiction in the Microsoft-SCO relationship

The SCO Group's legal actions against Linux have shed light on the inner workings of the open-source programming project and on the operations of a company desperate to survive. They've also created a cottage industry for conspiracy theorists over Microsoft's role in the affair.

SCO's attack, based on the company's disputed claim of Unix copyright ownership, and with IBM as the main target, has been bold and expensive. Lindon, Utah-based SCO hired the pricey but high-profile attorney David Boies (of Microsoft antitrust and Napster fame) to launch the attack at a time when product revenue was shrinking and cash was dwindling.

But it was Microsoft that helped ensure that SCO could mount the fight, by providing major financial help at least twice in 2003. (SCO's finances are currently being tallied for the quarter ended Oct. 31, with the results to be reported in late December.) Though it doesn't appear that Microsoft was in the driver's seat when it came to SCO's legal attack on Linux, Microsoft's financial assistance was unusual and crucial.

Naturally, the arrangement has captured the imagination of legions of conspiracy theorists worldwide. And why not? In one corner you've got a tech Goliath that has dominated the PC industry by humbling companies ranging from giant IBM to former Net darling Netscape. In the other corner stands the company's new nemesis, Linux, an underdog operating system that has thousands of devotees preaching its virtues and, more importantly, contributing to its growth.

In an effort to separate fact from fiction, CNET News.com presents the following answers to some of the more common questions swirling around the SCO-Microsoft relationship.

Has Microsoft's money been a significant resource for the financially ailing SCO?
Without a doubt. In early 2003, Microsoft started paying SCO what eventually grew to $16.6 million for a Unix license, according to regulatory filings. Only longtime Unix fan Sun Microsystems previously paid close to that, with a $9.3 million license deal.

Microsoft provided a second, though indirect, boost in August or September of 2003, when it referred SCO to BayStar Capital, a fund that arranged a $50 million investment.

"Microsoft obviously has an interest in this, and their interest is obviously in keeping their operating system on top."
--Larry Goldfarb
managing partner, BayStar
SCO chief Darl McBride has been up front about the importance of Microsoft's funding, direct or otherwise.

"A year ago we had $6 million. Now we have $60 million, with $50 million of that coming in through the investment. We have a war chest to defend our rights, to fight our claims in the courtroom," he said earlier this year, adding that the cash is enough for the long haul. "We think the legal battles we have won't even go through half that amount of cash, even played over a multiple number of years."

Most of that cash is now gone: SCO paid most to its law firms and to retire BayStar's preferred stock.

Paying the license fees could indicate that Microsoft simply believes SCO's Unix ownership claims have merit. But doesn't arranging the BayStar investment reveal Microsoft's ulterior motive? After all, why would you want to help prop up a company that is demanding millions in royalty fees from you?
That may not be far off the mark, according to a key BayStar executive.

"Microsoft obviously has an interest in this, and their interest is obviously in keeping their operating system on top," says Larry Goldfarb, managing partner of BayStar.

Without naming names, Goldfarb explained that BayStar received a call from a "senior" Microsoft employee, but not Chairman Bill Gates or Chief Executive Steve Ballmer. "When they started telling me what it was, I wasn't shocked (that) this was something they'd like to see prevail."

Is the licensing agreement unusual for Microsoft?
Not only was the license fee the largest SCO has yet landed, but Microsoft's willingness to write a check also contrasts with its behavior in the 1990s when SCO's predecessor, the Santa Cruz Operation, tangled with the software behemoth over a 1987 Unix contract. In that case, Microsoft dug in its heels and the dispute was settled only by a European Commission ruling.

Is Microsoft more than a passive participant? Is it driving the decision to take IBM (and Linux) to court and to sow FUD--fear, uncertainty and doubt--among corporate buyers?

CONTINUED:
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12 comments

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Steve S really doesn't get it
Once again, a Steve Shankland article uses the childish bad-journalist definition of "objective" to totally muff a story. An article is not objective if, in reporting a dispute, it give equal credence to both sides, regardless of however imbalanced the evidence is. A good journalist calls a spade a spade. Yet here, Shankland acts as if SCO had a good case, and ends with an old quote from Darl McBride that implies that the case is headed to a jury. That is *extremely* unlikely. None of SCO's cases are that strong -- the countersuits are more likely to get there, with SCO as a defendant.

He also mixes up the AIX/Monterey issue with Linux itself. Most of the SCO suits are around Linux, except when they are losing, and claim that they're about an IBM contract. These are two distinguishable issues. There is a shadow of a case concerning IBM's role in Monterey, if they acted in bad faith in pulling out and recycling the code against what an alleged contract said. That remains to be seen. It's doubtful, but it has nothing to do with Linux.

The Linux issue began with McBride's asssertion that there were "millions of lines" of SCO-owned code in Linux. This falls flat on its kiester for various reasons:

1) There are zero lines of copyrighted Unix System V code in Linux; SCO never produced any, even after repeated discovery requests. (There are some lines in common, of course, but they're not subject to copyright, and mostly originate in standards outside of System V, or older versions.)

2) SCO doesn't own the copyrights in the first place. Novell just last week opened its corporate kit to show that their BOD, in selling its Unixware business to SCO, absolutely meant to retain the copyrights, as the bill of sale says. Novell, not SCO, is the rightful owner, and Novell's now a Linux shop.

3) SCO, formerly called Caldera, distributed Linux under the GPL, and therefore is bound by the terms of the GPL. That prohibits them from enforcing a closed-source copyright claim on that code.

All of those are probably grounds for dismissing all of SCO's claims on Linux. The judges are being methodical, and SCO is a master of dilatory tactics (presumably to give them more time to unload worthless stock on investors, er, speculators fooled by bad coverage). But there is obviously no valid SCO threat to Linux users. Microsoft has profited from the FUD, but it should be called just that, not treated as equally valid as evidentiary reality.
Posted by fgoldstein (144 comments )
Reply Link Flag
Steve S really doesn't get it
Once again, a Steve Shankland article uses the childish bad-journalist definition of "objective" to totally muff a story. An article is not objective if, in reporting a dispute, it give equal credence to both sides, regardless of however imbalanced the evidence is. A good journalist calls a spade a spade. Yet here, Shankland acts as if SCO had a good case, and ends with an old quote from Darl McBride that implies that the case is headed to a jury. That is *extremely* unlikely. None of SCO's cases are that strong -- the countersuits are more likely to get there, with SCO as a defendant.

He also mixes up the AIX/Monterey issue with Linux itself. Most of the SCO suits are around Linux, except when they are losing, and claim that they're about an IBM contract. These are two distinguishable issues. There is a shadow of a case concerning IBM's role in Monterey, if they acted in bad faith in pulling out and recycling the code against what an alleged contract said. That remains to be seen. It's doubtful, but it has nothing to do with Linux.

The Linux issue began with McBride's asssertion that there were "millions of lines" of SCO-owned code in Linux. This falls flat on its kiester for various reasons:

1) There are zero lines of copyrighted Unix System V code in Linux; SCO never produced any, even after repeated discovery requests. (There are some lines in common, of course, but they're not subject to copyright, and mostly originate in standards outside of System V, or older versions.)

2) SCO doesn't own the copyrights in the first place. Novell just last week opened its corporate kit to show that their BOD, in selling its Unixware business to SCO, absolutely meant to retain the copyrights, as the bill of sale says. Novell, not SCO, is the rightful owner, and Novell's now a Linux shop.

3) SCO, formerly called Caldera, distributed Linux under the GPL, and therefore is bound by the terms of the GPL. That prohibits them from enforcing a closed-source copyright claim on that code.

All of those are probably grounds for dismissing all of SCO's claims on Linux. The judges are being methodical, and SCO is a master of dilatory tactics (presumably to give them more time to unload worthless stock on investors, er, speculators fooled by bad coverage). But there is obviously no valid SCO threat to Linux users. Microsoft has profited from the FUD, but it should be called just that, not treated as equally valid as evidentiary reality.
Posted by fgoldstein (144 comments )
Reply Link Flag
Hoping for an over-patriotic jury?
So SCO are relying on a jury, and IBM are trying their best to prevent it getting that far.

But what if a Jury did go for SCO? Could a jury be biased towards the locals, or even worse, could the jury become madly patriotic. Linux is a chance for non-Americans to participate equally in the software world. A win for SCO, if non-Americans honour it of course, would be a chance for America to tax one of the largest growing sectors in the industry. Haven't SCO already tried to play this card with their letters to Congress?

I can just imagine SCO hoping for a jury that thinks along the lines of "Gawd Bless America - down with Johnny Foriegner". I just hope that such a thing doesn't happen.
Posted by Not Bugged (195 comments )
Reply Link Flag
Hoping for an over-patriotic jury?
So SCO are relying on a jury, and IBM are trying their best to prevent it getting that far.

But what if a Jury did go for SCO? Could a jury be biased towards the locals, or even worse, could the jury become madly patriotic. Linux is a chance for non-Americans to participate equally in the software world. A win for SCO, if non-Americans honour it of course, would be a chance for America to tax one of the largest growing sectors in the industry. Haven't SCO already tried to play this card with their letters to Congress?

I can just imagine SCO hoping for a jury that thinks along the lines of "Gawd Bless America - down with Johnny Foriegner". I just hope that such a thing doesn't happen.
Posted by Not Bugged (195 comments )
Reply Link Flag
Smoking Gun
This report asks some relevant questions, but seems to have missed crucial evidence:

<a class="jive-link-external" href="http://www.opensource.org/halloween/halloween10.html" target="_newWindow">http://www.opensource.org/halloween/halloween10.html</a>
Posted by (2 comments )
Reply Link Flag
Smoking Gun
This report asks some relevant questions, but seems to have missed crucial evidence:

<a class="jive-link-external" href="http://www.opensource.org/halloween/halloween10.html" target="_newWindow">http://www.opensource.org/halloween/halloween10.html</a>
Posted by (2 comments )
Reply Link Flag
Good ending
MS is backing away from SCO and embracing some form of open source after trying to destroy it.

SCO will end up bankrupt, and hopefully anybody that worked there that had anything to do with this farce will never be empliyed in the IT industry.

If you have to litigate to stay in business, you shouold be out of business.
Posted by (242 comments )
Reply Link Flag
Good ending
MS is backing away from SCO and embracing some form of open source after trying to destroy it.

SCO will end up bankrupt, and hopefully anybody that worked there that had anything to do with this farce will never be empliyed in the IT industry.

If you have to litigate to stay in business, you shouold be out of business.
Posted by (242 comments )
Reply Link Flag
Paul Allen is a (the?) major investor in Baystar Capital
From the article on wired:

"BayStar Capital is a private equity fund that makes direct
investments in privately held and publicly traded companies.
One of BayStar's largest investors, according to BayStar (PDF), is
Vulcan Capital, the private investment vehicle of Paul Allen. Allen
co-founded Microsoft with Bill Gates, and is the second-largest
Microsoft shareholder after Gates."

So although the Microsoft and Baystar as _companies_ have
nothing to do with each other, Paul Allen is a major share holder
in both companies.

The Baystar connection is just a back door that MS can shove
money through.

This kind of hiding makes me sick. It may be perfectly legal for
Paul Allen to start up a company with his own (all MS derived)
money, and then say that the company has nothing to do with
MS, but the OWNERS are THE SAME people.

<a class="jive-link-external" href="http://www.wired.com/news/business/" target="_newWindow">http://www.wired.com/news/business/</a>
0,1367,62544,00%20.html?tw=wn_tophead_2

--Tom
Posted by knobsturner (46 comments )
Reply Link Flag
Hmmm.
You raise an interesting point. Whether Allen really is this big-time investor is still speculation, though, correct? Although, I wouldn't doubt it.

MS has its ways of sneaking around things and getting where they want to be. Let's hope they don't get their way.
Posted by (461 comments )
Link Flag
Paul Allen is a (the?) major investor in Baystar Capital
From the article on wired:

"BayStar Capital is a private equity fund that makes direct
investments in privately held and publicly traded companies.
One of BayStar's largest investors, according to BayStar (PDF), is
Vulcan Capital, the private investment vehicle of Paul Allen. Allen
co-founded Microsoft with Bill Gates, and is the second-largest
Microsoft shareholder after Gates."

So although the Microsoft and Baystar as _companies_ have
nothing to do with each other, Paul Allen is a major share holder
in both companies.

The Baystar connection is just a back door that MS can shove
money through.

This kind of hiding makes me sick. It may be perfectly legal for
Paul Allen to start up a company with his own (all MS derived)
money, and then say that the company has nothing to do with
MS, but the OWNERS are THE SAME people.

<a class="jive-link-external" href="http://www.wired.com/news/business/" target="_newWindow">http://www.wired.com/news/business/</a>
0,1367,62544,00%20.html?tw=wn_tophead_2

--Tom
Posted by knobsturner (46 comments )
Reply Link Flag
Hmmm.
You raise an interesting point. Whether Allen really is this big-time investor is still speculation, though, correct? Although, I wouldn't doubt it.

MS has its ways of sneaking around things and getting where they want to be. Let's hope they don't get their way.
Posted by (461 comments )
Link Flag
 

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