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Proof emerges of SCO's Microsoft link

Tags:
Investment,
BayStar Capital,
Microsoft,
Ties

Stephen Shankland CNET News

Published: 12 Mar 2004 08:25 GMT

Investment company BayStar Capital has confirmed ties between two Linux foes, saying on Thursday that a Microsoft referral led to $50m (£27.8m) in BayStar funding for the SCO Group.

"Yes, Microsoft did introduce BayStar to SCO," a BayStar representative said on Thursday, declining to share further details and repeating the firm's earlier position that Microsoft did not actually invest money in the deal.

Word of the Microsoft matchmaking surfaced last week when open-source advocate Eric Raymond published a leaked memo about Microsoft's help in the BayStar investment. SCO Group confirmed the authenticity of the memo but said its author, S2 Strategic Consulting's Mike Anderer, misunderstood the situation. Open-source fans leaped on the memo as evidence that Microsoft is aiding SCO's attack on Linux.

Linux threatens Microsoft's business -- chiefly in hampering the growth of Windows on higher-end computers called servers, but also in Microsoft's desktop computing stronghold and in "embedded" computing devices such as electronic ticket dispensers, where Microsoft is trying to expand.

SCO argues that the Linux operating system infringes on its Unix intellectual property, and the company says businesses should pay to use Linux, a claim that advocates of the open-source

OS vehemently deny. To back up its demands, SCO has hired a high-profile attorney, David Boies, and is suing AutoZone, DaimlerChrysler, Novell and IBM and earlier had prepared a suit against Bank of America as well.

Microsoft's referral doesn't reflect well on the software giant, said Illuminata analyst Gordon Haff.

"There's no smoking gun yet showing an orchestrated Microsoft executive-level pulling of SCO's puppet strings. What there is, however, is rather unseemly involvement by Microsoft around the periphery of SCO's funding," Haff said. "Given that Microsoft, on the one hand, is a convicted monopolist and that, on the other, SCO's financial dealings and actions look increasingly shady, Microsoft should certainly be worried about even a little bit of SCO's stench rubbing off."

A Microsoft representative on Thursday repeated the company's assertions from last week that "Microsoft has no direct or indirect financial relationship with BayStar." The representative declined to comment on why the referral took place or whether the company was looking into the matter.

SCO spokesman Blake Stowell declined to comment.

SCO's legal actions are expensive. In its most recent quarter, the company spent $3.4m in its legal actions and other aspects of its SCOsource initiative to profit from Linux use.

In May 2003, SCO said it didn't need any more funding, but in October, BayStar made the $50m investment -- $30m of which came from the Royal Bank of Canada, which BayStar said has participated in several of its investments. In addition, Microsoft has paid SCO millions of dollars in a Unix licensing deal announced in May.

SCO's actions have flown in the face of the enthusiastic embrace of Linux by just about every major computing company besides Microsoft. Strong Linux allies include Intel, Computer Associates, SAP, Hewlett-Packard, Dell, Oracle, IBM, BMC and Motorola. And SCO's actions haven't stopped Linux's growth: in the fourth quarter of 2003, Linux server sales grew 63 percent to $960m and unit shipments increased 52 percent to 250,000, according to market research firm IDC.

Open-source advocates are not the only ones suspicious of the BayStar deal. In its legal fight with SCO, IBM subpoenaed BayStar. Big Blue declined to comment on whether it plans to send new subpoenas to Microsoft.

Helping SCO find funding may in fact advance Microsoft goals that are anticompetitive, but it isn't necessarily a basis for a lawsuit under the Sherman Antitrust Act, said Andy Gavil, an antitrust expert at the Howard University School of Law. The reason: filing lawsuits is protected under the First Amendment.

"There are many examples of firms funding somebody else to sue their rivals. Sure, their underlying goals are anticompetitive, but they're exercising First Amendment rights in filing lawsuits," Gavil said. "Even if the goal is to squelch competition, as it frequently is in patent and copyright cases, it can't be a violation of the Sherman Act if all you're doing is exercising your valid right to initiate litigation."

Boies has plenty of experience in antitrust litigation. He represented IBM when the US Justice Department alleged Big Blue violated antitrust law, then he led the department's later case against Microsoft. (When representing IBM, Boies worked for Cravath Swaine & Moore, which now is defending IBM in the SCO case.)

Microsoft's actions also aren't likely to run afoul of the Justice Department settlement, said Richard Donovan, an antitrust partner with law firm Kelley Drye & Warren.

"The Microsoft settlement with the DOJ does not cover something like this. It dealt with commitments about interoperability and dealings with OEMs," Donovan said, referring to original equipment manufacturers, a term for computer makers. "There was no broad provision that said [Microsoft] shouldn't do anything else to harm other operating system owners or providers."