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EXCLUSIVE COMMENTARY: Oh, Historic Day! Sun & Microsoft Settle

EXCLUSIVE COMMENTARY: Oh, Historic Day! Sun & Microsoft Settle

Microsoft is going to pay $1.95 billion to get Sun Microsystems, the company with the sharpest spurs, off its back.

The pair said this morning that they had settled all their legal differences. Microsoft will pay Sun $700 million to resolve antitrust issues, $900 million to resolve patent issues and a $350 million up-front down payment on a 10-year cross-license that includes Java and .NET. Sun will pay Microsoft when the technology gets into its servers.

The $1.6 billion payment is more than people thought it would take to settle the Sun litigation - heck, Microsoft only paid AOL Time Warner $750 million for Netscape and Netscape is D-E-A-D dead. Sun had only put a value of $1 billion on its suit.

But it's a good investment. Microsoft is paying Sun to withdraw its long-running antitrust complaints to the European Commission, which were a big factor in the EC finding against Microsoft last week. And the EC's spurs threaten to draw blood from Microsoft's flanks.

The fact that Sun persuaded the EC to order Microsoft to share more of its Windows secrets is not as dangerous to Microsoft's fundamental business as is the fact that the regulators were persuaded to order Microsoft to offer two versions of Windows in Europe, one of them stripped of the Windows Media Player, and reserve for themselves the right to challenge any future bundling by Microsoft.

The new kissy-kissy 10-year collaboration accord between Sun and Microsoft, however, will force the EC to reconsider its position and modify its ruling, softening it up to come to terms on tying. Bo Vesterdorf, the president of the EU appeals court where Microsoft is headed next, is also making noises about trying to broker a compromise.

Microsoft CEO Steve Ballmer denied that there was any connection between the settlement and the state of things in Europe. The companies were close to a deal at Christmas, he said, and were delayed by the fact that Microsoft's top lawyers, who were working out the Sun deal, had to camp out on the EC's doorsteps.

Ballmer and Sun CEO Scott McNealy appeared together on CNBC this morning beaming at each other, shaking hands and talking up their newfound "unique" and "exceptional" interoperability and compatibility. They ever exchanged signed Detroit Red Wings jersey later at the press conference.

Among other things, Sun is now going to certify Windows on its Opteron and Intel servers that otherwise run Solaris x86 and Linux.

The fact that they had signed their treaty at 4 o'clock this morning was a godsend for McNealy, because it stopped Sun's stock from going through the floor. It turned it around and at mid-day Sun was trading up about 19% to $4.97.

See, news of the pact followed immediately on the heels of Sun's admission that its third fiscal quarter, which closed on Wednesday, was a disaster and that it would lose between $750 million and $810 million. That would work out to 23-25 cents a share when Wall Street was braced for a loss of only three cents. Revenues are coming up short at around $2.65 billion.

The shortfall in both earning and revenues - Sun is getting slaughtered at the low end where it gets the bulk of its sales by Linux and Windows - is forcing Sun to cut another 9% of its workforce, roughly 3,300.

McNealy, who has been obsessed to the point of neurosis by Microsoft for years and has been personally overextended since president and COO Ed Zander stepped down, has tapped Sun software chief Jonathan Schwatz to fill Zander's size 13 shoes.

Schwartz gets everything except HR, corporate resources and finance. The CTO will report to Schwartz. Sun said it will name a replacement for Schwarz soon.

The layoffs - and Wall Street has been telling McNealy that he didn't cut deeply enough when he fired people before - will cost Sun roughly $475 million in charges over the next few quarters. McNealy indicated terminations would start worldwide in the next five or six weeks.

McNealy took credit for initiating the talks last June when he called Ballmer and invited him to play golf. (The two men went to high school, Harvard and Stanford together and have been known to hit a little ball around the fairways together before.) One thing led to another and they exchanged legal teams and have had Bill Gates and Sun CTO Greg Papadopoulos talking on a regular basis for months now.

McNealy said he was pressured to try glasnost by his customers, who have mixed environments and wanted the companies to "stop the noise" and "get it together." Ballmer said there was "nothing, nothing, nothing, nothing" in the agreement, which was barely sketched, that "would not delight" both sets of customers.

Ballmer and McNealy said the agreement contained an "IP framework" or "patent regime" that would assure them of protection going both "forward and backward" and prevent the two companies from fouling up their collaboration.

Merrill Lynch called the Sun layoffs "directionally correct," and said it viewed Schwartz's promotion as a "positive step," but it said Sun's 1Q pre-announcement still shows operating performance is deteriorating, and the cost structure is unsustainable." Sun is also proposing to dispose of more of its real estate.

Microsoft's money will raise what Sun has in the bank to around $7 billion and McNealy indicated he would flash his bank book around in hopes of getting the rating services to upgrade Sun from junk.

For its part, Microsoft still has other private antitrust and patent infringement suits to resolve such as the one brought by burst.com and potentially whopping big one by InterTrust Technologies, now a property of Sony and Philips. It also has to deal with the $521 million and rising Eolas decision, which it has promised to appeal. It also appears there may be a number of other significant suits that haven't surfaced yet or haven't been publicized.

Sun is supposed to license communications protocols from Microsoft under the program established under the terms of Microsoft's settlement agreement with the United States government. Those are the protocols Sun bitched to the Justice Department cost too much.

Microsoft is going to continue peddling the Microsoft Java Virtual Machine that it was going to excised from its software.

Microsoft has already certified Windows on Sun's Xeon servers. Its AMD boxes come next.

Microsoft and Sun are supposed to get access to "aspects of each other's server-based technology" and propose to use it to develop new server software product that work better together. The cooperation is supposed to center on Windows Server and Windows Client at first, but will eventually include e-mail and database software as well as other unidentified stuff.

The Liberty Alliance-Passport authentication divide looks like it's also being sewed up. Sun and Microsoft engineers are supposed to cooperate to allow identity information to be shared between Microsoft's Active Directory and Sun's Java System Identity Server.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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Most Recent Comments
David Mohring 04/07/04 10:15:57 PM EDT

Jav876, you can find an extended version of the above commentary on linuxworld
http://www.linuxworld.com/story/44348.htm

Jav876 04/04/04 10:26:23 AM EDT

Have you see what Chris diBona has blogged about this:

Aside from the monetary payoff, most of the gains for Sun do not make any sense for Sun in the long term.

Windows Certification for Sun is the equivalent of hosting hostile enemy bases on your own territory. Sun, like Apple, relies on a separate identity from Microsoft to position itself in the server Market. Windows Certification for Sun hardware is an oxymoron, as it is possible to host Microsoft''s OS on more stock standard and cheaper Dell, HP and whitebox hardware, without any significant loss of performance or quality. At least with Solaris and Linux, Sun is able to completely hack, recompile to tune the kernels and libraries to take advantage of any Sun specific hardware.

Sun''s agreement to Microsoft Communications Protocol Program represents a real sellout by Sun. Until now, the only major vendors to sign up to the protocol agreement have been Cisco and guess who, The SCO Group ( only after the "investment" by Microsoft ). Even the U.S. Justice Department expressed concern that Microsoft has not completely lived up to its agreement.
http://news.com.com/2100-1012_3-5142795.html
Just as with the SCO Group, it appears Microsoft has effectively paid off Sun to accept this agreement.

Of the legal settlements, where Sun that states that "the agreements announced today satisfy the objectives it was pursuing in the EU actions pending against Microsoft", is the reason why the monetary payoff to Sun was so large. Sun was one of the companies that complained to the EU over Microsoft''s licensing of CIFS information in a manner incompatible to SAMBA''s GPL license.

When the EU Competition Commission initiated the latest investigation against Microsoft in 2001, they included the following in their press release
http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/01/1232|0|AGED&lg=EN&display=

The last statement is very important, since the CIFS file and print services software that the protocol complaint was based on is the GPL''ed SAMBA. I don''t believe that without Sun''s outright acceptance of the Microsoft Protocol agreement, Mario Monti, Competition Commissioner, would accept any Licensing from Microsoft for the required information that would be a "friend-enemy" scheme incompatible with the same GPL.

JavaSavant 04/02/04 03:09:44 PM EST

It''s just a matter of time for MS CLR to fully emulate the Java virtual machine environment.

Can Sun, IBM and others that announced 6 months ago that they were working on a next generation virtual machine agree to work with MS this time?

Plain Wrong! 04/02/04 03:08:09 PM EST

how come then it''s precisely Linux - via the Java Desktop System - that Sun is taking into China, to 200M desktops or is it 300M?

tanguyr 04/02/04 03:06:43 PM EST

If IBM and HP announced a deal like this, the spin would be "industry giants unite behind linux and open source". Sun and Microsoft have at least one thing in common: they are both threatened by the rise in visibility of linux/open source solutions of late.

$DayTrader$ 04/02/04 03:05:16 PM EST

Two billion is pretty unusual. It may even raise its junk bond status after a while. If you don''t own SUNW, you''d better get in during the dips and by the end of the day.

zogger 04/02/04 02:51:39 PM EST

My guess is, sun is basing their plan on a couple of realities. They are FORCED to deal with microsoft in some manner at this time. And they are gambling that linux and their java platform will slowly start to gain serious inroads against microsoft, and that will FORCE microsoft to play ball with more-even rules, which is what everyone except microsoft wants anyway. They are also getting paid serious cash right now to take the only options they had available. Reality would have forced them into (probably) the same exact decisions and eventualities, now they just get some cash, too. It's not a perfect solution for them, but it's a *viable* solution with some gravy they didn't have before.

emil 04/02/04 02:49:12 PM EST

Forget Java or Perl, I would draw your attention to the awk programming language.

While awk is clear, expressive, and easy to learn, it does not allow direct access to many kernel system calls or other similar primitives. This makes awk rather portable - VMS and DOS versions of awk are easy to come by.

perl does allow this type of access, making perl programs less portable than awk programs between platforms. perl also supports a C API for extending the language, which is not implemented in awk.

Most enterprise J2EE applications are deployed on UNIX, but these same applications cannot directly access a number of important system calls (i.e. stat(), creat(), mkfifo(), signal(), ipc, etc.). In this way, Java is crippled on UNIX.

There is a time and a place for both approaches for access to system calls, but Java (mostly) chose the awk model for political/portability concerns. Whether this choice is ultimately a benefit or a hinderance remains to be seen, but I wish that a more creative solution had emerged.

tanguyr 04/02/04 02:46:07 PM EST

Sun and Microsoft look at the world in much the same way: it's about selling units (as opposed to IBM which sees it as selling service). This is classic "enemy-of-my-enemy" business strategy... we'll have to wait and see how it works out.

drzhivago 04/02/04 02:45:00 PM EST

Cross-licensing patents is a common occurrence between technology companies. There really isn't anything unusual there, I think

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