Sun, Microsoft pact draws mixed reactions

The broad legal settlement reached between Microsoft and Sun Microsystems could be a big boost for the companies and their customers, but any impact it may have on the European Commission's efforts to rein in Microsoft's anticompetitive behaviour remains unclear, analysts and legal experts said.

In an unexpected move, Microsoft announced that it will pay Sun a total of $US1.6 billion to settle all outstanding antitrust and patent issues between the companies and make a further $US350 million royalty payment to use Sun technologies in its products. Meanwhile, Sun will pay royalties for Microsoft technologies that it uses.

The payments provide the backbone for a technology sharing agreement that will see the companies work together to make their competing products interoperate. For example, they plan to build a bridge between Microsoft's Active Directory software and Sun's Java System Identity Server and "improve technical collaboration" between Java and .Net, their competing platforms for Internet-based computing, the companies said.

That could benefit customers, particularly large enterprises that have struggled to make Sun's Unix systems interoperate with client and server software from Microsoft, analysts said.

"The competitive disagreements between the two companies have put customers in the middle," vice-president of systems software research at IDC, Dan Kusnetzky, said. "Customers who wanted to deploy software wherever they chose to deploy it have found it hard because the companies haven't wanted to make it work. ... This removes one level of stress for customers as they try to come up with a broad deployment strategy."

The injection of cash from Microsoft, combined with the technology sharing agreement, also positioned Sun as a viable alternative to IBM as an "end-to-end" supplier of hardware, software and services for large enterprises, principal analyst with Forrester Research, Frank Gillett, said.

"People thought we were heading towards two software ecosystems that would matter end to end - Microsoft and IBM," Gillett said. "This now means that Sun will be a more viable alternative to IBM. It won't have the same breadth in services or management software, but you now see an alternative platform that goes from the operating system to the software development tools."

Indeed, the agreement marks the latest step in Sun's efforts to transform itself from a Unix system vendor with declining sales to a more general provider of software, systems and services. Sun already has begun selling "x86" servers, based on chips from Intel and Advanced Micro Devices, and has tentatively embraced the Linux operating system. It now appears ready to add Windows to the list of operating systems it sells and supports.

"We are very close to pulling off one of the great repositionings of the post-Internet bubble," Sun's chairman and chief executive officer, Scott McNealy, said.

Sun still faces challenges.

Dampening the bluster of its settlement deal, it said that it expected to report a loss of as much as $US810 million for the quarter ended March 28, and that it would lay off 3300 staff as part of ongoing efforts to cut costs. But the $US1.95 billion it will accrue from Friday's settlement more than doubles the amount of cash and cash equivalents that it had on hand at the end of the December quarter.

"We hear from our clients that they like Sun, but they have been concerned about them. ... For your average firm, we think this [settlement] removes the questions of Sun's viability," Forrester's Gillett said.

The settlement also saves Sun from drawing out any longer its protracted legal battle with Microsoft.

"Sun was in a position to unleash a very costly and potentially long lawsuit against Microsoft," a senior analyst with Jupiter Research, Joe Wilcox, said. "The settlement relieves them of that burden, and they can claim some victory in the money from the deal and show customers who adopted Windows that the Sun products will work well with what they have."

Not everybody approved of the settlement, though. After years of branding Microsoft "the evil empire", Sun had effectively capitulated to Microsoft in return for a large handout, according to Jeremy Allison, the co-author of Samba, a widely used open-source program for sharing Windows files between Unix and Linux systems.

As part of the deal, he said, Sun accepted the terms of Microsoft's Communications Protocol Program, which provided the communications protocols for exchanging data between servers and Microsoft desktops.

Sun might not be able to make use of those protocols in its Linux servers, Allinson said, because Microsoft's technology was governed by strict licensing terms.

"By licensing those protocols they are basically conceding that that stuff is Microsoft's intellectual property and promising to keep it secret," he said. "That means they conceded one of the most important points they had been fighting for."

For Microsoft, thesettlement closes the curtain on a long-standing feud with one of its most vociferous public critics and eliminates Sun from its list of ongoing legal battles. Microsoft already erased America Online from that list, paying $US750 million last year in a deal that settled an antitrust complaint brought by AOL's Netscape division. And it weathered the US government's antitrust case with a set of behavioural restrictions that many observers considered lenient and ineffective.

Microsoft still faces a $US1 billion private antitrust suit brought against it by RealNetworks, which said that Sun's settlement did not weaken its resolve to fight that case.

"We brought our case because we strongly believe their conduct is illegal," deputy general council for RealNetworks, Dave Stewart, said. "We think that was validated by the [antitrust] findings of the European Commission, and we intend to prove it through a court of law."

RealNetworks had an "obligation to its shareholders" to consider any settlement that Microsoft may offer, but currently had no plans to settle the case, he said.

Also of concern to Microsoft is the antitrust decision reached against it last month by regulators in Europe. The Commission fined Microsoft $US613 million for harming competition, and ordered it to sell a version of Windows without its media player software to encourage competition in that market, among other requirements. Microsoft has said it would appeal the ruling.

Sun was an instigator of that EU lawsuit, complaining in 1998 that Microsoft unfairly withheld software code that competitors needed to make their servers work with Microsoft's products.

With the settlement, Sun will be a less vocal supporter of the Commission's case.

"It is likely that we will be less active and visible given the fact that we have indeed already received everything we wanted," Sun's vice-president for legal affairs, Lee Patch, said. "It would be a little odd for us to be out demanding something we already have."

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