Sun And Microsoft Call Truce; Sign 10-Year Technical Agreement

Sun Microsystems Inc. and Microsoft Corp. said Friday both companies have settled a longstanding score that ends their antitrust battle, and outlines steps for unprecedented collaboration. The biggest part of the agreement calls for the two companies to share future technologies, Microsoft to pay US$1.95 billion in royalties to Sun and both sides to not sue each other regarding any past patent infringement claims.

Declaring a new relationship between itself and Microsoft, Sun also said that the companies have agreed to enable their products to better work together and have entered agreements on patents and other issues. The agreement includes technical collaboration, giving access to each otheris server technology, as well as Sunis licensing of Microsoftis communications protocols and Microsoft support of some Sun products.

Under the agreement, Microsoft will pay US$700 million in legal fees, and US$900 million to Sun as part of a broad agreement not to sue each other over past patent infringement claims. In addition, the companies will have access to each otheris server technology, enabling their products to work together. Initially, the technology sharing will include Windows, but will expand to include e-mail and database software. Both companies have also agreed to pay royalties for each otheris technologies with Microsoft making an up-front payment of US$350 million and Sun making payments whenever it uses Microsoftis technology in its server products.

Sun chairman and Chief Executive Officer Scott McNealy said that Microsoft could end up paying an additional US$450 million as part of the agreement, "depending on the level of collaboration."

The two companies will initially cooperate on Windows Server and Windows Client, but could expand to include cooperation on e-mail and database software. Sun will also license communications protocols for the Windows desktop OS under terms established through the consent decree with the Department of Justice. The companies will work together to improve technical collaboration between Sunis Java and Microsoftis .Net technologies and a Windows certification for Sunis Xeon servers will be created.

"Our companies will continue to compete hard, but this agreement creates a new basis for cooperation that will benefit the customers of both companies," Microsoft CEO Steve Ballmer said in a Friday news conference.

Why the agreement?

The agreement, which both sides admitted had been in the works for over a year, is seen by industry experts as a necessity to head off fierce competition from the likes of HP, IBM and others who have taken advantage of the lack of technologies the two companies havenit been able to use because of their legal fight.

"Both these companies needed this truce," Frank Gillett, principal analyst with Forrester Research, told The Mac Observer. "This agreement allows Sun to become less of a Unix system supplier to a more general provider of software, systems and services. That means that Sun will be a more viable alternative to IBM. It wonit have the same breadth and depth in services or management software, but it will be an alternative."

Sun is struggling with competition both from Microsoft and from the open operating system Linux. Microsoft is also feeling heat from Linux and IBM. And 14 years of antitrust investigations and lawsuits is starting to show, according to Gillett.

"Microsoft needs these issues out of the way," said Gillett. "At least with the Sun agreement, they can start to focus in on competitive targets like HP and IBM with a partner that can get through doors."

The company still faces a US$1 billion private antitrust suit brought against it by RealNetworks and the ongoing antitrust decision reached against it last month by regulators in Europe. The commission fined Microsoft ?497 million for harming competition, and ordered it to sell a version of Windows without its media player software to encourage competition in that market. Microsoft has said it will appeal against the ruling.

Sunis additional problems

The agreement, however, does nothing to ease Sunis current problems. The company is hemorrhaging money and while announcing its agreement with Microsoft on Friday, Sun also announced plans to cut 3,300 jobs. The company says it has more than 35,000 employees worldwide, so the layoffs account for about 9 percent of its work force. The majority of cuts will take place by the end of September, Sun Microsystems chairman and CEO Scott McNealy said Friday. Sun already had cut 8,500 employees in two major layoffs in 2001 and 2002.

The company now sees deeper-than-expected losses for the quarter that ended Sunday. The company already has suffered 12 straight quarters of shrinking revenue. To be exact, Sun announced that based on preliminary financial results, it expects revenue for its financial third quarter, which ended March 28, to be about US$2.65 billion. Net loss, excluding one-time items, is expected to be in the range of US$710 million and US$810 million. Excluding one-time items, which take into account cost of layoffs, net loss for the quarter would range between US$200 million and US$260 million.

McNealy and Sun Chief Financial Officer Steve McGowan promised details of what other cost cutting measures the company will take when it reports full results April 15. Sun expects to reduce both administration and research and development expenses by US$500 million from about US$5.2 billion in fiscal 2004, which ends June 30, to US$4.7 billion in fiscal 2005.