Sun, Microsoft pact draws mixed reactions

The broad legal settlement reached Friday 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 behavior remains unclear, analysts and legal experts said

In an unexpected move, Microsoft announced Friday that it will pay Sun a total of $1.6 billion to settle all outstanding antitrust and patent issues between the companies, and make a further $350 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. 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," said Dan Kusnetzky, vice president of systems software research at IDC, in Framingham, Mass.

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

"People thought we were heading towards two software ecosystems that would matter end to end -- Microsoft and IBM. ... 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," Gillett said.

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 AMD, 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," said Scott McNealy, Sun's chairman and CEO, at a press conference Friday morning.

Sun still faces challenges. Dampening the bluster of its settlement deal, it said Friday that it expects to report a loss of as much as $810 million for the quarter ended March 28, and that it will lay off 3,300 staff as part of ongoing efforts to cut costs. But the $1.95 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.