• Sidebar: Sun and Microsoft: A Timeline

After years of antagonism, Sun Microsystems and Microsoft have settled all outstanding litigation and entered a technology-sharing agreement. The US$1.95 billion deal spares Microsoft bad trial publicity, solidifies its patent position, and may improve its standing in other antitrust cases. Sun no longer faces an expensive legal battle against an adversary with almost unlimited resources, and the cash infusion will help it transition from high-end hardware specialist to a more versatile company. Most important, the deal answers pleas from customers to improve interoperability, although the Java and .NET platforms will remain competitive, and the two companies will favor different OSs.

(For an overview of the two companies' shared history, see the sidebar "Sun and Microsoft: A Timeline".)

Key Elements of the Agreement

The agreement was announced by Sun CEO Scott McNealy and Microsoft CEO Steve Ballmer in a joint press conference on Apr. 5, 2004. Both executives cited the importance of respecting each other's intellectual property, particularly patents, as the starting point for a deal.

End to Litigation

Sun has ended its private antitrust lawsuit against Microsoft in exchange for a US$700 million payment. Burst.com is the last remaining plaintiff in that case, which is scheduled to go to trial in the U.S. District Court of Maryland by 2006; Microsoft previously settled with AOL Time Warner, Be, and a class of individual consumers who alleged overcharging.

Sun also announced that the settlement resolved all the issues that had prompted it to complain to antitrust regulators in Europe. Sun's 1998 complaint spurred a six-year investigation by the European Commission (EC) that recently ended with the EC fining Microsoft US$613 million and imposing other behavioral remedies; Microsoft is appealing that decision. (For details, see "EU Aims to Restrict 'Future Conduct'".)

In addition, Microsoft paid Sun US$900 million to sign a covenant prohibiting both companies from collecting financial damages for all past instances of patent infringement, a move which will reduce Sun's incentive to file any patent infringement lawsuits. Microsoft may make annual payments to Sun to extend the covenant for up to 10 years (the total amount could be up to US$450 million), after which the companies will automatically have perpetual rights to each other's patents. The two companies might also sign a perpetual patent cross-licensing agreement before the 10-year period is up, eliminating the need for the covenant.

Lastly, Sun agreed that Microsoft may continue to provide support, including security-related patches, for its version of the Java Virtual Machine (JVM) in products that customers have already deployed—a major sticking point in the legal battles between the companies. (The JVM is an intermediate middleware layer that lets Java-based applications talk to the underlying OS; Sun and Microsoft have long offered different and only partially compatible versions.)

Technology Licensing

Microsoft will initially pay US$350 million to use unspecified Sun technologies in its products (this is separate from the patent-related payments). Sun will also license Microsoft technologies, including communications protocols offered as part of the Microsoft Communications Protocol Program (MCPP), which was mandated by Microsoft's settlement with the U.S. Department of Justice (DoJ). Sun will pay Microsoft for these technologies when they're incorporated into Sun products.

In addition, Sun servers based on Intel's Xeon processor have been certified for Windows, and its servers based on AMD's Opteron processor are moving through the Windows certification process. This would allow customers to install their own copies of Windows on such servers and receive support from Microsoft. However, Sun is not likely to become a Windows OEM.

Technical Collaboration Agreement

The two companies will work together to improve interoperability between their products. At first, the companies will focus on enabling Sun products to exchange information with Windows clients and servers, particularly in the areas of authentication, authorization, and identity management. The companies also mentioned e-mail, databases, and better interoperability between Java and .NET-based applications as areas of future collaboration.

Although details of the technical collaboration agreement were not revealed, the companies said that Microsoft Chief Software Architect Bill Gates and Sun Chief Technology Officer Greg Papadopalous had been meeting since late 2003 to discuss a framework for interoperability, and that other engineers from both companies would now participate in the process. This suggests that the agreement has some real meat to it, and it may help Sun move from untrusted enemy to partner.

Why They Settled

Given their long and entertaining history of public antagonism—McNealy could always be relied upon to pepper his speeches with anti-Microsoft remarks, and Ballmer once called McNealy "two standard deviations away from reality"—the fact that the two companies could find common ground was somewhat surprising. Nevertheless, both companies had good reasons for ending their adversarial relationship.

Common Customers, Interests

Most of Microsoft's largest enterprise customers are also Sun customers. These customers repeatedly told both parties that they wanted to see more effort put into solving interoperability problems that cost them money. With both Sun and Microsoft feeling the effects of reduced IT spending, meeting the demands of these large customers has become more important than fighting over principles—such as whether Microsoft can update its JVM for security reasons—that don't matter to most customers.

In addition, both companies are facing upgrade reluctance from IT customers who believe their current installations are adequate. By working together on technologies that have not yet reached their potential—particularly Web services, which are not widely used in business-to-business transactions because many necessary underlying protocols have not yet been decided—Microsoft and Sun can push these key technologies forward, which could eventually spur upgrades among both companies' customers.

Microsoft: Public Opinion, Patents

Ever since the landmark DoJ antitrust trial, Microsoft has been keenly aware of how trials can influence public opinion. In particular, every trial has a discovery phase in which internal documents, including e-mails and strategy discussions from past years, are exposed. In addition, Microsoft has cited legal uncertainty as one reason for maintaining more than US$53 billion in cash, rather than paying a greater dividend, which could increase demand for Microsoft shares and bolster its languishing stock price. These considerations have driven Microsoft to settle antitrust lawsuits wherever possible, particularly if such settlements could be achieved through one-time cash payments rather than changes in business practices.

The deal could also help Microsoft's standing in its antitrust negotiations with government bodies. In particular, Sun has complained to the DoJ and the presiding judge that the MCPP was too restrictive, which resulted in Microsoft having to change the terms of program. Now Sun is a participant, which will probably end this pressure. Similarly, now that Microsoft has agreed to license to Sun all the information at issue in the European antitrust case, an appeals court may reconsider whether the EC needs to force Microsoft to reveal this information through a uniform licensing program.

Finally, the deal helps solidify Microsoft's patent portfolio by removing past infringements from consideration and establishing a framework for patent cross-licensing with Sun. Patents have become increasingly important to Microsoft as the company looks for new revenue sources and attempts to stem a rising tide of patent-infringement lawsuits. The new focus on patents also played a major role in Microsoft's legal settlement with digital rights management company Intertrust, which followed the Sun settlement by less than two weeks.

Sun: Changing Business

Sun's Java programming language and application platform are popular, but they don't contribute much revenue, largely because other companies (notably IBM) have been more successful at selling applications and developer tools that implement Java standards.

Meanwhile, as the dot-com boom ended and corporations turned from proprietary Unix hardware to less expensive Intel-based systems, Sun's core business—selling hardware based on its SPARC processors—suffered. As a result, the company has experienced losses in 11 of its last 12 quarters. (It announced 3,300 layoffs and a deeper-than-expected quarterly loss on the same day it announced the Microsoft deal.)

Facing these numbers, Sun realized it could no longer remain a proprietary hardware specialist and had to put a greater focus on software. Underscoring this change, McNealy appointed Sun's head of software, Jonathan Schwartz, as chief operating officer and president on the same day that the Microsoft deal was announced. But the company couldn't make this disruptive and expensive change to its business while simultaneously carrying on an expensive legal battle with Microsoft. So, in fall 2003, McNealy called Ballmer and initiated the discussions that led to this settlement.

What the Deal Means

As with Microsoft's 2003 settlement with AOL Time Warner, the full implications of the Sun deal will be slowly revealed over time. However, based on what the two companies are saying publicly, the following changes are likely:

Server interoperability. With the information licensed from Microsoft, Sun's Java System Identity Server will probably be able to perform the full functions of a Windows domain controller, and Sun's Java System Directory Server will be able to exchange identity attributes, including passwords, with Microsoft's Active Directory. Other types of interoperability between the companies' products—particularly Sun servers and Windows PCs and servers—are likely to follow.

Cooperation on standards. The two companies have often clashed over standards, particularly for exchanging security-related information between companies over the Web (such as WS-Security and WS-Federation, both of which were initially favored by Microsoft but not Sun). The new relationship could put an end to such squabbles and pave the way for cooperation on other emerging standards, such as digital rights management (DRM) technologies used to protect proprietary content, which Schwartz has highlighted as an important area for Sun.

Where Competition Remains

Despite the truce, Sun and Microsoft will remain at odds in many areas, particularly regarding their respective development platforms (Java and .NET). For example, the agreement will probably have no effect in the following areas:

JVM compatibility. According to Schwartz, there are no efforts under way to make the two companies' JVMs interoperable. In all likelihood, Microsoft will only release security-related updates to its JVM, while continuing to concentrate future development on its .NET equivalent, the Common Language Runtime (CLR).

Cross-language support. Microsoft's C# language is unlikely to be supported by J2EE, and Microsoft will continue to promote the Java Conversion Language Assistant (JCLA), which helps developers convert Java code into C#, while deemphasizing J#, which lets .NET developers use the Java language (albeit with Microsoft’s APIs rather than Sun’s).

Development tools. Microsoft tools, such as Visual Studio .NET, will not allow developers to create J2EE applications.

Desktop productivity applications. Sun began offering StarOffice, a low-cost competitor to Microsoft's Office suite, in 1999, and introduced the Java Desktop System, a suite of Java-based productivity applications that run on top of Linux, in Dec. 2003. The deal does not mean that Sun will stop offering these products, and Sun COO Schwartz says they continue to remain strategic.

However, StarOffice has not taken much market share from Office, and most enterprises have expressed little interest in Linux on the desktop. As a result, business considerations may force Sun to refocus on its traditional strength in running back-end systems—albeit with more of a software focus—and put less effort into competing with Microsoft on the desktop.

OSs. Although Linux has cut into both Sun's and Microsoft's server sales, the agreement does not indicate a change in either company's attitude toward the open-source OS.

Realizing that low-cost Intel-based hardware is eroding the market for its SPARC-based systems, Sun will continue to offer Solaris for Intel and AMD systems, while at the same time trying to capitalize on Linux momentum by building Linux-based versions of its server software (the Java Enterprise System). However, Sun is unlikely to port its application software to Windows or become a Windows OEM.

Similarly, the deal bodes no change in Microsoft's approach to Linux, which is still its number-one competitor and biggest long-term threat to growth. If anything, the deal will place Microsoft into even more direct competition with Linux from Sun, as the cash infusion and technology-sharing agreement could help Sun create more viable Linux-based versions of its products.

Resources

Sun's private antitrust lawsuit against Microsoft is detailed in "Sun, Be File Private Antitrust Lawsuits" on page 25 of the Apr. 2002 Update.

Microsoft's newfound attention to patents is described in "Patent Licensing Broadened" on page 23 of the Jan. 2004 Update.

Microsoft's settlement with AOL Time Warner is described in "Truce Reached with AOL" on page 20 of the July 2003 Update.

For more background on the .NET development platform, see the June 2003 Research Report, "The .NET Development Platform." The sidebar "Comparison of the .NET Development Platform and J2EE" on page 22 offers some useful comparisons between the two platforms.