The broad legal settlement reached last week between Microsoft and Sun Microsystems may 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.
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Microsoft announced it will pay Sun a total of $1.6bn to settle all outstanding antitrust and patent issues between the companies and make a further $350m royalty payment to use Sun technologies in its products. Meanwhile, Sun will pay royalties for the Microsoft technologies 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 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.
The settlement positions 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.
"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."
The agreement marks the latest step in Sun's efforts to transform itself from a Unix system supplier with declining sales to a more general provider of software, systems and services. Sun has already 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," said Scott McNealy, Sun's chairman and chief executive officer.
Sun expects to report a loss of as much as $810m for the quarter ending 28 March, but the $1.95bn 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.
"Sun was in a position to unleash a very costly and potentially long lawsuit against Microsoft," Joe Wilcox, a senior analyst with Jupiter Research. "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."
However, not everyone approved of the settlement. Sun has, 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.
He noted that as part of the deal, Sun accepted the terms of Microsoft's Communications Protocol Program, which provides the communications protocols for exchanging data between servers and Microsoft desktops. Sun may not be able to make use of those protocols in its Linux servers, he said, because Microsoft's technology is 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. That means they conceded one of the most important points they had been fighting for," Allison said.
Microsoft, meanwhile, still faces a $1bn private antitrust suit brought against it by RealNetworks, which said on Friday that Sun's settlement does not weaken its resolve to fight that case.
"We brought our case because we strongly believe their conduct is illegal. We think that was validated by the [antitrust] findings of the European Commission, and we intend to prove it through a court of law," said Dave Stewart, deputy general council for RealNetworks.
RealNetworks has an "obligation to its shareholders" to consider any settlement that Microsoft may offer, but has 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 €497m 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.
Sun was an instigator of that lawsuit, complaining in 1998 that Microsoft unfairly withheld software code that competitors needed to make their servers work with Microsoft's products. With Friday's 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. It would be a little odd for us to be out demanding something we already have," said Lee Patch, Sun's vice president for legal affairs.
However, the settlement does not necessarily weaken the commission's position as the case goes to appeal, said Dana Hayter, an attorney with Howard Rice in San Francisco. The commission has compiled 300 pages of documentation describing Microsoft's offences, and its case is concerned with the company's impact on competition in general, not just against Sun, he noted.
"This does not, I would think, have a big impact on the commission's deliberations, except to the extent that they think the settlement between Microsoft and Sun would have an impact on Europe," Hayter said.
James Niccolai writes for IDG News Service