Instead of voting Scott McNealy off the island, Sun Microsystems Inc. has decided to forge a secret alliance with archrival Microsoft Corp. in the latest, strange twist in the technology-industry reality game.
And not just any old alliance, but an old-fashioned lovefest between two hometown boys, is how McNealy, Suns chairman and chief executive, and Steve Ballmer, Microsofts chief executive, played the settlement of their legal differences during a news conference Friday in San Francisco.
During the event, McNealy said he initiated the settlement and collaborative agreement almost a year ago with a phone call to Ballmer, a cross-town high-school rival in suburban Detroit, as well as a fellow student at both Harvard University and Stanford Universitys business school. That call led to a game of golf, when the two discussed the possibility of settling Suns lawsuit and beginning a pattern of working together.
McNealy and Ballmer opened the news conference by trading Detroit Red Wings memorabilia. “We couldnt make a stronger statement than, at playoff time, to exchange gifts,” McNealy said, calling himself and Ballmer “Motown fans.”
With Sun settling its lawsuit against Microsoft and gaining nearly $2 billion to boot, McNealy took the lead in the news conference, which was set in his back yard. McNealy said the agreement came “at the prodding of almost every customer we have, who said, Cut the rhetoric, Scott, and go get interoperable; stop the noise. Its a very unique and special way we can advantage our customers while respecting each others intellectual property.”
“Im very thankful of Scotts initiation of this a year ago,” Ballmer said. The deal, he said, is “an agreement that is really all about helping our customers, who will continue to buy our products that compete with each other.”
The settlement, which stems from a lawsuit Sun filed in 2002, will include Microsoft continuing to support Suns Java Virtual Machine, as well as Microsoft paying $700 million to Sun to resolve pending antitrust issues and $900 million more to resolve patent issues.
Meanwhile, Sun and Microsoft have agreed to pay royalties for use of each others technology, with Microsoft making an up-front payment of $350 million and Sun making payments when its competitors technology is incorporated into its server products.
Patent Regime a Key
A key part of the agreement, Ballmer said, was the establishment of what he called a “patent regime”—a framework that establishes policies for the companies regarding one anothers intellectual property rights. It took a year, he said, “because this is complicated stuff.”
In addition, McNealy said Bill Gates, Microsofts chairman and chief software architect, and Greg Papadopoulos, Suns chief technology officer, have been meeting “for several months now” to work out ways for the two companies frameworks to better interoperate. The two will continue to meet, he said.
Under a technical collaboration agreement, the companies will share access to each others server-based technology for use in building new server software products that will work better together, the companies said. The cooperation initially will center on Windows Server and Windows Client but eventually will include other technology, such as e-mail and database software.
Sun also has agreed to license the Windows desktop operating system communications protocols under Microsofts Communications Protocol Program, which came as part of Microsofts consent decree and final judgment with the U.S. Department of Justice and 18 state attorneys general.
Adding to the collaboration, the two companies announced that they will work together to improve the interaction between the Java and .Net platforms and to seek cross-license agreements. The companies also announced Windows certification for Suns Xeon servers.
“Were going to continue to compete,” Ballmer said.
“The customers dont want us to stop competing,” McNealy said.
McNealy also cryptically added: “Theres a potential this is just phase one.” But he also said there were no plans to merge core Sun and Microsoft products.
“It draws more developers to the two platforms,” McNealy said of the deal.
Both company leaders and analysts agree that customers gain the most from the deal. “Well, Sun gets the cash in the settlement, but the real winner is the customer,” said Thomas Murphy, an analyst with META Group Inc. of Stamford, Conn. “I have taken many calls over the past year from people who were facing a lot of issues with Microsoft not being able to ship its virtual machine anymore, and all the apps that would break in the world.
“Now, they can continue forward without costly ports. And since almost all large companies will or do have both .Net and Java, anything that will promote interop will be big value.” John Rymer, an analyst with Forrester Inc. of Boston, said Microsoft and Sun can focus on security in the short term and focus on deeper interoperability later. “Microsoft and Sun will first make it easier to use their respective directory servers together to improve application security. Next, the companies will focus on operating-system interoperability,” he said.
Meanwhile, Rymer said, “Interoperability of the key protocols and formats of Java 2 Enterprise Edition [J2EE] and .Net, as well as Java language support of .NET, would be the big wins for enterprise customers—and should be the top priority of the new partners.”
IBM is a common enemy for the two companies, Rymer added, and open-source technology represents a common threat. Sun and Microsoft share an interest in providing customers with an alternative to IBM for mixed environments, he said. And “Microsoft and Sun can compete with open source by reducing the cost of implementation through out-of-the-box interoperability,” he said.
Execs Stress IP Respect
Both Ballmer and McNealy said significant interoperability already exists between their companies platforms but that they expect it to increase. “Well have server-to-client and server-to-server interoperability and have our stuff talk to each other while respecting each others IP,” Ballmer said.
“And dont underestimate the fact that we work together and interoperate already—theres just more we can do if we put the legal stuff behind us,” McNealy said.
“Note that they both talk a lot about IP and the value of IP,” METAs Murphy said. “This is also a statement about the ability to control your IP, i.e. Java and open-source push from IBM. So, it reaffirms both companies values, but I believe it is also very positive for customers.”
Asked if he thought Microsoft might continue the kind of predatory behavior he has spoken out so often about, McNealy said, “Im not sure weve ever asked for this kind of relationship before” but added that the settlement “has been handled with a high level of professionalism.”
“Maybe weve grown up, maybe theyve grown up, or maybe the customers are driving this.”
“In an environment that gets litigious, it gets harder to have open discussion,” Ballmer said.
McNealy said he would try to refrain from making the comments he is notorious for that poke fun at Microsoft. “There were equal amounts of rhetoric going both ways, mine was just more clever,” McNealy said. But he said he had begun to tone down the rhetoric years ago. “The truth is, we are both very well-established in the enterprise.”
Sun, the creator of Java, sued Microsoft in 1997 for what Sun claimed was Microsofts improper use of Suns Java technology. Sun and Microsoft agreed to settle the suit in January 2001. Microsoft paid Sun $20 million, and the two agreed to a plan for Microsoft to phase out products that included the older version of Microsoft Java that allegedly infringed on Suns Java copyrights and trademarks.
Sun sued Microsoft again in 2002, again claiming improper use of Java and seeking to have Microsoft include an up-to-date version of the Java runtime in every copy of Windows shipped.
Also Friday, Sun said it will cut 3,300 jobs and take a $475 million charge. The company said it will spread out the charge over several quarters, including $200 million in the third quarter. In addition, Sun said it has promoted Jonathan Schwartz, who had been Suns executive vice president for software, to president and chief operating officer. The COO position had been vacant since Ed Zander, now chairman and chief executive of Motorola, left Sun in 2002.
McNealy would not comment on the job cuts.