Microsoft, Sun Reach Settlement

Agree to $1.6 billion deal and technology sharing.

The second times a charm. Sun Microsystems Inc. and Microsoft Corp. resolved their legal issues in a $1.6 billion settlement announced Friday that calls for the two companies to work together over the next 10 years.

Sun, not satisfied with the results of a 2001 settlement in its first lawsuit against Microsoft, filed suit again in 2002. The new settlement includes payments of $700 million to Sun by Microsoft to resolve pending antitrust issues, $900 million to resolve patent issues and Microsofts agreeing to support Suns Java Virtual Machine.

Sun and Microsoft also each have agreed to pay royalties for use of each others technology, with Microsoft making an upfront payment of $350 million and Sun making payments when this technology is incorporated into its server products.

Also Friday, Sun said that it will cut 3,300 jobs and take a $475 million charge. Sun also has promoted Jonathan Schwartz, who had been the Santa Clara, Calif., companys executive vice president for software, to president and chief operating officer. The COO position had been vacant since Ed Zander, now the chairman and chief executive of Motorola Inc., left Sun in 2002.

In a conference call Friday, Sun CEO Scott McNealy said he initiated the settlement agreement almost a year ago with a phone call to Microsoft CEO Steve Ballmer.

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."

Ballmer said a key part of the agreement was the establishment of what he called a "patent regime," or framework, that would set forth the policies by which the companies would honor each others intellectual property rights. Ballmer said it took a year "because this is complicated stuff."

In addition, McNealy said Microsoft Chairman and Chief Software Architect Bill Gates and Sun Chief Technology Officer Greg Papadopoulos have been meeting "for several months now" to work out ways the two companies frameworks could better interoperate.

Other than that, it will be business as usual, the two said. "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 1." But he also said there were no plans to merge core Sun and Microsoft products.

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 that Microsoft would phase out products that included the older version of Microsofts Java implementation. Sun then 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 run-time in every copy of Windows shipped.