Sun-Microsoft Deal Seen Benefiting Both

Sun Microsystems's sweeping agreement with Microsoft benefits both companies and their customers, but it remains to be seen whether Sun's decision to make nice with its longtime enemy will help reverse its financial troubles, analysts said Friday.

The $1.6 billion deal announced Friday settles Sun's antitrust and patent claims against its Redmond, Wash., rival. In addition, the two companies agreed to pay royalties for use of each other's technology, with Microsoft making an up-front payment of $350 million.

Sun is expected to make royalty payments to Microsoft when Sun incorporates Microsoft technology in its server computers.

From a technical standpoint, both companies promised that their products going forward would inter-operate at a level that will satisfy customers, who have had to struggle for years to establish communications between Sun servers running the Solaris operating system and desktops and servers running Microsoft Windows.

"Our customers will all be quite thankful that we got on with this as quickly as we possibly could," Steve Ballmer, chief executive of Microsoft, said during a joint news conference with Sun CEO Scott McNealy.Without exception, interoperability between computer systems is the top priority among information technology organizations, Joe Wilcox, analyst for Jupiter Research, said. If both companies stick to their promises, then customers should find it easier to integrate applications built on Microsoft's .Net platform and Sun's Java enterprise environment.

"By agreeing to work with Sun on Java, and vice versa on .Net, Microsoft has reached a potentially beneficial dtente with its rival," Wilcox said. "This could lead to better interoperability between the two's development/web services platforms, Java and .Net.... Web services are IT decision makers favorite, or preferred, means of solving interoperability problems."

Web services is an umbrella term for an emerging set of standards for loosely coupling software running on different infrastructures. The agreement between the leaders of the two major application platforms should boost industry efforts in developing integration standards, experts say.

Nevertheless, some experts held back their enthusiasm, saying the industry won't know how far the two companies would take the agreement until they start shipping products.

"It's better for everyone that these kinds of disagreements are settled this way, rather than in the courts," Michael Cherry, analyst for Directions on Microsoft, said. "But it takes time to really see what shakes out."Aside from technology, some analysts questioned whether the deal would help reverse Sun's financial troubles. On the same day it announced the Microsoft deal, Sun said it would eliminate 3,300 jobs, or about 9 percent of its work force, because of projected weak sales and larger-than-expected losses.

The Santa Clara, Calif., computer server and software maker warned that net losses for the third quarter ended March 28 would be between $750 million and $810 million, or 23 cents to 25 cents a share, on projected revenue of about $2.65 billion. The losses were the latest in a string of losing quarters.

The job cuts were part of a major restructuring plan that included the naming of Jonathan Schwartz as president and chief operating officer. He had been executive vice president for software.

"There will be some positives from this point in time from the Microsoft deal," Wendy Abramowitz, financial analyst for Argus Research Corp., said. "But at the same point, it still doesn't eliminate the issue from the competitive standpoint in trying to gain share back from the likes of IBM and HP (Hewlett-Packard). It's still more or less a big question mark, as I see it."

In 2003, Sun's share of the server market dropped to 11.8 percent, and it was the only top 5 vendor to post a revenue decline from server sales for the year, dropping 11.4 percent to $5.4 billion, according to International Data Corp.For Microsoft, the deal could help in its appeal of the European Union's antitrust ruling against the company last month. Although Sun did not play a direct role in the case, the company has been the biggest advocate of government intervention in the way Microsoft leverages its Windows monopoly in the U.S. and Europe.

Sun gave Microsoft ammunition in its EU case by stating in a press release that the agreement satisfies "the objectives it was pursuing in the EU actions pending against Microsoft."

"This definitely gives some leverage now that the biggest proponent going against Microsoft settles with Microsoft for a pretty substantial amount," Jason Kraft, financial analyst for A.G. Edwards & Sons Inc., said. "From Microsoft's standpoint, it's probably money well spent to angle, or direct, Sun to possibly getting a settlement with the EU."

In addition, the agreement means Sun and Microsoft can now concentrate on the "larger, looming threat for both companies in the mid- to long-term, and that's Linux and its biggest supporter, which is IBM," Kraft said.

The open source Linux operating system has been steadily gaining market share within the server market, market research shows.Another fallout from the announcement will probably be less colorful comments from McNealy against Microsoft. Over the years, the Sun chief executive has entertained attendees of many high-tech conferences with his jabs.

"I will be good," McNealy said during the news conference with Ballmer.

But even while announcing a new era of cooperation with his fiercest competitor, McNealy couldn't resist a parting shot in defending his past comments.

"There's been an equal amount of rhetoric coming back the other way," he said. "Mine was just more clever."

TechWeb's Gregg Keizer contributed to this report.0