Microsoft, Sun Settle Antitrust Differences

One of the most bitter rivalries in the high-technology era ended yesterday as Microsoft Corp. agreed to pay Sun Microsystems Inc. $1.6 billion to settle antitrust claims and the companies announced a partnership to make their products work better together.

For Microsoft, the settlement resolves the largest private antitrust lawsuit still pending against it and makes peace with a company that repeatedly called it a predatory monopolist.

Sun was at the center of cases brought by U.S. and European prosecutors that resulted in rulings that Microsoft broke antitrust laws in seeking to crush competitors, including Sun.

Although Sun might have eventually won significant damages from Microsoft, the deal provides it with badly needed cash.

The Silicon Valley firm, which makes server systems that power computer networks for businesses, has been struggling in the face of competition from Microsoft and others. The company yesterday announced steep losses for the past quarter and said it would lay off about 9 percent of its workforce and reorganize top management.

The deal is the latest in a string of settlements Microsoft has stuck with the Justice Department, consumers in several states and corporate rivals in an effort to put its nearly decade-old antitrust problems behind it.

The company has also sought to turn those deals into partnerships, as it did in settling with America Online last year.

But a 10-year technical collaboration with arch-enemy Sun far exceeds any past agreement in altering the high-tech tableau.

For years, Sun has been the public face for many Silicon Valley firms as they did legal battle with the behemoth from the north, Redmond, Wash.-based Microsoft.

“I know a lot of you think this is kind of weird,” Sun chief executive Scott G. McNealy began sheepishly at a crowded San Francisco news conference. Famous for bombastic barbs against Microsoft and its top executives, he once called a version of Windows a “hairball” and referred to Chairman Bill Gates and chief executive Steven A. Ballmer as “Ballmer and Butthead.”

Yesterday, it was a new McNealy, poking fun at himself and relating how he and Ballmer — who shared the stage — are friends, grew up in the same city in Michigan, were at Harvard together and share a love of sports.

“Maybe we’ve grown up,” he said. “Maybe they’ve grown up. . . . I’m going to do my best to be good.” In an interview, he insisted that none of the vitriol of the past decade was personal.

“It’s fun; it’s all about winning,” he said. “There’s a lot of theater involved.”

Ballmer, no stranger to bombast himself, focused on the new relationship, which he said would help customers “who own both our stuff.”

By committing to make their systems work together more seamlessly, the companies say they hope to relieve the headaches of many systems operators who prefer to use multiple types of software and hardware on their networks.

“Our customers said, ‘Cut the rhetoric. Get interoperable,’ ” said McNealy, who added that he first approached Ballmer to discuss a deal about a year ago by inviting him to play golf.

But Ballmer said it was difficult to reach an accord that allowed each company to protect its intellectual property: the software code that is the heart of the industry, akin to the secret formula for Coca-Cola. Many of the technical negotiations were handled by Gates and Sun Chief Technology Officer Greg Papadopoulos, McNealy said. Negotiations did not wrap up until 4:15 a.m. yesterday.

In the end, the firms agreed to pay royalties for using each other’s technology. Microsoft will pay Sun an additional $350 million in fees immediately, while Sun will pay undisclosed fees later. They also agreed not to sue each other over patents.

Efforts to make their systems more compatible will begin with Windows server and desktop systems, the executives said. Later, however, they will branch out into systems such as Web services, which allow companies to conduct Internet-based transactions and manage other tasks.

Ballmer said the companies will continue to compete hard in all areas, though both he and McNealy hinted at further collaboration in the future.

Some financial analysts said the deal also helps the two firms battle what has been a growing nemesis for both: systems based on Linux, software that often is less expensive and is based on an “open-source” model that allows more customization by users.

Linux-based systems, marketed by IBM and others, have made strong inroads in the corporate-systems market. So far, Sun has been the primary victim, but Linux has provided more competition for Microsoft than has any software in years.

Ted Schadler, an analyst for Forrester Research Inc., said the compatibility problems between Sun and Microsoft systems made switching to Linux even more attractive for many customers.

“If we get a world where Solaris [Sun's server operating system] is a reasonably priced OS, and oh, by the way, it interoperates with Windows, all of a sudden the need to have Linux is much less,” Schadler said.

“Sun and Microsoft are saying, ‘We’ll buddy up here . . . and together we’ll shut out” competitors such as Hewlett-Packard Co. and International Business Machines Corp.

George Weiss, an analyst with Gartner Inc., said the collaboration will reduce what Sun spends trying to make its systems work with Microsoft’s products.

But he said that by paying each other for their code, the companies are reaffirming their belief that software companies should be compensated for their creations. Open-source code is typically distributed for free, and companies like Red Hat Inc. and IBM make their money building custom versions of it for clients.

McNealy said Sun will not give up on its support for some open-source initiatives, including a suite of programs that competes with the word-processing and spreadsheet features of Microsoft Office.

Sun also has been pushing a version of its Java software as an alternative to the Windows operating system for personal computers.

“We’ll continue to pursue our approach to life and they’ll pursue their approach to life,” Ballmer said.

Under the terms of the settlement, Sun also announced that it is now satisfied that the complaints it made to the European Union about Microsoft’s anticompetitive conduct have been resolved.

The EU ruled last week that Microsoft was abusing its “near monopoly” status in the markets for servers and media-playing software.

Microsoft was slapped with the largest antitrust fine ever, roughly $600 million, and ordered to reveal more of its code to rivals such as Sun.

Microsoft has vowed to appeal and continues to try to settle the case, although talks broke down before the ruling was announced.

But Philip Lowe, the director general of competition for the EU, said yesterday that the settlement would not affect the case.

“The effect of our decision is not limited to any one competitor in any one area,” Lowe said at a briefing in Washington. “It is decision aimed at competition problems that are harmful to competition and harmful to consumers.”

Edward Black, head of the Computer & Communications Industry Association, which has a new pending complaint against Microsoft in Europe, said Sun’s decision would not affect his case.

“Sun is one of many companies who care about Microsoft’s behavior,” Black said. “They were unique because they were willing to be vocal about it.”

Staff writer Christopher Stern and researcher Richard Drezen contributed to this story.

Reported By TechNews.com, http://www.TechNews.com

(20040403/WIRES /)