Java Peace Treaty

And so it was, that when the two shared a stage in San Francisco to disclose their settlement, it marked one of the most stunning about-faces in IT industry history. Bitter foes for at least a decade, Microsoft and Sun Microsystems effectively laid down their Java-laced swords, ending their notorious feud with an out-of-court legal settlement worth $1.6 billion. The deal ends the battle waged over Sun's Java programming language and sets the stage for a remarkable, 10-year technology collaboration to enable their respective products to work better together. Up to this point, Sun had been pursuing a $1 billion lawsuit over Microsoft's use of Java; now the two are entering agreements on patents and other technology issues. It borders on surreal.

"I know a lot of you think this is kinda weird," McNealy said, leading off the press conference last month before going on to explain how long he has known Ballmer and, more important, how many customers had told him to quit squabbling with Microsoft and work together instead. McNealy explained that virtually every major customer he met with of late told him that the Sun products they bought from him needed to better interoperate with Microsoft's Windows and .Net technologies, which they all used, too.

McNealy's decision to make nice with what he has in the past referred to as a "convicted monopolist" may have just as much to do with the state of his own company's affairs. As it happens, the Microsoft agreement came on the same day that McNealy gave up his title of president to 38-year-old Sun software chief Jonathan Schwartz, announced layoffs and cutbacks that will cost 3,300 employees their jobs and potentially hundreds of millions of dollars, and alerted Wall Street and the world that the quarter just ended in March was a loser. Revenue for the third quarter was $2.651 billion, a 5 percent drop from the same quarter of fiscal 2003. Total gross margin for the quarter was 40.3 percent, down 4.3 percentage points from Q3 '03. Net loss for the quarter was $760 million, or 23 cents per share, a big drop from the company's $4 million gain during Q3 '03.

And although Microsoft will end up paying Sun a huge sum of money to settle legal disputes--including one totaling $700 million to resolve pending antitrust issues and another totaling $900 million to resolve patent issues--it is Microsoft that is likely to be seen as the company that benefits most from this unexpected alliance. For starters, the money is only a fraction of Microsoft's $50 billion-plus cash holdings. Moreover, the deal puts another significant legal fracas behind Microsoft: The agreement with Sun came just a few days after the European Union slapped the software giant with more than $600 million in new fines relating to ongoing antitrust concerns.

For his part, Ballmer said the overture from McNealy was welcomed at the highest levels within Microsoft, though it took time for the two companies to rebuild a level of trust so they could move forward.

"It's an agreement that comes from two companies that believe in intellectual property, that develop intellectual property and that are respecting intellectual property," Ballmer said, in an apparent shot across the bow to fans of Linux and open-source software. "We needed a framework for our collaboration that honors our mutual interest in intellectual property, and as part of doing all of this collaboration, oh by the way, we had to make sure we took care of other ongoing legal matters between the two companies."

Industry analysts say the decision, while to a large degree a capitulation by Sun, will likely benefit the company.

"It was a difficult decision for Sun's management team, and McNealy in particular. But it was necessary," says Stephen O'Grady, an analyst with RedMonk, an industry firm based in Bath, Maine. Indeed, the detente with Microsoft, coupled with the elevation of Schwartz to Sun's No. 2 post, only proves the extraordinary pressure McNealy is under from investors to right the ship, O'Grady says.

At this point, it's not exactly clear what will result from the technical collaboration between the two companies, although Microsoft, as part of the agreement, will fork over $350 million in royalties to Sun. It is unlikely, however, that Sun's Web Services Architecture will merge with Microsoft's .Net technology, for example, according to Ballmer and McNealy. However, it is likely that the companies will begin to interoperate on a protocol level, as well as forge smoother ties among ID-management products and e-mail servers.

"We are going to work hard...to go drive the appropriate interoperability and compatibility frameworks that will allow the two architectures to work in a more seamless way than they would had our technical teams not been allowed to collaborate," McNealy said.

"There's a level of interoperability that we both know people want," Ballmer added.

In a report issued after the settlement announcement, Yankee Group industry analyst Dana Gardner said the prospect of Sun's technology intermingling with Microsoft's proprietary systems on a protocol level "should send shivers down the spines of other IT vendors." If the Java/Unix platform begins to play nice with .Net/Windows, it lessens the need for middleware purveyed by the likes of BEA and IBM, and for integration work in general, according to Gardner.

To that end, McNealy said no one should make the mistake of thinking that the two companies would be worried or upset if the agreement resulted "in people buying more Microsoft and more Sun equipment than they normally would have. We have no issue with that." Sun's chief even said he had already toned down much of his notorious anti-Microsoft rhetoric and, going forward, expects to change his demeanor, at least somewhat.

"Maybe we've grown up, maybe they've grown up--who knows," he said. "Maybe the customers are getting more in charge these days."