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Sun settles with Microsoft, cuts jobs
Updated: 2004-04-03 11:40

Halting one of the most bitter rivalries in U.S. business, Sun Microsystems Inc. gave up its fight with Microsoft Corp. on Friday, reaching a US$1.6 billion legal settlement and pledging to cooperate with its longtime nemesis.

The surprise agreement, signed at 4:15 a.m., ended a protracted legal wrestling match among rivals with plenty of other weighty challenges ! Microsoft's antitrust sanctions by the European Union and Sun's staggering financial losses since the dot-com bust.

Sun announced Friday that it is cutting 3,300 jobs, or 9 percent of its 36,000-strong work force, and that its net loss for the fiscal third quarter will be wider than expected.

Sun, once a shining star of Silicon Valley, makes servers that tie desktop computers together and serve up Web pages. It has repeatedly accused Microsoft of sabotaging its business, including by making Windows operating systems incompatible with Sun's Java programming language.

Sun's antitrust complaints helped spark the investigation that led to the EU's US$613 million fine against Microsoft last month for abuses of its virtual monopoly in desktop operating systems.

Because Sun and Microsoft have had a rancorous, acidic relationship ! Scott McNealy, Sun's chief executive, used to call Microsoft's software a system-clogging "hairball" ! the announcement might have been mistaken for an April Fool's joke if it had come a day earlier.

"It puts peace on the table in a big way," McNealy said during a conference call Friday morning.

A few hours later, McNealy and Microsoft chief executive Steve Ballmer sat side by side at a news conference in San Francisco, and explained that the decision to collaborate was based on business.

The "broad cooperation agreement" calls for the two companies to make their products compatible ! an issue McNealy said had become a growing concern among many of the corporate customers the two companies serve.

"It's all about helping our customers who own both our stuff," Ballmer said.

McNealy said he initiated the talks almost a year ago. Several golf games and dozens of weekly meetings later, the two rivals hammered out 10-year deal that ends Sun's US$1 billion antitrust suit against Microsoft.

Microsoft will pay Sun US$700 million to resolve the antitrust case, which was scheduled to go to trial in January 2006, and US$900 million to resolve patent issues. Sun and Microsoft also will pay royalties for each others' technologies, with Microsoft making an upfront payment of US$350 million.

The move was not related to the EU ruling, Microsoft's top lawyer, Brad Smith, said in an interview. However, he said the company understood Sun's position better after Sun executives testified at a hearing in Europe in November.

Matt Rosoff of independent researcher Directions on Microsoft said he was surprised by the settlement.

"Sun and Microsoft have been at each other's throats for so many years, and the level of rhetoric between the two companies has been so extreme, I'm surprised they were able to reach an agreement," he said.

Santa Clara-based Sun has accused Microsoft of crippling its growth, but its financial troubles stemmed in large part from the dot-com bust, as corporate spending shrunk and rivals like IBM Corp. and Hewlett-Packard Co. started offering machines with less expensive hardware and software.

Inexpensive microprocessors from Intel Corp. have grown increasingly powerful, and the open-source Linux operating system has become more reliable. Companies that once powered their Web sites and applications on Sun machines can do so just as easily ! and a lot less expensively ! using an Intel-based box running Linux.

Sun was slow to react, analysts said. Last year, it announced that it too would offer Linux and launched a version for desktop computers in December. Sun also, until last year, gave mixed signals about its support for low-end machines running its Solaris operating system.

Several top executives left Sun over the past two years, including president Ed Zander and chief scientist Bill Joy.

Now, analysts said, Sun will benefit by licensing Microsoft's desktop technology, allowing it to build servers for customers already using Windows-based products.

"They have to co-exist," said Thomas Murphy, senior program director at the Meta Group, "and Microsoft can't be wasting more money on litigation."

Sun's biggest complaint ! and the main charge in its antitrust case against Microsoft ! involved Java, which Sun introduced in 1995. Java allows software to run on all computers ! even cell phones, regardless of the operating system.

Sun said Microsoft violated its license agreement by creating its own version of Java. Though the sides settled that case, they ended up in court again after Microsoft said it planned to stop supporting Sun's version of Java, which forced computer users to download it separately.

Under Friday's agreement, Microsoft can continue to support its version, called Microsoft Java Virtual Machine.

The deal also calls for the companies to cooperate on Web-based software and "identity management" that lets Web surfers enter multiple sites with a single user name and password.

Sun also agreed to sign a license that will allow its software to better communicate with Windows-based desktop computers.

That settles Sun's complaint over Microsoft's server communications that led to the EU ruling against Microsoft. The EU also ordered Microsoft to uncouple its digital media player from Windows; Sun did not play a role in that complaint.

Sun's business challenges remain immense. The company said it expects to report that revenue for the third quarter, which ended March 28, will be approximately US$2.65 billion. The net loss will be between US$750 million and US$810 million, or 23 cents to 25 cents per share.

Analysts polled by Thomson First Call were projecting a loss of just 3 cents a share on revenue of US$2.85 billion.

Daryl Plummer, chief fellow for emerging technologies at the research firm Gartner Inc., said he was concerned whether Sun's 9 percent staff cut would affect research and development, which Sun has fiercely protected in previous rounds of layoffs.

"It's important they keep that innovation alive," he said.

Sun shares jumped 21 percent, adding 87 cents to close at US$5.06 on the Nasdaq Stock Market. Microsoft shares rose 3 percent, 77 cents, to US$25.85.

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