Sun Microsystems Inc. said today that it has entered into a "broad cooperation agreement" with Microsoft Corp. and has settled all outstanding litigation. Microsoft will pay Sun $700 million to resolve all pending antitrust issues and $900 million to resolve all patent issues, Sun said in an announcement.
Both companies also agreed to pay royalties for each other's technologies. Microsoft is making an upfront payment of $350 million, and Sun will make payments whenever it uses Microsoft's technology in its server products.
In a telephone press conference to discuss the deal this morning, Sun Chairman and CEO Scott McNealy said that Microsoft could end up paying an additional $450 million as part of the agreement, "depending on the level of collaboration."
Sun also said today that it expects to post a net loss in the quarter that ended March 28 and expects to lay off 3,300 workers worldwide. And it announced that its software head, Jonathan Schwartz, has been promoted to president and chief operating officer.
In a teleconference held after the initial announcement, McNealy and Microsoft CEO Steve Ballmer, who have known each other since high school, said the deal came after about a year of talks between the two companies that began with McNealy inviting Ballmer to play a round of golf and talk.
"About a year ago, customers told us they wanted Sun to go interoperable, stop the noise and start the collaboration," McNealy said. Ballmer said the discussions took about a year because "we needed to rebuild between the companies ... a level of trust. The agreement is all about helping our customers who own both of our stuff ... put that together in a really unique way."
Asked how he can steer his company to work more closely with Microsoft after years of comments critical of its tactics and monopoly status, McNealy said, "I'm going to do my best to be good." Since the talks for this deal began, he said, "the relationship has had a high level of professionalism, respect ... and integrity. Maybe we've grown up. Maybe they've grown up. Or maybe the customers are in charge and their desire [for increased interoperability] fuels it."
Ballmer said the deal was complicated and required discussion with people at many levels, including Microsoft founder Bill Gates and teams of staffers. "There was a lot of creativity required," Ballmer said. "How do you interoperate without giving away the crown jewels?"
Today's announcement, however, doesn't mark the first time the two companies have worked together, McNealy said. "Don't underestimate that we work and interoperate to a large degree already," he said. "There's just a lot more we can do if we put the legal stuff behind us."
Ballmer agreed. "In an environment of litigation, it's harder to have open discussions," he said, adding that the settlements resolve those issues and allow the companies to move foward.
McNealy said new layers of interoperability will be announced each quarter. "You'll see a gradual building of the compatibility," he said. "I think this will make both of our organizations more productive from an R&D perspective."
Earlier, Microsoft and Sun said the agreement means they will not sue each other regarding past patent infringement claims and will begin negotiations for a patent cross-license agreement.
Sun also said the companies have entered into agreements regarding patents and other issues. As part of the deal, each company will have access to the other's server technology; Sun will license Microsoft's communications protocols, and Microsoft will support some Sun products.
The two companies will initially cooperate on Windows Server and Windows Client but could expand to include cooperation on e-mail and database software. For example, engineers from both companies might work together on problems such as user identity management, allowing information to be more easily shared between Microsoft's Active Directory and Sun's Java System Identity Server identity management products.
Also under the agreement, Microsoft and Sun will work together to improve collaboration between the Java and .Net technologies, while Microsoft will be allowed to continue to provide support for the Microsoft Java Virtual Machine in its products.
Sun will receive Windows certification for its server products. The companies announced Windows certification for Sun's Xeon servers, effective immediately. Certification for Sun's Opteron-based servers is "moving forward," the companies said.
Rudy Ebisch, assistant technical support director at printer and copier vendor Canon USA Inc. in Lake Success, N.Y., said the deal appears to provide Sun with an injection of cash, but he's not sure what's in it for Microsoft.
"I'm just wondering what [Bill Gates] gets out of it. What can he get from Sun that he can use? I don't get it." Canon is a minor Sun user, Ebisch said, explaining that much of his new hardware is from Hewlett-Packard Co.
Richard Teasdale, a Unix administrator and second vice president at reinsurance vendor General Re Services Corp. in Trumbull, Conn., said the new cooperation between the two companies will likely have little impact for his company because there's not much existing interfacing between Sun and Microsoft products in its operations.
"Until I know more details about it, I don't see any real pluses or minuses for us," Teasdale said. "I know that Microsoft, it has seemed for a while, has been concerned about Linux, and I don't know if this is a sign that they want to do more in the Unix and Linux spaces. That could be good for us, but I'm just speculating."
As for Sun's preliminary financial results, the company said it expects revenue for its fiscal third quarter, which ended March 28, to be about $2.65 billion. It expects a net loss including one-time items to be $750 million to $810 million, or 23 cents to 25 cents per share. Excluding one-time items, which take into account the cost of layoffs, Sun's net loss for the quarter would be $200 million to $260 million, or 6 cents to 8 cents per share.
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