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What's in it for Microsoft?

Steve Ballmer once joked that Sun employed "sub-50 IQ people", while Sun itself was "just a very dumb company". Although he might be less likely to make such a statement in public again, he may think privately that the deal he has struck is better for his company than Sun.

The devil, as they say, is in the detail. A single line, buried deep within a regulatory filing published a full five days after Sun's agreement with Microsoft was announced, shows just how much Microsoft has got for its $2 billion. "Sun has agreed," says the Sun filing, "to take no further steps to participate in the proceedings pending against Microsoft instituted by the European Commission."

What that means is that one of the EC's most enthusiastic witnesses in its ongoing legal dispute with Microsoft has been removed from the equation. Suddenly, with Sun accepting Microsoft's offer, the EC's case looks a lot weaker. The settlement also seems to rule out Sun initiating any further anti-competitive disputes against Microsoft for the next decade. That should make it easier for Microsoft to push through changes to Windows in future by, say, embedding a search engine. It could also remove a hurdle to Microsoft's medium-term plans to tightly integrate future versions of Windows with its business applications, an initiative known as Project Green.

There are other benefits to Microsoft. For one thing, the software company gets a valuable licensee to help buttress a key element of the 2001 antitrust settlement with the Department of Justice, which has been repeatedly criticised for being soft on the software giant.

Microsoft has nevertheless been the subject of complaints already that it is not abiding by the spirit of the settlement by charging too much to licensees. "Twice US trustbusters have raised concerns that the communications protocol licensing program has turned out to be an ineffective tool," points out Jupiter Research analyst Joe Wilcox.

Perhaps most important of all, Microsoft is able to license every last patent ever filed by Sun, as well as anything that Sun happens to file in the next 10 years. Its upfront, non-refundable royalty payment suggests that it intends to make full use of all Sun's technology.

And access to that technology, as well as the technology-sharing agreement, will help to improve the scalability of .Net and its perception as a major enterprise platform. The way is now open for Microsoft to port Java to .Net, providing a migration path from J2EE to .Net for both applications and, crucially, developers.

The deal will not necessarily herald a love-in between Sun and Microsoft. "Our companies will continue to compete hard, but this agreement creates a new basis for cooperation that will benefit the customers of both companies," said Ballmer.

His idea of hard competition often goes further than anyone else's. But Microsoft has proved to be a masterful deal-maker in the past, most notably when it licensed database technology from pioneer Sybase in a deal that helped Microsoft establish itself as one of the big three database makers at the expense of its one-time partner.

It is possible to imagine that Microsoft may now do something similar to Sun.

What's in it for Sun?

He might have performed a U-turn to bring a flush of embarrassment to the cheeks of even the most hard-nosed politician, but McNealy's agreement with Microsoft is nothing if not audacious.

And it is lucrative: Whether it turns out to be good or bad, McNealy can nevertheless claim that Sun has 'won'. After all, it originally sued Microsoft for $1 billion and ended up with $2 billion.

Sun needed the money because although on the surface, its level of current assets in its balance sheet appear stable at about $5.8 billion, its actual cash in hand and short-term investments have been dwindling rapidly, falling $902 million to $2.2 billion in the quarter to the end of December 2003 alone.

As for the $2 billion that it has secured from Microsoft, how it is broken down is revealing. He has extracted $700 million to settle a legal wrangle over Java, a dispute that dates back to 1997. Second, the two companies have agreed a 10-year patent cross-licensing deal, for which Microsoft pays another $900 million, plus $350 million in a pre-paid, non-refundable royalty. After 2014, both companies will grant each other irrevocable, non-exclusive, perpetual licences for their entire patent portfolios.

Finally, the two companies agreed to a technical collaboration agreement intended to enable .Net and Java to "get interoperable". However, that work has barely started, admits McNealy.

The whole deal raises many big questions to which neither Microsoft nor Sun have been keen to provide anything but the sketchiest of answers. For example, will the interoperability between the two environments be based on web services or involve a deeper, perhaps proprietary, form of integration? Will the integration technology the two companies develop be incorporated into Java via the Java Community Process - and therefore available to all Java licensees - or will it remain proprietary?

And will Microsoft's access to Sun's intellectual property enable it to introduce all kinds of new features into .Net - particularly from Java - that might otherwise have been out-of-bounds? All that remains to be seen.

But McNealy may nevertheless endure many sleepless nights contemplating exactly what he has handed over to Microsoft. He may reflect on the fate of Bristol Technologies, another company that cut an apparently favourable collaboration deal with Microsoft.

In the mid-1990s, Bristol successfully cloned the 'Win32' application programming interface (API), the key Windows interface for applications developers.

While highly functional, Win32 also hooks those developers into the Windows platform and their dependence on it makes it difficult to port their applications to alternative operating systems, thereby locking them into Windows.

A cloned Win32 on Unix or Linux would thus be disastrous for Microsoft. But the software giant's response was cunning. First, it licensed its Win32 technology to Bristol to enable it to iron out the wrinkles in its technology. Then, once hooked it hiked the licence fees: Bristol was trapped.

Its original Win32 technology was now tainted by association with Microsoft's own code, yet the licence fee increases were so great that its business was no longer viable. What is more, when the company took its case to court, it lost on all but one count.

As Bristol CEO Keith Blackwell (and many others) can testify, doing deals with Microsoft can be a dangerous game.

What it means for users

"Just about every customer I meet," said McNealy, "says 'cut the rhetoric, Scott. Go get interoperable. We have Solaris, we have Sun, we have Java. But we also have Windows and .Net. We need to interoperate. We need you to just stop the noise and start the collaboration.'" Ballmer agreed, adding: "There is nothing in this - nothing, nothing, nothing, nothing - that will do anything other than delight customers."

But should they be delighted?

Certainly, analysts say there is cause for optimism on the thorny issue of interoperability between Sun and Microsoft products. It has long been assumed that Microsoft's proprietary .Net application development and deployment environment and Sun's semi-open J2EE-branded alternative would have to co-exist. But while both vendors have always paid lip service to this conclusion, precious little in a practical sense was done to build deep links between the two.

So far, details on what has changed since the April deal have remained sketchy. But too much might be read into this apparent inactivity: the two companies have only just finished putting together teams of engineers to work out the finer points.

Once established, they will focus on the Technical Collaboration Agreement, in which the two companies share the precise bits of the source code required for interoperability. The two also promise to improve "technical collaboration" between Java and .Net.

McNealy is promising almost instant benefits. "Every quarter we'll announce another set of features or capabilities of interoperability and compatibility with the Microsoft environment," he says. But Forrester analyst John Rymer doubts that users will see any benefits that quickly.

Most analysts have welcomed the change in rhetoric, at least. Gartner's Frank Gillett says the deal has prevented the development of two mutually antagonistic camps of software eco-systems: something that would undoubtedly have been harmful to users. And Ted Neward, who has written books about programming in both the .Net and Java environments, believes the agreement might indirectly compel Sun to make structural improvements to the Java platform.

But there is real concern among the open source 'movement'. Richard Stallman, founder of the Free Software Foundation, fears the deal is based on the proverb that 'my enemy's enemy is my friend' - in other words, open source software.

Certainly, both fear the potential of open source software to undermine their respective business models. Open source technologies are gaining ground in the corporate world, but an anti-Linux alliance between Sun and Microsoft would be a major setback.

Sun was the first of the major vendors to be hit by the increasing popularity of open source software when buyers of low-end servers started to purchase Intel-based machines running Linux in preference to Sun's more expensive proprietary offerings.

Similarly, Microsoft CEO Steve Ballmer has long recognised the threat posed by open source software, and has deployed a variety of strategies to try to combat its spread: first, by criticising the nature of the open source model, and then by arguing that open source can be more expensive than proprietary software in the long run.

Another strategy is to invoke intellectual property laws. The developer community has been buzzing since Microsoft issued a patent filing last year for .Net that seeks patents on APIs for accessing the network, handling XML and managing data from multiple sources. "It is as if they sent their .Net documentation to the patent office and said, 'Here it is. We want a patent on everything'," says one disgruntled developer.

Equally, attempting to re-implement elements of .Net without authority from Microsoft - such as Novell's Mono project - could become an expensive legal minefield.

All the same, as Sun can testify, Microsoft is far more willing to compromise today. It may still market its products as aggressively as ever, but it is also more likely to collaborate with the rest of the IT industry. And that can only be good news for customers.