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Sun settles with Microsoft, announces 3,300 job cuts

By May Wong
The Associated Press

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The surprise agreement was accompanied by Sun's announcement that it is cutting 3,300 jobs and that its net loss for the fiscal third quarter will be wider than expected. The cuts represent 9 percent of Sun's work force of more than 35,000.

The "broad cooperating agreement" with Microsoft ends Sun's $1 billion private antitrust suit against the Redmond, Wash.-based software giant. Sun's complaints also helped spark the investigation that led to the European Union's recent record $613 million fine against Microsoft.

"It puts peace on the table in a big way," said Scott McNealy, Sun's chief executive, during a conference call today.

As part of the deal, Microsoft will pay Sun $700 million to resolve the antitrust case, which was scheduled to go to trial in January 2006, and $900 million to resolve patent issues. Sun and Microsoft also will pay royalties for each others' technologies.

"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 Steve Ballmer, Microsoft's chief executive officer.

Sun's biggest claim — and the main charge in its antitrust case against Microsoft — involved the Java programming environment Sun created to allow software to run on all computers regardless of the operating system.

Sun said Microsoft violated its license agreement by creating its own version of Java, thus making Java less universal. Though a settlement of that case was reached, both sides ended up in court again after Microsoft said it planned to stop supporting Java.

Under today's agreement, Microsoft "may continue to provide product support" for its version of the software, called Microsoft Java Virtual Machine.

The deal also creates cooperation between the companies in the technical area of Web-based applications and user identity management between Sun and Microsoft servers. Sun also agreed to sign a license that will allow its software to better communicate with Windows-based desktop computers.

The agreement settles Sun's complaint over Microsoft's server communications that led to the EU's decision against Microsoft last month. That ruling also was based on Microsoft's bundling of its media player with its ubiquitous Windows operating system, though Sun did not play a role in that complaint.
 
"Sun is also satisfied that the agreements announced today satisfy the objectives it was pursuing in the EU actions pending against Microsoft," Sun said in a statement today.

The agreement is an unprecedented change in the relationship between the two companies.

Sun's McNealy often railed against Microsoft, repeatedly calling Microsoft a monopoly and its .Net Web services technology "dot-Not." He often used the world "hairball" in describing Microsoft's proprietary software.

But the anti-Microsoft rants quieted in recent months, as Sun struggled to post a profit and the companies worked at resolving the issues between them. Today, Sun executives said discussions have been ongoing since Sun licensed Java to Microsoft.

Santa Clara-based Sun, once a shining star of Silicon Valley, also said it expects revenue for the quarter ended March 28 to be approximately $2.65 billion. The net loss will be between $750 million and $810 million, or 23 cents to 25 cents per share.

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

Sun's heyday was during the dot-com boom of the late 1990s, when companies relied on its powerful servers to run their Web sites and e-commerce systems. They paid top dollar for Sun hardware that ran on its own Sparc microprocessor and Unix-based Solaris operating system.

But the dot-com collapse wasn't the end of Sun's problems.

Inexpensive microprocessors from Intel Corp. were growing increasingly powerful, and the free Linux operating system was becoming more reliable. Companies that once powered their Web sites and applications on Sun machines could 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 a version of Solaris that could run on lower-end chips.

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

McNealy, until today, served as its chief operating officer in addition to chief executive and chairman. Today, Sun named vice president Jonathan Schwartz as president and chief operating officer.

Schwartz previously led Sun's software business. The ponytailed 38-year-old, known as an expert salesman and a visionary software engineer, will fill the position Zander vacated in 2002. Zander became head of Motorola Inc. in December.

Schwartz "is overall a sharp, aggressive guy who's got the customer touch and certainly has a lot of energy for the job," said Thomas Murphy, senior program director at the Meta Group. "Moving him up to president focuses the entire company on the fact that software is really important."

Daryl Plummer, chief fellow for emerging technologies at the research firm Gartner Inc., said the news that most concerned him today was that Sun's 9 percent staff cuts would be across the board — even in research and development, which Sun has fiercely protected in previous rounds of layoffs.

"Cutting R&D is a sign of fiscal responsibility," Plummer said. "However, any cuts in R&D will be unfortunate since Sun relies so heavily on innovation, and they're trying to change the mind-set of the industry — simplifying architecture, getting operational flexibility from chip design to software innovations. It's important they keep that innovation alive."

Shares of Sun jumped 14 percent, adding 61 cents to $4.80, in morning trading on the Nasdaq Stock Market.

Copyright © 2004 The Seattle Times Company