Sun
Settles With Microsoft; Reinvents Itself
Sun
woke us all up this rainy Friday morning with the unexpected news
that it was:
-
Entering into a
multi-billion dollar legal settlement, IP licensing, and
interoperability agreement with Microsoft (this includes
technical collaboration, Sun’s licensing of Windows desktop
operating system communications protocols, Microsoft support for
the MS JVM, Windows certification for the Sun Xeon and Opteron
(Intel and AMD) servers, collaboration for Java and.NET, and an
agreement not to sue over patents and intellectual property and
to negotiate for cross-licensing agreements);
-
Naming
former VP of Software Jonathan Schwartz as its President and
COO, with Scott McNealy moving to the job of Chairman and CEO;
and
-
Announcing
a deeper than anticipated restructuring, with extensive cuts in
its work force.
(You
can find all of these news releases, in their full glory, at http://www.sun.com/aboutsun/media/.)
While we’ll attempt to summarize them here, we’re more
interested in commenting on them and attempting to understand why
they happened and where they may lead.
New Best Friends
Scott
McNealy, CEO of Sun and Steve Ballmer, CEO of Microsoft hosted a
press announcement to discuss their new relationship. With the gift exchanges (both men grew up in the Detroit
suburbs and exchanged prized Redwing team shirts) and public
camaraderie going on, it would be easy to forget just how bitter
their 17 year rivalry has been.
Apparently,
they’ve been working on changing their relationship for over a
year, following a phone call from McNealy to Ballmer, suggesting an
initial discussion. The
settlement seems to cover everything:
previous antitrust disagreements, patent issues, past and
future licensing. It
would seem that Sun and Microsoft just want to build interoperable
– but, competitive, of course, systems, to better please their
respective customers.
The
settlement seems to run more in the direction of Microsoft giving
money to Sun (a total of nearly $2 billion), although Sun and
Microsoft will both pay licensing royalties to each other in the
future. We’d guess that must mean that Microsoft is settling up for
a few past transgressions and/or that the value of the IP going from
Sun to Microsoft (at this point) exceeds the value of the IP coming
from Microsoft to Sun. (Those
of us on the phone at the press conference couldn’t ask questions,
so I’m speculating.)
It
seems clear that Sun and Microsoft agree on three things:
-
They’re
both in favor of being paid for IP (that is, they prefer this
model to a full Open Source model).
As Ballmer remarked, they both want to honor our mutual
interest in IP. He
further commented, “This is complicated stuff.
Lots of was creativity required to enable interoperating
without giving away the crown jewels.”
-
They
need to be able to interoperate across the Solaris, Linux, and
Windows environments (and across Java and .NET) because the
customers want them to. As Scott McNealy said, “Maybe we’ve
grown up; maybe they’ve (Microsoft) grownup; (or) maybe the
customers are in charge.”
-
They
have every intention of continuing to compete.
Advantage Sun
Sun
gets some money (which they clearly can use, given that they’re
about to announce another less than marvelous quarter, plus $475
million in restructuring expenses).
They also get:
-
The
possibility of future revenues (depending on how the IP exchange
is structured, what the royalty rates are, and who uses what).
-
An
end to the endless arguments over how to get Java supported in
Windows environments. Is
this a benefit to Java and the J2EE environment generally or
just to Sun? Could this be the real reason why Sun was so unwilling to go
with Eclipse?
-
Windows
certification for Intel and AMD Opteron –x86 boxes from Sun.
(Perhaps they intend to sell more of these than we
think?) Could they
have designs on being in the virtualization and system
management business for big Windows users?
Many of Microsoft’s own software efforts in this area
(what we call Virtual Computing) are put off by the Longhorn
delay, probably off in 2007 or so.
-
IBM
and HP (the other “big” systems vendors, lest we forget) are
two of Microsoft’s biggest partners for the implementation and
support of Microsoft platforms, especially in large and complex
settings. Perhaps Sun is hoping for some of this business?
But both IBM and HP have extensive expertise in Windows,
Exchange, and other Microsoft platforms. Does Sun plan to add that skill?
Advantage Microsoft
Microsoft
gets to stop the management distraction of yet another of its old (7
years old) ongoing legal wrangles.
You may have noted that Microsoft has been going around like
a good housekeeper, tidying up all of these old battles.
We
wonder about this deal and Microsoft’s battle with the EU.
Steve Ballmer said the process was not speeded up because of
the then-pending EU decision. “We completely separate the two things,” he said.
Nevertheless, Sun was one of the original complainants to the
EU. If Sun now claims that its complaints against Microsoft have
been entirely satisfied, that is sure to enter into Microsoft’s
arguments for an appeal and a stay of judgment, currently
proceeding. The events
may not be connected, but they’re certainly related in an
interesting way.
Microsoft
will be just as happy as Sun to get past the interoperability
complaints of customers and potential customers.
Advantage
Others
Clearly,
customers who are able to more easily implement and manage
heterogeneous systems will be happy.
It’s
less clear what the benefits to developers and other players might
be. Ballmer and McNealy
feel that developers will face a larger market as more customers are
drawn by interoperability. But
which market? .NET? Java?
Some combined Microsoft/Sun standard that excludes or places
in a lower tier other Java players?
We’d guess we’ll have to wait and see.
On the other hand, McNealy observed that Sun and Microsoft
already interoperate quite a bit via standards and that this just
goes farther, so perhaps we’re just being overly cynical.
On
the other hand, Scott mysteriously remarked at the end, “There’s
a potential that this is just Phase One.”
We’re not sure what Phase Two he has in mind – more
cooperation? Or
something more.
Jonathan Schwartz Appointed President And COO
At the same time, Sun announced that Jonathan Schwartz would become
its president and COO, reporting to Scott McNealy as chairman and
CEO. Schwartz formerly
served as Sun’s executive vice president of Software.
Schwartz
is credited with having come up with Sun’s innovative and
disruptive strategies for selling both server and desktop stack
licenses as company subscriptions, on a per employee basis.
He recently indicated to industry analysts that Sun might
extend that model further, providing some hardware as an adjunct to
multi-year software licenses, as they have with a recent developer
offer.
Sun has
no dearth of technology, so it will be interesting to see if
Schwartz determines another way to package and market with different
and better results.
Sun Announces A Restructuring
Sun
also announced a number of actions, based on its preliminary third
quarter financial results, to cut staff and other expenses, to bring
them more in line with revenue.
The company expects losses for the quarter to be in the range
of $750 to $810 million ($0.23 to $0.25 per share) including a
valuation allowance for deferred taxes and restructuring costs of
$350 million and $200 to $260 million respectively.
Sun
expects to reduce its workforce by approximately 3,300.
Additional restructuring charges of approximately $215 to
$275 million will be spread over the next several quarters.
We
noted that Sun didn’t indicate where the $2 billion settlement
from Microsoft entered into its calculations, but we’d guess it
will be very welcome.
The
company has continued to ship new hardware and software at a rapid
pace, so that if it could get its cost structure under control –
or find increasing acceptance in new markets – Sun could finally
find things looking up.
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