Behind the Sun-Microsoft Deal

WSJ has a fascinating look at what went on behind-the-scenes. In four words: customer pressure, IBM, Linux.

The deal is a capitulation for Sun’s brash leader, who for years blasted Microsoft, verbally and through his lawyers. But Microsoft may no longer be Mr. McNealy’s biggest problem. International Business Machines Corp. has been effectively exploiting customer dissatisfaction with complex technology, deploying armies of consultants to help different kinds of hardware and software to operate more like a single system.

The Linux operating system also has disrupted Sun’s business. The software, which can be downloaded free or obtained with computers from IBM and other vendors, has made it easier for customers to use machines that are simpler and less-expensive than Sun’s. That trend has hammered Sun’s hardware prices and profit margins. Sun on Friday disclosed plans to lay off 3,300 workers, about 9% of its work force. The company said it expects a loss for the fiscal period ended March 28 of between $750 million and $810 million, or 23 cents to 25 cents a share. Sun promoted Jonathan Schwartz to president and chief operating officer. He had been Sun’s executive vice president for software.

Microsoft is also feeling heat from Linux and IBM. And the software giant bears another big burden, 14 years of antitrust investigations and lawsuits. The company wants to quickly settle such cases, which hurt its image with customers, so it can share more of its $53 billion cash hoard with investors.

If the relationship advances, Sun should find it easier to attract and retain customers who want to use its machines in combination with Windows PCs and servers. Microsoft, over time, could gain more freedom to emulate Sun innovations in the largest computer systems, where Windows plays a small role now.

Adds Red Herring: “[Microsoft] seems merely to be clearing the playing field for its next great wars in the search market and with Linux.”

Excerpts from an interview with Jonathan Schwartz, Sun’s new President and COO by Steve Gillmor:

If we make our desktop more interoperable with a Microsoft server or with another Microsoft client, it ought to make that desktop all the more appealing in the mass market. So, this is very much about advantaging Sun’s software efforts, which, as you know, spans Java on all the platforms on which Java runsWindows, Linux and Solaris.

If you think about it, we are probably, second to Windows, the largest driver of volume technology on PCs on desktops. I don’t think it’s reached the level that Windows has on the desktop, but Java runs on hundreds of millions, close to half a billion PCs out there. For us to deliver technology to all those runtimesremember those runtimes are also auto-updatingand potentially deliver some interoperability to the native Windows environment, that’s a compelling opportunity.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.