The broad legal settlement reached on Friday between Microsoft and Sun could be a big boost for the companies and their customers, but any impact it may have on the European Commission's efforts to rein-in Microsoft's anticompetitive behavior remains unclear, analysts and legal experts said

In an unexpected move, Microsoft announced that it will pay Sun $1.6 billion to settle all outstanding antitrust and patent issues between the companies and make a further $350 million royalty payment to use Sun technologies in its products. Sun will pay royalties for Microsoft technologies that it uses.

The payments provide the backbone for a technology-sharing agreement that will see the companies work together to make their competing products interoperate. For example, they plan to build a bridge between Microsoft's Active Directory software and Sun's Java System Identity Server and "improve technical collaboration" between Java and .Net, their competing platforms for Internet-based computing, the companies said.

That could benefit customers, particularly large enterprises that have struggled to make Sun's Unix systems interoperate with client and server software from Microsoft, analysts said.

"The competitive disagreements between the two companies have put customers in the middle. Customers who wanted to deploy software wherever they chose to deploy it have found it hard because the companies haven't wanted to make it work. This removes one level of stress for customers as they try to come up with a broad deployment strategy," said Dan Kusnetzky, vice president of systems software research at IDC.

Sun as an alternative

The injection of cash from Microsoft, combined with the technology-sharing agreement, also positions Sun as a viable alternative to IBM as an "end to end" supplier of hardware, software and services for large enterprises, said Frank Gillett, principal analyst with Forrester Research.

"People thought we were heading towards two software ecosystems that would matter end to end – Microsoft and IBM. This now means that Sun will be a more viable alternative to IBM. It won't have the same breadth in services or management software, but you now see an alternative platform that goes from the operating system to the software development tools," Gillett said.

Indeed, the agreement marks the latest step in Sun's efforts to transform itself from a Unix system vendor with declining sales to a more general provider of software, systems and services. Sun already has begun selling "x86" servers, based on chips from Intel and AMD, and has tentatively embraced Linux. It now appears ready to add Windows to the list of operating systems it sells and supports.

"We are very close to pulling off one of the great repositionings of the post-Internet bubble," said Scott McNealy, Sun's chairman and CEO Friday.

Sun still faces challenges. Dampening the bluster of its settlement deal, it said on Friday that it expects to report a loss of as much as $810 million for the quarter ended March 28, and that it will lay off 3,300 staff as part of ongoing efforts to cut costs. But the $1.95 billion it will accrue from Friday's settlement more than doubles the amount of cash and cash equivalents that it had on hand at the end of the December quarter.

"We hear from our clients that they like Sun, but they have been concerned about them. We think this settlement removes the questions of Sun's viability," Forrester's Gillett said.

Court drama averted

The settlement also saves Sun from extending its protracted legal battle with Microsoft.

"Sun was in a position to unleash a very costly and potentially long lawsuit against Microsoft. The settlement relieves it of that burden, and it can claim some victory in the money from the deal and show customers who adopted Windows that the Sun products will work well with what they have," said Joe Wilcox, a senior analyst with Jupiter Research.

Not everyone approved of the settlement, however. After years of branding Microsoft "the evil empire," Sun has effectively capitulated to Microsoft in return for a large handout, according to Jeremy Allison, the co-author of Samba, a widely used open-source program for sharing Windows files between Unix and Linux systems.

As part of the deal, he noted, Sun accepted the terms of Microsoft's Communications Protocol Program, which provides the communications protocols for exchanging data between servers and Microsoft desktops. Sun may not be able to make use of those protocols in its Linux servers, he said, because Microsoft's technology is governed by strict licensing terms.

"By licensing those protocols they are basically conceding that that stuff is Microsoft's intellectual property and promising to keep it secret. That means they conceded one of the most important points they had been fighting for," Allison said.

For Microsoft, Friday's settlement closes the curtain on a long-standing feud with one of its most vociferous public critics and eliminates Sun from its list of ongoing legal battles. Microsoft already erased America Online from that list, paying $750 million last year in a deal that settled an antitrust complaint brought by AOL's Netscape division. And it weathered the US government's antitrust case with a set of behavioural restrictions that many observers considered lenient and ineffective.

Microsoft still faces a $1 billion private antitrust suit brought against it by RealNetworks, which said on Friday that Sun's settlement does not weaken its resolve to fight that case.

"We brought our case because we strongly believe their conduct is illegal. We think that was validated by the (antitrust) findings of the European Commission, and we intend to prove it through a court of law," said Dave Stewart, deputy general council for RealNetworks.

RealNetworks has an "obligation to its shareholders" to consider any settlement that Microsoft may offer, but currently has no plans to settle the case, he said.

Euro implications

Also of concern to Microsoft is the antitrust decision reached against it last month by regulators in Europe. The Commission fined Microsoft €497 million for harming competition, and ordered it to sell a version of Windows without its media player software to encourage competition in that market, among other requirements. Microsoft has said it will appeal.

Sun was an instigator of that EU lawsuit, complaining in 1998 that Microsoft unfairly withheld software code that competitors needed to make their servers work with Microsoft's products. With Friday's settlement, Sun will be a less vocal supporter of the Commission's case.

"It is likely that we will be less active and visible given the fact that we have indeed already received everything we wanted. It would be a little odd for us to be out demanding something we already have," said Lee Patch, Sun's vice president for legal affairs.

However, the settlement does not necessarily weaken the Commission's position as the case goes to appeal, said Dana Hayter, an attorney with the law firm Howard Rice in San Francisco. The EC has compiled 300 pages of documentation describing Microsoft's offenses, and its case is concerned with the company's impact on competition in general, not just against Sun, he noted.

"This does not, I would think, have a big impact on the Commission's deliberations, except to the extent that they think the settlement between Microsoft and Sun would have an impact on Europe," Hayter said.

At least one Sun customer was optimistic that the settlement signalled a new era of improved relations between Sun and Microsoft. The industry may be evolving to a point where Windows and Unix can live side by side in the enterprise, said Chris Kramer, chief technology officer at Gridway Computing.

"Microsoft and Unix are starting to evolve to a point where the applications and services and tool-sets that are available lend themselves to a heterogenous environment. It shouldn't really matter what the server operating system is, and it shouldn't really matter what the desktop operating system is," Kramer said.

Tom Krazit, Robert McMillan and Scarlet Pruitt contributed to this report.