Microsoft and Sun agree $2bn 'truce'

Sun Microsystems has moved to a new phase of legal and technical cooperation with longtime foe Microsoft that will involve a payment of $1.95bn to Sun.

Sun also said Friday that it plans to cut 3,300 jobs, after it issued an earnings warning. The company now sees deeper-than-expected losses for the quarter that just ended.

In addition, the company named Jonathan Schwartz, 38, previously executive vice president of software, as president and COO. Previously, CEO Scott McNealy had said the company didn't need to fill the position, after the departure of Ed Zander in 2002.

Under the 10-year pact with Microsoft, the software company will pay Sun $700m to resolve antitrust issues and $900m to resolve patent issues, the companies said. The companies will pay royalties to use each other's technology; Microsoft is paying $350m now, with Sun to make payments when it incorporates technology later.

"Our companies will continue to compete hard, but this agreement creates a new basis for cooperation that will benefit the customers of both companies," Microsoft CEO Steve Ballmer said.

The executives said they had been working on the deal for a year, since McNealy had made a call to his Microsoft counterpart. In a press conference in San Francisco on Friday, Ballmer addressed why it took so long to finish the deal, which was wrapped up only a few hours earlier.

"I think we were close in December," he said. "We needed a little bit more creativity."

For Microsoft, the deal with Sun is the latest settlement it has struck with a key rival. Last May, the company inked a $750m deal with AOL to drop pending litigation, share technology and jointly distribute software. And in 1997, the software maker and Apple Computer agreed to settle their differences.

A $1bn antitrust suit filed by RealNetworks in December, however, is still pending.

Ballmer said the deal with Sun was not driven by events in Europe, where regulators last week levied a record fine on Microsoft in an antitrust decision that also seeks changes in the way the company offers its software.

"I think you need to completely separate the two things," Ballmer said.

Complaints from Sun had been a key factor behind the European action, but with Friday's deal, the company backed down from its earlier claims. Sun said the points of the agreement "satisfy the objectives" it was pursuing in the European Commission's case against Microsoft.

Lawyers said the Sun settlement will bolster Microsoft's efforts to get a stay, or temporary hold, in the antitrust decision. That's because the deal allows the software giant to argue that there is no need to rush forward with regulators' remedies for server interoperability, before the case can be heard in a European appeals court.

"This will strengthen Microsoft's hand in arguing for a stay. I don't think there is any way this can't help them," said Chris Compton, an antitrust attorney at Wilson Sonsini Goodrich & Rosati. "It will also put pressure on RealNetworks to settle their case against Microsoft. And if they do, the Court of First Instance may get out of the line of fire and say they will not require any remedies until the case is formally heard." The judge in the European Union's Court of First Instance is expected to hold a hearing in the coming weeks on whether to grant Microsoft a stay. A trial, however, is not likely for years.

"This settlement could be the first domino to fall in resolving Microsoft's problems with the European Commission," Compton said.

Stephen Shankland writes for CNET News.com