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AOL-Netscape deal draws a billion from Sun

AOL will net $1.25 billion from Sun over the next three years by result of a side deal licensing Sun to sell Netscape software on behalf of the Internet giant.

America Online stands to net $1.25 billion from Sun Microsystems over the next three years by result of a deal allowing Sun to sell Netscape software on behalf of the Internet giant.

Under the complex agreement that comprised AOL's buyout of Netscape, Sun has guaranteed that AOL will earn $975 million in sales royalties on Netscape software. Sun also will pay AOL $275 million for licensing rights, bringing Sun's three-year financial commitment to AOL to a total of $1.25 billion, according to Sun's regulatory filing on the transaction, made today.

Further, Sun will pay AOL $10 million a year in cooperative marketing fees.

On the other end of the deal, due to close this spring, AOL will buy $500 million in Sun hardware and services, pay Sun $5 million per quarter to license Sun's Java software, and pay $1 million a month for technical support of Netscape software. Total payments to Sun will thus reach $596 million over three years.

In effect Sun is underwriting a significant portion of the $4.2 billion Netscape buyout in return for a guarantee of $500 million in sales of hardware and services to AOL, where Sun had not previously been strongly represented. The world's largest ISP and most popular Web destination is still growing quickly, today announcing it added another million members (to reach 16 million) in a little over five weeks.

"We have no reason to believe that the revenue figures are not attainable," said Sun's Jeremy Barnish, director of corporate communications, who confirmed the filing is correct. A Netscape spokeswoman declined to comment on the filing, and AOL did not respond to several requests for comment.

AOL's acquisition of Netscape, announced November 24, calls for AOL to pay $4.2 billion in stock for the Internet software company. A crucial side deal arranged for Sun to sell Netscape's e-commerce software and jointly develop new versions and new products.

When the deal became public, Sun said it would pay more than $350 million in fees, plus significant minimum revenue commitments over three years. The 10-Q filing details those Sun guarantees to AOL--$312 million, $330 million, and $333 million in successive years.

AOL had discussed its $500 million commitment for Sun hardware and services, but AOL's tech support and license payments to Sun had not previously been disclosed.

"We had to agree to a commitment on continuing revenues. We're happy, and there's upside for both parties," William Ruduchel, Sun's chief strategy officer, said when the deal was announced in November. "We put a lot of money on the table."

Also in the filing
On the product side of things, Sun disclosed in a heavily edited section of the Sun-AOL agreement that it will jointly develop a "new browser" with AOL, but offered no details.

When the acquisition was announced, AOL chairman Steve Case emphasized the "AOL Anywhere" initiative, which envisions consumers using devices smaller than PCs to access AOL. That suggests the new browser could be intended for so-called PC companion notebooks and various kinds of handheld computers, as well as other information appliances now in development.

The filing repeats AOL's intention to maintain Microsoft's Internet Explorer in its position as AOL's preferred browser. But Netscape's Navigator will remain under state-of-the-art development, perhaps giving AOL additional clout in dealing with Microsoft.

The filing also underscores the importance of Sun's Java technologies to the deal, as well as the Jini "spontaneous networking" software. Sun and AOL will support the latest Java software, currently Java 2, to the jointly developed browsers.

Looking further ahead, AOL and Sun intend to develop an integrated, "turnkey" e-commerce system relying on Netscape software and featuring "an end-to-end solution including consumer traffic, dial-up connectivity, network services, client software, server software, computer systems, computer hardware, professional services, help desk, and service and support," the filing states.

The joint Sun-AOL offering "is expected to include traffic from AOL's multiple brands and related directory services." It also will include private-label versions of Netcenter or AOL.com services and data, AOL network access, AOL instant messaging, Sun support services, Sun or AOL consulting, and Netscape or AOL outsourcing.

But both sides are allowed to offer e-commerce components from competitors as well.

The deal specifies that AOL and Sun will divide revenues on any new, jointly developed software, but the split has been omitted from the filing.

In addition, the filing says Sun and AOL intend to make their jointly developed software run on the Microsoft Windows NT and Sun Solaris operating systems. The companies plan to port to other operating systems as well, the filing said, mentioning Linux, Hewlett-Packard's HP-UX version of Unix, and IBM's AIX version of Unix. But translating the software to these other systems is contingent on a financial analysis showing "a reasonably appropriate return on investment," the filing said.

The documents shed little light on what will happen to competing Netscape and Sun software, including their application servers, email servers, and directory software.

In November, Ruduchel, who negotiated the deal for Sun, hinted that the application and messaging servers would be combined. He noted that both companies have committed to use enterprise Java beans for their application servers, making integration easier.

"There's lots of complementary features," the Sun executive said at the time. For email servers, Ruduchel suggested Sun might market competing products for a time.

The agreement states that AOL, along the sales staff of Netscape's Netcenter portal, will market Netscape's e-commerce software and that Sun will provide sales support for that effort.