The two companies said a complex legal framework and "patent regime" protecting intellectual property were necessary to not only settle past disputes but also pave the way for deep technical collaboration.
Microsoft CEO Steve Ballmer and Sun Chairman Scott McNealy said at a press conference on Friday that the two companies struggled for many months to find ways to ensure that they could share technical information without infringing on each other's intellectual property.
The result is a $1.95 billion payment from Microsoft to Sun, including $900 million to resolve patent issues, $700 million to clean away ongoing antitrust suits and a $350 million payment for interoperability software to be incorporated in each company's server products.
Analysts said the agreement, with its high-priced legal settlement, underscores both companies' commitment to strong intellectual property (IP) protections. In another high-profile licensing deal, Microsoft last May paid the SCO Group a license for rights to use the Unix operating system, which SCO claims rights over.
"Microsoft is taking the high road on intellectual property because it's the foundation of their business," said Ted Schadler, an analyst at Forrester Research. "This settlement is a sign of respect for IP."
Ballmer on Friday said that after nearly a year of negotiations, the companies are now comfortable that the settlements and "patent regime" will ensure that the two firms' technical teams can work without fears of legal reprisals. He said the agreement covers past disputes and paves the way for in-depth technical collaboration.
"In an environment that gets litigious, it's harder to have open discussions," Ballmer said. "The question is, how do you get interoperability without giving away the crown jewels?"
The two companies met on a weekly basis last fall to hammer out the details. After stalling in December, negotiators brought more "creativity" to the process and established the collaborative framework, Ballmer said. After being distracted by trying to settle the EU's antitrust suit against Microsoft, the companies' legal teams were able to work out the deal this morning at 4:00 a.m., McNealy and Ballmer said.
"We are both big developers of (intellectual property). We both own lots of patents," Ballmer said. "It was impossible to create a technical collaboration without some framework for both companies with respect to each other's IP."
The agreement could also help Microsoft in its European Union case, because it shows a willingness to license technology, even to rivals, analysts said . In a press releases, Sun indicated that the agreements satisfy the objectives it was pursuing through the EU antitrust investigation.
"It's very, very clear that Microsoft can turn around and say, 'We're working with Sun about sharing intellectual property, so we don't need outside regulation," said James Governor, an analyst at RedMonk. "This will be a tremendously powerful argument the next time they talk to (EU competition commissioner) Mario Monti."
Now that the agreement between the two companies is announced, Ballmer said Sun chief technology officer Greg Papadopoulos and Microsoft chairman and chief software architect Bill Gates can get more feedback from customers on what kinds of technical interoperability the companies should strive for.