Sun wins round one against Microsoft

BY DAVID SPEAKMAN

When Sun Microsystems Inc. won a major battle in its antitrust war with Redmond, Wash.-based Microsoft Corp. Dec. 23, it left many in the valley wondering whether to cheer for the local underdog.

U.S. District Judge J. Frederick Motz’s ruling says Microsoft must start shipping Sun-approved versions of Java in future Windows operating systems.

Santa Clara-based Sun claimed Microsoft had been including older versions or customized versions of Java that didn’t work according to contract requirements between the two companies.

The day after the ruling, Sun’s stock rose about 6 percent to $3.13 a share, where it stayed through the holidays. Microsoft’s shares fell less than 1 percent to $52.82.

“In the final analysis, the public interest in this case rests in assuring that free enterprise be genuinely free, untainted by the effects of antitrust violations,” Motz said, temporarily ordering Microsoft to deliver current versions of Java until a full injunction trial takes place later this month.

“This decision changes the dynamics of the distribution channel for Java technology,” said Mike Morris, Sun’s vice president and special counsel, in a written statement released Dec. 23, during his company’s annual holiday shutdown.

“It’s a victory for the Java community,” Morris said, “including developers, consumers and system vendors.”

Sun has been trying to use its newest Java technology, Java 2 Enterprise Edition (J2EE), to launch a Web services arm called Sun One, which would compete directly with Microsoft’s .Net initiative.

Motz says if Microsoft’s .Net dominates Web services, “it should be because of .Net’s superior qualities, not because Microsoft leveraged its PC monopoly to create market conditions in which it is unfairly advantaged.”

And as Wall Street analysts look at the situation, many think it could be years before a lucrative Java-based market for Sun sees the light of day.

Sun says it’s already making money from Java technology, but recent figures on Java are not available.

However, Richard Gardner, a San Francisco-based analyst with Salomon Smith Barney, says since Java developer tolls only make up about 1.5 percent of Sun’s revenue, which he estimates at $12.1 billion dollars for the fiscal year ending in June, it is too early to justify any material impact to revenue or earnings.

“Although it is not possible at this time to estimate any near-term financial advantages to Sun,” says Jay Stevens, analyst with New York-based Buckingham Research. “Sun needs a business model that enables the company to develop a comfortable profit stream from the Java line.”

But he says the long-term impact of this case is huge.

“In the world of standards, Microsoft — a proven monopolist — has proprietary control over the Windows environment,” Stevens says. “The future of the computer, communications, video, game and photo industries is at stake. Current legal decisions will determine the shape of these industries in 2010.”

Stevens says Motz’s ruling attempts to level the playing field between Microsoft and Sun as the case drags on through the courts — which could take a year or more.

Stevens says one of Sun’s largest partners on Java for enterprise is New York-based IBM, which is pairing Java with its popular Linux-based offerings.

“We view Java and Linux as technologies that provide alternatives to Microsoft products,” Stevens says.

But Microsoft has appealed Motz’s ruling.

“The implementation of [Motz’s] ruling may be delayed if Microsoft is successful in getting a stay order,” says Salomon’s Gardner. “This ruling could be overturned in the permanent injunction ruling.”

In the meantime, software writers — who may have felt forced into supporting Microsoft’s .Net technology — can now use Java freely thanks to Motz’s ruling.

New York-based Goldman Sachs analyst Laura Conigliaro believes this is the case.

“Developers will now feel more comfortable writing applications to the Java platform,” she says, pointing out the ruling does not affect Goldman Sachs’ outlook for Sun.

“While we expect Sun to gradually recover when IT spending picks up,” she says, “the company remains in a relatively weak competitive position given the shift toward lower-cost platforms and we believe Sun must make substantial changes to win back customers that have switched off of its systems.”

Conigliaro says if Sun is ultimately successful in the courts and Microsoft is forced in a “must carry” rule to include Java in Windows, other companies will benefit.

“IBM and others, including BEA [Systems Inc.] and Oracle [Corp.] have built profitable business models around Java with their middleware products,” Conigliaro says. Given the strength of IBM’s middleware and its involvement with Java, IBM may well end up prospering at least as much as Sun from this sort of ruling.”

But one prominent analyst says Sun’s recent courtroom win may be disguising the company’s primary hurdle.

“Nevertheless, [the legal victory] is still overshadowed by the concerns we have over the profit and market share compression Sun is facing in its core hardware business,” says Bill Shope, equity research analyst with J.P. Morgan Securities Inc. in New York.