Sharks, Laziness and Sun’s Gateway to Success

Sometimes bitter humor is the only sensible response to absurd injustice. A few years ago, for example, a lot of frustrated Apple fans were sure that if Steve Jobs walked across San Francisco Bay, the PC press would thunder “Jobs Can’t Swim!” and The Wall Street Journal would editorialize the experience as a business disaster from which Apple should never hope to recover.

Of course, that was then, and this is now. Now, if George W. Bush were to walk across the Gulf of Mexico, CBS would spend days interviewing sharks personally affronted by his callous indifference to their needs for sustenance, The New York Times would thunder its horror and outrage at this appalling abuse of his ability to walk on water for electoral purposes, and a dozen totally uncoordinated political action groups would launch pretty much the same commercial touting John Kerry’s superior ability to tread water.

Or, more topically, if Sun Microsystems were to win a major legal victory against Microsoft, the press would headline the report as “Sun Surrenders to Microsoft,” and hundreds of commentators would immediately urge customers, developers and investors to abandon the company as hopeless. Of course, this one isn’t funny because that’s the way it happened just last week.

Background on the Sun Deal

Here’s the background: Microsoft’s attacks on the open-standards community process rubbed against Sun in many different areas. There were three in which legal action was possible:

• Microsoft modified, contrary to its license from Sun, its version of the Java Virtual Machine and related code, with the effect of reducing Java’s value as a write-once, debug-everywhere environment.
• Microsoft tried to create its own user identification and system authentication technologies while refusing to implement the open standards developed by the Sun-led Liberty Alliance.
• Microsoft tried to establish, through webXML and other proprietary means, secret protocols for interoperability only between its own server and client software.

Each of these Microsoft strategies, if successful, would strengthen Microsoft’s competitive position while weakening Sun’s — and so required some response.

In the case of the Java changes, Sun’s lawyers saw Microsoft’s actions as a violation of Sun’s licenses and asked the courts to address both the action and its consequences. As a result, Microsoft now has agreed to pay Sun US$900 million in penalties for past behavior and make a $350 million dollar deposit against future royalties.

The other two cases, however, were not so clear-cut because Microsoft had no legal obligation to Sun or anyone else to adopt open standards. Thus, Sun’s counter on those two wasn’t based on licenses or contracts, but on Microsoft’s position as a near-monopoly because that made it vulnerable under antitrust legislation in both Europe and the United States.

As a result, Microsoft has now agreed to pay Sun $700 million to drop the legal action, let Sun license its protocols at preset prices and implement Sun’s preferred open protocols in its own systems.

Achieving All Sun’s Goals

In other words, this settlement achieved all of Sun’s goals in undertaking these legal actions actions.

First, Sun agreed to let existing Microsoft JVM “enhancements” stand, but Microsoft undertook the act of bringing its actions with respect to Java into compliance with its licenses; agreed to align its bytecode execution engine with Java standards (and thus eventually morph C# and the CLR into Java); agreed to pay Sun $900 million in compensation for its past actions; and agreed to pay Sun a further $350 million deposit against future royalties due under the licenses covered by the agreement.

Next, Microsoft agreed to implement Sun’s open standards for user identification, system, user and document authentication, and offer Sun licensed access, at predetermined prices, to the proprietary API and related information needed to maintain interoperability with Microsoft’s previously closed communications and interoperability technologies.

Finally, Microsoft agreed to pay Sun $700 million to withdraw its antitrust actions in Europe and elsewhere. Note, however, that this doesn’t seriously affect government antitrust action undertaken or contemplated in Europe, Australia, Japan or the United States. Sun helped instigate much of that but can’t stop any of it.

Rocks and Hard Places

It’s unclear right now to what extent, if any, Sun can or may want to release all or some of the Microsoft proprietary protocol information to the people behind Samba and OpenOffice.org. What’s behind this is an unusual combination of rocks and hard places — for Microsoft. If Microsoft follows through and offers a full and fair implementation of open interoperability standards in its products, then the people using open-source products would not need to adopt Microsoft’s proprietary protocols.

If, on the other hand, Microsoft sets out to vitiate the agreement through poor or limited implementations, then Sun can use Microsoft’s proprietary protocols in its own products –including StarOffice and Linux tools like Samba. That, of course, would effectively release the API information to the open-source community, again leveling the playing field and inviting Microsoft to break the nonaggression part of the treaty by taking on a high-risk lawsuit against Sun, whose legal basis arguably would boil down to “Sun can’t do what we do.”

There are some other terms, too, especially a mutual agreement to allow the other side to license key server technologies. With the exception of Microsoft’s interest in Sun’s container technology — something that’s highly dependent on Solaris symmetric multiprocessing multiprocessing code and thus out of reach for current-generation Windows machines — none of that is ever going to happen. These kinds of clauses are routinely used in contracts dealing with intellectual-property exchange to ensure that accidental leakages have some form of contractual cover, and their existence here, while handy as a face-saver for Microsoft, does not presage any planned technology exchange.

On balance, it’s hard to see how this isn’t a runaway success for Sun. After all, the company got everything it wanted, plus $1,950,000,000 in found money. But, somehow, most of the press managed to see it as McNealy surrendering to Microsoft. Rationally, I don’t see how anyone could read even just the press release and believe this, but then I don’t believe in sharks with unmet emotional needs either.

Optics Horrible for Sun

On the other hand, I do believe in what political pundits call “optics,” and the sight of McNealy cavorting on stage with Ballmer reminded me uncomfortably of a similar situation in Alberta a few years ago. During the late 1970s and early 1980s, Peter Lougheed was widely revered as the premier (the equivalent of a governor in the United States) of Alberta and led the political and legal battle against illegal federal seizures of Alberta’s mineral revenues.

When the feds, led by prime minister Trudeau — an idealogue friend to Castro, Mao and Ho Chi Minh fawned over by central Canada’s media and soundly despised in the west — finally surrendered, they made Lougheed’s appearance with Trudeau at a news conference a condition of the settlement. The result was a PR disaster for Lougheed. His public image never recovered from being seen on television making nice with a prime minister whom most Albertans see as having set the Canadian gold standard for pond scum.

That, I think, is the key reason so many people completely misunderstood what this settlement was about: The optics were horrible for Sun, especially in the eyes of people conditioned to see Microsoft as a winner.

Appearing with Ballmer

Agreeing to appear with Ballmer may have seemed magnanimous to McNealy but appears to have been a serious mistake, because perception is reality, particularly among the shallower members of the financial analyst and press communities. In their minds, the sight of McNealy on stage with Ballmer made actually reading the press release and related documentation so irrelevant that many committed their hearts and minds to what they thought they saw.

As a result, they wrote about Sun surrendering to Microsoft when simply doing their job would have shown them that this was a lot more like Bill Gates bending over with his pants down.

Peter Lougheed is now seen as an elder statesman in Canadian politics, but his image at home never recovered, and it’s not obvious that McNealy’s will either. In principle, this kind of issue shouldn’t matter to Sun. After all, the competition isn’t about who hates Microsoft most, but about who generates the most value for their customers. Unfortunately, reality doesn’t conform to principle, and both Sun’s sales prospects and its share price react more to market perception than technical reality.

That’s why I think McNealy needs to drop another shoe in such a way as to make clear to even the most bigoted analysts what really happened in the first go-round.

Double Win for Sun

Since Sun doesn’t need the cash, one option might be simply to declare an extraordinary dividend and hand the money to the shareholders of record at the time of the settlement. An even better idea, at least in my opinion, would be to use the money to turn Gateway into an all-Linux business through an investment fund whose shares would be distributed pro rata to Sun’s existing shareholders.

That would keep existing management — which knows how to sell nickel-and-dime x86 products but lacks the cash to compete with Dell — largely in place while freeing Sun to focus on its core competency: network computing with Solaris on Sparc.

Gateway’s conversion to an all-Linux format would give Linux a big boost in market credibility while saving a few American jobs, because Gateway could keep its stores open now and quite possibly merge them with Apple’s stores later to form an independent retail chain dedicated to Unix. Having those stores around would make the job of selling Linux into small businesses and other organizations infinitely easier, because the reality of nationwide brick-and-mortar stores is far more reassuring to buyers than those disturbingly hermaphroditic IBM commercials or the ability to buy a Linux cheapo at Wal-Mart.

Strategically, this would be a double win for Sun and open source. Gateway’s success as a Linux vendor would come mainly at Microsoft’s expense on the software side and IBM’s expense on the hardware side, while forcing companies like Dell to get into the Linux game. Thus, both the business and psychological impacts of this use of Microsoft’s own money to threaten its core markets would be tremendous — and no amount of Microsoft damage control could alleviate the impression of utter defeat this would leave in the eyes of the financial and press communities.