Microsoft and Sun end their bitter feud with a $1.6bn settlement

The long-running computer wars pitting Microsoft against Sun Microsystems, the maker of java software, came to a swift and amicable conclusion yesterday as the two companies announced a $1.6bn (£875m) settlement and promised a new era of co-operation.

For six years, Sun had been the most aggressive challenger to Microsoft's dominance in the software market, launching antitrust challenges across the world in an effort to prevent its products being squeezed out of Microsoft's pre-packaged Windows operating systems and thereby out of the marketplace.

Under the terms of the settlement, Microsoft will pay $700m to Sun to settle the antitrust issues and another $900m to resolve patent disputes concerning Microsoft's development of rivals to java and other Sun products. They have also inaugurated a system of royalty payments for each other's wares, with Microsoft paying an initial $350m to Sun, and pledged to improve compatibility.

Both sides hailed the new spirit of co-operation, saying it would advance consumer choice and allow the two companies to compete more fairly. It is also clear, however, that the war has exhausted both parties.

Sun yesterday announced it was cutting almost 10 per cent of its workforce - 3,300 of its 35,000 employees - because of continuing losses that are now likely to be wider than expected for the fiscal third quarter.

Microsoft, meanwhile, is still smarting from last week's $600m fine imposed by the European Union over its software bundling practices, and may have decided that a settlement with Sun - which initiated the complaint lodged with the EU -- was a safer bet than risking costly defeat in the courts.

Sun's chief executive, Scott McNealy told reporters in a conference call that customers of both companies had been clamouring for a truce. He said: "Everywhere we go, our customers say 'We have both Sun technology and Microsoft technology - we need peace'."

His words were echoed by Microsoft's chief executive, Steve Ballmer, who said in a statement: "Our companies will continue to compete hard, but this agreement creates a new basis for co-operation that will benefit the customers of both companies."

The share price of both companies improved on the settlement news. Sun shares rose around 15 per cent in morning trading, while Microsoft registered a more modest 2 per cent increase.