Sun Microsystems' Scott McNealy and Google Inc.'s Eric Schmidt, former colleagues at Sun's Bay Area campuses, are on common ground again. The CEOs last week revealed a partnership to cross-promote and distribute their companies' software, in a deal that hints at something bigger. That something could come at Microsoft's expense.

Sun CEO McNealy and Google CEO Schmidt reveal a partnership to promote and distribute each other's software. Photo courtesy of Sun Microsystems

In a packed press conference at the Computer History Museum in Mountain View, Calif., Sun outlined plans to offer the Google Toolbar as an optional download with its Java Runtime Environment, under-the-covers software that's downloaded 20 million times a month. By hitching a ride on Java, the Google Toolbar could show up on millions more Windows PCs. "There's going to be a lot of money flowing both ways if we do this thing right," McNealy said hopefully. Details of the financial arrangement weren't revealed.

For its part, Google has committed to "explore opportunities to promote and enhance Sun technologies" such as the Java Runtime Environment and the OpenOffice.org applications suite, which Sun markets under its StarOffice brand. Google plans to buy Sun servers for use in its computing infrastructure, too.

The companies also will pursue joint engineering. And, while they didn't come right out and say it, there's a strong indication that Google will at some point in the near future start distributing OpenOffice, which includes a word processor, spreadsheet, and presentation software. Google gave no plan to host OpenOffice on its Web site, a move some expected, but there are other things Google could do with the apps, including offering them for download onto PCs. Sun itself gave up on developing a Web-based version of StarOffice years ago. "Working online is great for E-mail or writing a blog, but not for writing a Ph.D. thesis," says Sun president Jonathan Schwartz.

Network bandwidth is becoming so ubiquitous that downloading apps isn't a big deal anymore. One possibility is for Google to integrate its search function and links to an online dictionary right into OpenOffice, according to people with knowledge of the Sun deal.

Schmidt was Sun's chief technology officer until 1997, when he left to become CEO of Novell, and it's no coincidence that the two industry veterans chose the Computer History Museum to reunite. As far as they're concerned, Microsoft's Office suite might as well be under Plexiglass. "Windows is the only remnant of the old client-server computing model," McNealy said.

Google's approach is to quickly develop new software capabilities--E-mail and instant messaging, photo management and satellite images--then give them away, paying development bills and collecting megaprofits by selling ads. "We take for granted the networking and Web ser- vices and build applications on top of that," Schmidt said.

Sun helped lay the groundwork for the open-source movement, but Google is the model for making it work, with its Ajax development tools and Linux-based data center. "The simple market momentum they've got is huge," says Jesse James Garrett, founding partner of interactive design company Adaptive Path LLC.

Microsoft doesn't seem to know what to make of Google's whirlwind development style and status as the company everybody needs to work with--or for. During a dinner panel last week at the Web 2.0 conference in San Francisco, Microsoft's senior VP in charge of MSN, Yusef Mehdi, quipped that Microsoft is now the industry's "underdog" and therefore easier to partner with--eliciting chuckles from the audience.

	Microsoft is watching Google's next moves like everyone else, Microsoft's chief technical officer Ray Ozzie says.

Microsoft Reacts
Microsoft chief technical officer Ray Ozzie says in an interview that the company will "pick up the tempo" of delivering software capabilities over the Web and points out that Google isn't the first company to take that approach. In the mid-1990s, Ozzie says, "Netscape was shipping every few weeks."

Microsoft's recent reorganization into three new business divisions represents an effort to deal with the changing marketplace dynamics. By moving MSN.com into the same group as Windows development, for example, the company is better positioned to cut down on duplicate efforts and increase synergies. Microsoft's Information Worker business unit, which includes Office, needed a jolt. Information Worker revenue grew only 2% in fiscal 2005, compared with 17% the year before. Other signs that something needed to change: The company's Internet Explorer Web browser has lost several percentage points of market share to open-source alternatives such as the Mozilla Foundation's Firefox browser. And MSN, in handling 15.5% of Web searchers, lags behind Google (36.5%) and Yahoo (30.5%), according to comScore MediaMetrix.

Given Microsoft's challenges as a mature company in a mature market, and Google's phenomenal growth, there's expectation among some that Microsoft's position will erode further. (Microsoft reported revenue of $10.16 billion for the June quarter, a 9% increase from a year earlier, while Google enjoyed a 98% jump in revenue, to $1.38 billion.) Following last week's Sun-Google fest, brokerage Merrill Lynch issued a research note titled, "Google & Sun Partnership Does Not Punch Microsoft As Much As Feared." It's as if everyone is waiting for the big lug to flop.