Can Google and Sun Slay the Giant?

In Silicon Valley, comeback stories comes in three sizes: large, extra-large and epic. So when Sun Microsystems and Google announced this week an agreement to distribute software together, some observers quickly pumped up the familiar Microsoft versus [insert latest tech threat here] story. Suns CEO is the fallen tech star Scott McNealy, who seems to be obsessed with vanquishing Microsoft. Google, the game-changing upstart, is now led by a battle-worn veteran, Eric Schmidt, who has been beaten up a couple times by Microsoft himself, but lived to fight another day.

With this backdrop, the story practically writes itself: given their combined smarts, distribution and chutzpah, Sun and Google will produce software products that will finally break Microsofts grip on the desktop. Theyve even got a lot of the same corporate DNA. Mark Stahlman, an analyst with Caris & Company, calls Sun and Google the same company because so much of Google's top brass is ex-Sun. Many of those same people, about 15 years ago, hatched a plan to use technology to radically transform the way people manage information. Much of what spun out of their efforts—Java, for one thing—has been powerful, but ultimately Sun's technology wasn't cheap or secure enough to really dent Microsoft, Stahlman says. For all the people involved, without a doubt, this is their big chance, he says.

Schmidt has deep roots in the tech industry. He was Suns chief technology officer but left to join Novell as CEO in 1997. If you dont remember Novell, youre forgiven. Theyre the guys who owned WordPerfect and, like Sun, were eventually stomped by Bill Gatess big boots. Since joining Google as its CEO in 2001, Schmidt has presided over huge growth, and all that cash has fueled forays into Microsoft territory, with applications like desktop search and Gmail.

But Googles products—cool as they are—and Suns technology together are not a Microsoft killer. Its the germ of the idea, but I cant imagine that Google would go to battle with Microsoft with the current products, says John R. Rymer, a vice president at Forrester Research. But I could imagine that they would put engineering investment into open office and try to create something eventually. The market, so far, has been lukewarm to the deal. Googles (GOOG) stock initially fell but is now back up $2.02 to $312.73 per share. Sun (SUNW), which originally went up with the news, dropped back down slightly to $4.16 per share.

So how do you make sense of the Google-Sun deal? Heres what we know: Sun has agreed to bundle the Google Toolbar with its Java programming tools, which are used by about 20 million developers around the world. After that, it gets fuzzy. Google agreed to consider buying Sun servers, a departure from its preference for the homegrown variety, and potentially a huge windfall for Sun, since Google needs ranches full of them. The companies may also work together to promote and enhance Sun technologies, like the Java Runtime Environment and the OpenOffice.org productivity suite. There lies the tantalizing bait. OpenOffice is Suns weak rebuttal to Microsofts dominant suite of MicrosoftOffice products. If Google develops a killer line of web-based desktop products for Sun computers, Microsoft could be on the ropes.

Thats a tall order, even for Schmidt. At Novell he learned first hand just how tough it can be to fend off Microsoft; Novell continues to roll along selling its network products. But that defeat spurred him on to golden success at Google. Schmidt knows the danger and the risks, says Rymer. You can learn from your experiences, and hes been effective at Google.

Every epic needs a dramatic confrontation as its climax. Can Schmidt finally capsize his old rival? Steve Allen, an analyst with Sierra Tech Research, put Schmidt in Silicon Valley perspective: This is a story of redemption, Allen says. Everyone loves a story of redemption. Here's a chance to come back the third time and see if he can do it. That's part of what's driving him. Google isn't going off to do that just because he has a personal vendetta. But that does play into the mix.—With reporting by Amanda Bower/San Francisco