IBM, Microsoft Revamp Their Partnership : Software: The computer giant will develop the next two versions of OS/2, an operating system it hoped would be more popular.

Seeking to shore up one of the most important partnerships in the computer industry, International Business Machines Corp. announced Monday that it had reached a new agreement with Microsoft Corp. on the development of advanced software systems for personal computers.

The companies denied widespread reports that their longstanding relationship was on the rocks. But analysts said the announcement nonetheless confirmed that IBM and Microsoft have different priorities in some aspects of PC software development.

Monday’s accord spells out a new division of labor in the two companies’ joint development of OS/2, an operating system that controls the basic functions of a personal computer. Microsoft developed the DOS operating system for IBM, and the wide acceptance of DOS as an industry standard was a key factor in the explosive growth of the personal computer.

But IBM is widely believed to be unhappy with Microsoft’s efforts on the more advanced OS/2, and it will now assume control over development of the next two versions of the operating system. Microsoft will remain responsible for a future version that will operate on many different types of computer hardware.

The first version of OS/2 is currently on the market, but it has received only a lukewarm reception from customers, and many doubt it can succeed DOS as the industry standard. IBM has been eager to release new versions that reduce the amount of memory that OS/2 requires and make better use of the high-powered processors contained in the latest personal computers.

IBM and Microsoft also said that they had agreed to a broad cross-licensing agreement covering DOS, OS/2 and Windows, a highly popular software package from Microsoft that makes it far easier for PC users to effectively operate their machines.

Windows, in fact, solves some of the problems that OS/2 was designed to address, leading many in the industry to doubt Microsoft’s commitment to OS/2. But Microsoft Senior Vice President Steve Ballmer said OS/2 remains an important product for Microsoft.

The cross-licensing deal means that both companies will supply Windows and OS/2, thus assuring that non-IBM vendors of computer hardware--so-called PC clone manufacturers--will have access to the software.

Analysts praised Monday’s agreement as an intelligent resolution of outstanding problems, but cautioned that the IBM-Microsoft relationship would remain a delicate one.

“This is a relationship in which the two sides may not love each other, but they’ve recognized that they have to work together in a rational way,” said Rick Sherlund, an analyst with Goldman, Sachs in New York. “They’ve acted like adults.”

He said there had been some “hard feelings” at IBM over the success of Windows, which many consider a competitor to OS/2. Independent software vendors in particular have worried that their investment in developing software for OS/2 will be wasted if Windows gains too large a share of the market.

“IBM’s timetable for OS/2 is different than Microsoft’s,” noted Andrew Seybold, an analyst with Dataquest. “Faster and sooner is what they want. IBM is saying, ‘Our priorities are different here.’ ”

IBM and Microsoft executives were adamant in saying there was no real split between the two companies, and maintained that the realignment of OS/2 development was undertaken for practical reasons. Ballmer of Microsoft confirmed that 20 or 30 engineers who had been working on OS/2 had been shifted to other projects, but added that “hundreds” of people at Microsoft were still involved in OS/2 development.

IBM called the agreement a “reaffirmation” of its relationship with Microsoft, and noted that both companies would be defining requirements for the new software packages. IBM hopes to complete both a new version of OS/2 requiring less memory and a new high-performance version by the end of this year.

David Bayer, an analyst with Montgomery Securities in San Francisco, said the agreement “codified what many of us had already suspected.” He predicted that the relationship would continue to be rocky, but “ultimately they have more in common than not in common. I don’t think it will end in divorce.”