Cisco and Microsoft's tricky partnership

The two giants increasingly find themselves competing as much as partnering. Can their relationship withstand the strain?

LAS VEGAS--Cisco Systems CEO John Chambers may not like to say so, but his old friends and partners at Microsoft are quickly becoming his competitors.

A few hours after delivering a keynote address at Cisco's annual Networkers user conference here last week, Chambers, a smooth-talking West Virginia native, sat down with about a dozen reporters in a small conference room at the sprawling Las Vegas Convention Center. He took off his blue suit jacket, cracked open a can of Diet Coke and parried questions with the best of them, particularly when it came to the folks in Redmond, Wash..

"That's why they're falling over each other. Companies that didn't used to be competitors are now competing."
--Dave Passmore, analyst, Burton Group

"Bill Gates and Steve Ballmer are very good friends of mine," Chambers said. "Our customers require that we work together, and you'll continue to see us work closely together."

But when pressed, he acknowledged they aren't always in lock step. "We are both companies that move very aggressively," Chambers said. "And at times don't take a step back to say 'what about the other guy'. That is something we need to do better in the future."

The 900-pound gorillas of their respective markets, Cisco and Microsoft are increasingly butting heads as they venture into new sectors such as security, communications that rely on the Internet protocol, and software for integrating big computer systems.

They're not the only old allies becoming competitors. Microsoft is well on its way to competing with longtime partner Symantec in security. German enterprise software maker SAP is selling integration software and has invested in an open-source database company, taking it squarely into longtime partner IBM's sweet spot. Even Sun Microsystems is starting to add networking functions to its servers--a development that surely has gotten the attention of executives at Cisco.

As reluctant as some of those companies may be to take one another on, they have little choice. Many economists figure the technology industry, five years removed from its boom days, can expect single-digit annual growth for the foreseeable future. That's a far cry from even the early 1990s, when the industry typically grew 10 percent or better every year.

"All the big technology companies are trying to find new areas of growth as revenue from their traditional businesses goes flat," said Dave Passmore, an analyst with the Burton Group. "That's why they're falling over each other. Companies that didn't used to be competitors are now competing."

Some observers wonder if the competition is also impacting sales between the companies.

After five years of using Cisco gear for its wireless network, Microsoft is switching to a new supplier.

After five years of using Cisco gear for its wireless network, Microsoft is switching to a new supplier. Earlier this month, Microsoft announced that it was replacing its existing Cisco wireless network gear with equipment from start-up and Cisco competitor Aruba Wireless Networks.

Technology from Cisco's recent acquisition of Airespace was believed to be a for the contract. But Microsoft went elsewhere with the contract, which is one of largest corporate deployments of wireless technology.

Microsoft execs insist that no one should try to read between the lines of their decision to go with Aruba. "When we make product decisions, we make them based on the best technology," said Ron Markezich, the chief information officer at Microsoft. "We don't make them based on any sort of partnership relationships. For our needs, Aruba came out No. 1."

But the situation has raised some eyebrows, particularly in light of recent initiatives that seem to pit the two companies against one another.

Last week, Cisco announced a new product initiative called "application-oriented networking," or AON, which will move the company beyond its core Internet routing business into application middleware. As part of the initiative, Cisco announced several software partners, including IBM and SAP. Microsoft wasn't on the list.

Microsoft execs wouldn't comment directly on the omission and said in a statement, "This is interesting, and we look forward to hearing more. We continue to work with Cisco on a number of initiatives."

Analysts believe AON differs philosophically from Microsoft's approach. "Microsoft's business is the opposite of what Cisco is talking about with AON," said Passmore. "Cisco wants to take application intelligence out of the data center and distribute it throughout the network to remote branches. A big piece of Microsoft's business is

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