Microsoft takes on Cisco with Nortel alliance

The gloves are off as Microsoft challenges Cisco Systems in the corporate communications market.

Microsoft's announcement Tuesday that it has formed a strategic partnership with Nortel Networks to jointly develop and sell Internet-based telephony and communications services is a clear indication the software powerhouse plans to go toe-to-toe with Cisco Systems, the leader in corporate communications.

The 900-pound gorillas of their respective markets, Cisco and Microsoft are increasingly crossing paths as they venture into new sectors such as Internet Protocol communications.

While the companies have said they'll cooperate to make sure their solutions work with each other's products, Microsoft's announcement that it will work closely with Cisco competitor Nortel to develop, market and sell communications services is a strong signal that the companies will be competing directly as they try to persuade large businesses to switch their old phone networks to ones based on IP.

"The fight is definitely on," said Zeus Kerravala, an analyst with the Yankee Group Research. "This deal confirms Microsoft's intention to take on Cisco in the IP telephony market. Cisco will really need to go out and do whatever it can to get their customers moved over to VoIP (voice over Internet Protocol) before Microsoft comes out with something that competes directly."

Deep networking background
Cisco, which provides most of the IP networking gear for major businesses around the world, has been aggressively moving into the communications market. The company has used its IP expertise to build a strong foothold in the IP telephony market with more than 8.5 million IP phones sold to date. The company sells its CallManager software as a replacement for traditional private branch exchanges, or PBXs--private switches that connect calls from the outside world to different extensions within a company.

Cisco also sells IP telephones. And the company claims it displaces about 12,000 traditional telephones (based on time-division multiplex, or TDM, technology) every business day. According to the latest figures from Synergy Research, Cisco is the No. 1 global supplier of enterprise voice, based on revenue. Avaya is a close second, while Nortel trails in third.

Now Cisco is moving toward integrating its voice services with other communications services like e-mail, instant messaging, video and Web conferencing. In March it introduced its Unified Presence Server, which collects status and availability data from users' devices and feeds it to Cisco applications, and the Unified Personal Communicator, which allows users to see on their PCs or IP phones who is online. The company claims that more than 70 percent of the Fortune 500 is using Cisco Unified Communications.

Microsoft's big IP plans
Microsoft, which dominates the software market both for consumers and business, has made it plain it is also going after the communications market. Last month, the company announced it would provide a complete solution to integrate IP telephony with Microsoft desktop applications. The announcement included the promise of a new 360-degree videoconferencing camera, new software and new partnerships.

Through its partnership with Nortel, which has long provided voice equipment to large phone companies and businesses, Microsoft is looking to get a piece of the enterprise voice market. According to Synergy, the market will generate about $4.9 billion in revenue by the end of 2006. By 2009, this figure is expected to jump to $10.7 billion.

"Microsoft is not just in the business of unified communications, but voice as well," Microsoft CEO Steve Ballmer said Tuesday, during the company's press conference announcing the Nortel partnership. "This alliance means that customers can and will evolve from using a traditional phone system to Microsoft's unified communications."

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