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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."

Because of their strong positions in their traditional markets, Cisco and Microsoft have already said they'll work together to make sure their products interoperate. Specifically, this means that Cisco's products will integrate with Microsoft's Office Communicator 2005 and Office Live Communications, allowing users to launch a VoIP conversation directly from their Microsoft Outlook client. The interoperable package should be available in August 2006, the companies said.

Interoperability and competitive advantage
Microsoft is working in a similar way with other IP communications providers, such as Avaya, Alcatel and Siemens. But Ballmer said the alliance with Nortel is different from these other efforts.

"This announcement is not about interoperability alone," Ballmer said. "This is about having an aligned offering and salespeople from Microsoft and Nortel in front of customers every day to talk about our common solution set based on our unified communications platform and extending to the advanced applications that Nortel builds."

For the time being, Cisco seems to be taking the assault in stride.

"Cisco and Microsoft have a strong track record of collaboration around our respective products and technologies," a representative said in a statement. "And we continue to look for opportunities to build on these successful initiatives, and to new collaboration and integration points moving forward."

Just before Microsoft announced its strategy for unified communications last month, Cisco CEO John Chambers told reporters at a press conference in Las Vegas that he doesn't see Microsoft as a direct competitor.

"I think unified communications will be enabled by the network," Chambers said. "But it brings together different elements, and it will require Microsoft and Cisco and others to work together. It's in our customers' best interest for us all to work together."

Still, analysts believe that Microsoft's alliance with Nortel will clearly put the two companies at odds with each other. Even though Nortel has trailed Cisco and Avaya in the IP telephony market, its voice and networking expertise in combination with Microsoft's software expertise and customer base put the companies in a strong position to cause trouble for Cisco.

"I think this could delay adoption in the voice over IP market for companies that are just now considering switching their phones to IP," said Yankee's Kerravala. "There could be a lot of customers who will just wait to see what Microsoft will come out with in 2007."

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