In-Depth

Microsoft and Cisco: The Odd Couple

Microsoft and Cisco are talking about collaboration in the nascent unified communications space, but they're approaching it from two very different angles. With customers heavily invested in both vendors' technologies, partners don't need to take sides -- yet.

The relationship between Microsoft and Cisco Systems Inc. in the unified communications (UC) market isn't exactly a love fest. But, as far as partners are concerned, it doesn't need to be.

When Microsoft CEO Steve Ballmer and Cisco CEO John Chambers sat down with television journalist Charlie Rose in front of a New York audience in August to talk about collaboration, the two companies billed the event with not-so-subtle fanfare. "Collaborating for the Future of Technology" was the day's theme and the title that sits atop Microsoft's transcript of the event.

But readers of the transcript will find Ballmer and Chambers not so much nuzzling up to each other as exchanging a cautious handshake. There is, in the minutes of this industry summit, a sense of awkwardness surrounding the "coopetition" between the two companies. Both CEOs tried to play down the awkwardness, but it remained evident.

"You know, no companies have done this well," Chambers said of inter-company cooperation at the New York event. "And it's a nice way of saying you tolerate each other in front of customers because your customers tell you [that] you have to. That's not worth the resources both of us are putting into this, and it also speaks to catching market transitions in a way the customer benefits."

"We're not trying to have a cultural fit," Ballmer added later, noting that Microsoft and Cisco are "not trying to merge." "We're trying to serve our customers. And that doesn't require a cultural fit; it requires shared interest and a commitment to customers' shared interests. And be realistic -- it's going to be very difficult. No one's done this well, in my opinion."

For his part, Ballmer also struggled to clarify the nature of coopetition between the two titans. "I mean, just to be honest, we don't know how much competition" Microsoft will have with Cisco, he said. "And yet customers are asking; there is some overlap. We don't know; we're just letting our teams pursue their independent directions but [having them] communicate so we can tell the customers clearly: Is there competition? Isn't there? Where are we going? What's happening? How will we work together? Let's make sure the [customers get] what they want."

At its heart, that's exactly what the expanding relationship between Microsoft and Cisco as both partners and competitors is about -- giving customers what they want. Or, more precisely, each company protecting its installed base and revenue stream by not forcing customers to abandon their already hefty investments in both Microsoft and Cisco, but by asking them instead to lean a little more heavily -- for now -- in one direction or the other.

And while Ballmer and Chambers used the August event to talk up collaboration, the battle for supremacy in unified communications -- technology that brings together elements such as telephony, e-mail, instant messaging and enterprise software into one big package (see "Preaching Convergence," February 2007) -- is already a dogfight.

Of course, that's as it should be, and partners who ramp up their UC practices now can profit from the battle to come. What's more, they should be able to work with one or both vendors without getting much hassle from the other side -- at least for now. And the cooperation and interoperability that Microsoft and Cisco do manage to achieve will only help partners rake in more revenues.

Bundles of Cash
The idea behind unified communications is that it bundles key elements of the communications infrastructure together both for end users and for IT administrators. In theory -- and, increasingly, in practice -- a user could, for instance, receive a reminder about a scheduled conference call and click to dial into the meeting via Voice over Internet Protocol (VoIP), possibly with a video component. The user and other participants could then dynamically share and update information contained in an ERP system. That would all take place via a single interface in a single application, and it would all be processed in one integrated back-end system.

In such scenarios, users would benefit from increased productivity and ease of use, while for IT administrators, an integrated system would generate huge savings and provide a single infrastructure that would be much easier to manage than multiple systems.

That prospect is intriguing for customers. "Everyone sees the opportunity as having more advanced features and breaking down silos and having users use applications without opening up another application," notes Nora Freedman, senior research analyst for enterprise networking at the research firm IDC.

Currently, IDC tags the nascent unified communications space -- which, Freedman says, is only about a year old -- as a $5 billion market. It'll be a $17 billion market by 2011, IDC says. And, Freedman adds: "The number encompasses a lot of different pieces. Our market is covering customer adoption and not total available market. Add up all components, and you could have a market north of $40 billion."

Those are the kinds of numbers that bring giants like Microsoft and Cisco steaming into a new area of technology. In fact, UC could invite a kind of competition that's increasingly rare in today's industry -- all-out war between major vendors from different categories of technology. Microsoft and Cisco are there, but so are major players such as Nortel Networks (with which Microsoft has a strategic alliance for UC -- see "Seeing Eye to Eye,"), Siemens AG, IBM Corp., Alcatel-Lucent, Avaya Inc. and even enterprise resource planning juggernaut SAP AG.

Microsoft and Cisco, though, each bring a distinct advantage to the UC game. Microsoft owns the desktop with its Windows operating system and Office productivity suite; Cisco, with its wealth of routers, hubs, switches and servers in businesses everywhere, is the king of networking, with 70 percent of the market, according to Freedman.

"These guys have the largest installed bases," Freedman says. "There are other vendors that will still play, but they're going to get overshadowed just like Microsoft and IBM will overshadow the rest of the software market."

Network vs. Desktop
Microsoft and Cisco are taking two distinctly different, though not surprising, approaches to unified communications. UC represents an unprecedented marriage of desktop computing and back-end networking, and partners say that neither Microsoft nor Cisco can fully cover both aspects of the technology right now -- although both companies might claim otherwise.

Still, the vendors are focusing on their respective strengths. "The crux of the Microsoft-Cisco dynamic is which direction is going to lead [unified communications]," Freedman says. "[With] Cisco, it's the network up to the desktop, and Microsoft is the inverse of that."

Cisco's message involves a software-agnostic, network-centric approach that lets the company's UC infrastructure -- including messaging, telephony, vertical applications, wireless networking and other elements -- work with any operating system or desktop application.

"Our view is not about the desktop," says Richard McLeod, director, unified communications in the worldwide channels group at Cisco. "Our view is about a workspace. It's not dependent upon a particular software package, a particular operating system, a particular device. Instead, resident within the network are all of the key ingredients that are open and accessible by any device, any application."

Microsoft, predictably, flips that approach upside-down. It focuses on elements such as Windows and Office and touts the benefits of letting those applications work with any network -- including one from Microsoft. "The fundamental premise and conviction that we have is that communications is moving to software," says Greg St. James, senior director of unified communications at Microsoft. Customers can "take advantage of any network that they want," with Microsoft's approach, he adds: "We also feel very confident in networking solutions from Microsoft, but we think customers should make the best choice they can for the network."

The reality, though, is that many -- and probably most -- customers have already made their choice of network and have chosen Cisco; those same customers have likely also chosen Microsoft on the desktop. And that's a big part of what's bringing the companies together: customer demand for interoperability. "The majority of customers are taking their existing, trusted, proven Cisco back-end and wiring it to new communications infrastructure from Microsoft," says Lee Nicholls, global solutions director for Microsoft technologies at global IT services company Getronics NV, a Gold Certified Partner based in Amsterdam, Netherlands.

Microsoft and Cisco also need each other because customers still haven't fully warmed to the idea of unified communications, says Leslie Rosenberg, research manager for network channels and alliances at IDC. For instance, the notion of unplugging a traditional private branch exchange (PBX) phone system and running telephony over an IP network is still scary to a lot of companies, Rosenberg says.

Microsoft, Cisco and their partners can play a key role in "educating the customer -- saying, 'We'll unplug your phone but you're going to be OK,'" Rosenberg says. "Partners need to get their head around what IP telephony is."

Crossing Paths
There is, then, more than just the transcript of a staged press event to the budding Microsoft-Cisco relationship. The two companies have already established interoperability at the product level. St. James, of Microsoft, notes that the Exchange e-mail server is integrated with Cisco's voice mail application and that Office Communications Server works with Cisco's PBX functionality. And Cisco's McLeod also points to integration between the Microsoft Dynamics CRM applications and Cisco's UC infrastructure.

At their New York event, Ballmer and Chambers talked of further collaboration based on customer demands and shifts in the market. But their comments don't mean that there isn't still serious competition between the two giants. Analysts say that Microsoft's advances on the networking side are a threat to Cisco, and the San Jose, Calif.-based company is taking steps to protect its territory.

"It's just a matter of time and money before Microsoft ramps up its core competency and can do call control," IDC's Freedman says. "[And] don't think that Cisco's not poaching Microsoft developers. There's a lot of bragging about poaching. It's almost become a very incestuous group."

Competition in the channel, though, has been less heated so far, although both companies extend open invitations to their rival's partners to work with them in UC.

"We're aggressively recruiting partners in any segment of the market, and that includes partners who are incumbently Cisco," St. James says. Adds McLeod: "We certainly welcome and have historically recruited partners from the applications and Microsoft and IBM and SAP space into the Cisco unified communications family."

Still, neither vendor has yet put pressure on partners to choose one side or the other, even though, according to McLeod, 80 percent of Cisco partners are also Microsoft Gold Certified Partners. Instead, McLeod says, channel players are partnering with each other to cover gaps in their UC skills. Software partners and networking partners, after all, often have distinctly different skill sets; Rosenberg says it's rare that a single partner can comprehensively cover both disciplines. And crossing from one category to the other isn't easy to do -- especially for software partners trying to move into networking.

"Networking VARs understand 'five-nines' reliability," Rosenberg says. "They understand the importance of uptime." Rosenberg compares voice and networking with more traditional software partners by saying that networking partners have to respond to problems -- such as a broken phone system -- immediately, while software partners aren't accustomed to acting with quite that level of urgency. "It's a different mindset," she says.

"Most of the Microsoft partners that I meet are really good little computer guys that understand the applications, but they're not network and they're not voice people," says Bryan Tate, CEO of Atlanta-based Digitel Corp., a Cisco partner that currently doesn't formally partner with Microsoft. "Voice is a whole different world for those guys."

But some Cisco partners do see the value of adding software skills to their networking expertise. Tom Moore, director of the technology solutions group at CXtec, a Cisco partner based in North Syracuse, N.Y., says that while his company doesn't currently partner formally with Microsoft, he's considering the opportunity. He says that he believes in Microsoft's desktop-down philosophy more than in Cisco's network-up approach, but he says that Microsoft's UC product roadmap still isn't clear. Although he voices the same complaint about Cisco, he's not ready to make a commitment to Microsoft until he sees something more solid.

"You're talking about hundreds of thousands -- if not millions -- of dollars we're going to have to invest. You don't want to do that on a whim," Moore says. "Investment in training for engineers, support staff, hiring forecasts to support sales efforts -- we really are tethered [to Cisco]."

Still, there's money to be made for partners from the Microsoft side, too, says Nicholls of Getronics. He notes that Exchange upgrades present particularly good opportunities to start talking to customers about UC. "We move people onto Exchange 2007; then we start talking about which bits of UC are sensible," Nicholls says.

And Freedman says that networking partners who want to move to the software side will have a lot to learn as well: "[Cisco's channel] needs to get up to speed selling software and dealing with software pricing structures. How do you go from selling boxes to selling software?" she says.

Calm Before the Storm?
Microsoft and Cisco are practicing "coopetition" now, but when, if at all, will they drop the cooperation and move into pure competition? Gradually, Rosenberg says: "I see them more as alliance partners, but in time as the offerings mature you'll see more competition."

Competition is probably what the companies would prefer, Freedman says, noting that Microsoft already has a strategic agreement with Nortel, a major Cisco competitor, which involved the exchange of money and intellectual property -- something that hasn't happened yet between Microsoft and Cisco. "It's a 'must-have, need-to, not-because-I-actually-want-to'" relationship between the two companies, Freedman says.

So will Microsoft and Cisco partners ultimately feel pressure to stick with one vendor or the other, or to choose between the two? It has happened in other markets, specifically in the enterprise resource planning space, where Microsoft and SAP have jostled for channel supremacy (see "Bittersweet Symphony," March 2007).

Seeing Eye to Eye

Microsoft and Nortel share a similar vision for UC.

Microsoft and Cisco Systems Inc. might be talking about cooperation and interoperability, but from the standpoint of shared philosophy, Microsoft's real partner in unified communications (UC) is Nortel Networks. Nortel is also the only company in the UC space with which Microsoft has a formal, strategic alliance.

Microsoft sees UC as evolving from the desktop down -- meaning that customers should focus their investments on desktop UC applications rather than on the network beneath them. Cisco looks at the market from the opposite perspective, with the message being that the network, not the desktop, should drive investment and UC strategy.

Officials in Redmond say that they see Nortel, a Cisco competitor, as the only networking provider that shares the desktop-down approach. That's why Microsoft announced a strategic partnership with the networking vendor last year. "Nortel is the only communications company that has said 'we're betting on software,'" says Greg St. James, senior director of unified communications at Microsoft.

St. James says that the Microsoft-Nortel relationship is deeper and broader than that which Microsoft shares with Cisco. Analysts at IDC also note that Microsoft has actually exchanged money and intellectual property with Nortel, something it hasn't formally done with Cisco.

Some networking partners who don't partner with Microsoft but do work with Nortel (and, in many cases, Cisco) see the formal Microsoft-Nortel agreement as a way to hedge the threat of Microsoft to their UC-based revenues.

"This whole Microsoft thing could be a huge threat [to Cisco business]," says Bryan Tate, CEO of Cisco and Nortel partner Digitel Corp. "However, we're encouraged by the fact that they're working with both Nortel and Cisco."

But for some partners, there isn't yet much substance in the Microsoft-Nortel relationship that has thus far produced more CEO presentations and press conferences than concrete product announcements.

"I've heard it at several trade shows referred to as 'slideware,'" says Tom Moore of Cisco and Nortel partner CXtec, who expressed disappointment at the lack of announcements coming out of the Microsoft-Nortel partnership. "I'm not sure the manufacturers are as committed as they'd like us to think they are." -- L.P.

That could happen as UC matures, but partners say that they haven't experienced pressure from either side thus far, and Rosenberg says that Microsoft and Cisco are unlikely to pressure their partners to make a choice for the time being. The UC market needs to emerge, she says, and the vendors are more likely to benefit from cooperation than from fierce competition in the channel.

"They need each other right now, so it's early in the game for them to get all muddy on each other," Rosenberg says of Microsoft and Cisco. "Partners are still getting their hands around [UC]."

As for who will win the battle when the two awkward giants do shift from coopetition into pure competition, observers agree that it's way too early to tell. For now, all partners can do is play to their own expertise and wait for the next development in the market.

"I've got to believe it's a waiting game," Moore says. "It's a matter of who's going to jump whom."