Microsoft and Cisco: Ready to Rumble?


Microsoft has no shortage of epic rivalries. There's Google (GOOG) and Yahoo! (YHOO) in Web services, IBM (IBM) in corporate software, Sony (SNE) and Apple (AAPL) in digital gear. But more and more, Microsoft (MSFT) is coming up against a new competitor: Cisco Systems (CSCO).

Cisco? Talk to the companies and, far from admitting a rivalry, they'll list the many ways they're partnering. They've collaborated on products like small-business call centers and set-top boxes. And on Nov. 10, they announced they would both support a standard way for Internet-based phone calls and videos to get safely through corporate firewalls.

But there's rising rivalry on other fronts, namely security software and voice over Internet protocol (VoIP) phone services -- two critical growth markets for the behemoths, which have struggled to convince investors they can still be hot growth stocks. "You have two Goliaths that need to find bigger pieces of new spending, and they're going to bump heads," says JMP Securities analyst Sam Wilson. "If you put the two of them in the same room, it could get rough and nasty."

INTELLIGENCE SHIFT. What's at the root of the increasingly complex relationship between Microsoft, the world's largest software maker, and Cisco, the No. 1 maker of computer-networking gear? Chalk it up to a megashift in technology's center of gravity -- from the PC, where Microsoft has ruled, to the network, where Cisco is dominant.

As more computing tasks are handled online -- from Web searches and phone calls to software and entertainment downloading -- Cisco wants the network to provide much of the smarts that have typically been handled in Microsoft-style applications.

"It's a fascinating discussion," 3Com (COMS) CEO Bruce Claflin told BusinessWeek earlier this year. "Cisco's whole strategy has been to move intelligence to the core of the network. Microsoft wants the intelligence to be in the clients, at the edge of the network."

Just look at some of the areas Cisco is looking to for future growth. One, announced in June, is called "application-oriented networking." By adding a blade server to Cisco routers, Cisco-based networks would, in a sense, learn the language of applications, in order to simplify and speed up various jobs. For example, the network could be programmed to notify the head of sales the moment a customer places a $1 million-plus order, or even generate a request that a thank you form letter be sent.

ALL-IN-ONE BOXES. This software is also designed to act as a translator between various applications -- say, to ensure that a purchase order flows from the online store through various back-office applications, each requiring different types of information, without lots of expensive application integration work. "Networking is moving from a way to connect things to a way to enhance the productivity of things," says Cisco Senior Vice-President Jayshree Ullal.

The second, announced on Nov. 14, is aimed at small and medium-sized companies. It's called Linksys One, after Cisco's unit that specializes in home-networking gear. Now, Cisco will sell routers that come preconfigured to offer basic networking as well as phone, video, and related applications. By combining all those features in one box, Cisco could potentially grab share in markets Microsoft is targeting as well, such as VoIP and security. Cisco has dubbed this market an "emerging technology," which it defines as one that has the potential to be a billion-dollar business for the company.

Microsoft is by no means standing still. Ray Ozzie, who's leading Microsoft's push to deliver software as a service over the Internet, on Oct. 28 issued a memo saying the software giant is already falling behind on the Web (see BW Online, 11/10/05, "Microsoft: Ozzie's Online Charge". The clarion call was followed days later by an announcement that Microsoft would create two families of Web services -- Windows Live and Office Live -- online counterparts to its Windows and Office software franchises (see BW Online, 11/02/05, "Why Microsoft Is Going 'Live'").

DISPUTED TERRITORY. Microsoft also has been pouring money into developing collaboration tools that would let Windows users work together over a network. "It's a very strategic area for us, and the investments we're making are similar, if not greater, than the investments we made around Office," says Zig Serafin, general manager of real-time collaboration for Microsoft.

The result: These two leaders of their respective worlds -- networking gear and software -- appear to headed for some significant collisions. While they compete only in pockets today, researcher Gartner thinks the overlap will expand to $20 billion in six years.

"They're infringing on each other's territory in a variety of ways," says Simon Khalaf, CEO of Vernier Networks, a network-security company that competes with Cisco and is partnering with Microsoft. "If they can find a way to work together, it would be great for the industry. If there's war, it's going to be ugly."

"MORE MEAT." Indeed, the companies strive to find ways to work together when they can. On Nov. 10, Cisco and Microsoft announced they would support a standard called Interactive Connectivity Establishment, which is designed to make VoIP and video work inside corporate networks with fewer glitches.

The companies also have a joint-marketing arrangement to make it easy for smaller companies to integrate some Microsoft business applications with Cisco-based networks. "There's always overlap, especially when you look at an industry that evolves as fast as this one," says Microsoft's Serafin.

And Cisco Senior Vice-President Dan Scheinman says the companies are collaborating on a range of other fronts, such as creating new "presence-based" applications that let workers get only the data they need in a given location -- say, on the factory floor.

VoIP CONNECTION. "In spite of a lot of analyst commentary, I've seen more meat to our collaboration in the last few years," says Scheinman. "Microsoft is dealing with the impact of the Internet revolution. Our hope and our goal is to work with them, to create opportunity for both of us."

Wishful thinking? Many observers believe so. Take the burgeoning VoIP market, which is revolutionizing the way businesses and consumers communicate. Cisco is a market leader in selling entire systems -- right down to VoIP handsets -- to corporations.

Its Linksys division is the leading provider of routers that create wireless home networks and adapters that let conventional phones make calls via the Net. That makes Cisco a leading supplier of gear that works with services offered by Vonage and others, which allow users to talk to one another via broadband lines -- a territory largely outside of Microsoft's traditional competency of desktops and servers.

WINDOWS CALLING. The market for VoIP phones and equipment is expected to rise to $1 billion in 2009, from $194 million this year, according to WinterGreen Research. Microsoft aims for as big a slice as possible. Microsoft bought one VoIP company, Teleo, in August, and another, media-streams.com, in November. "There's not a market that's safe from Microsoft," says Jeff Pulver, one of the leading authorities in VoIP.

In October, Redmond released a Beta version of its Communicator for souped-up cell phones and personal digital assistants (PDAs). Due for release in 2006, the Communicator Mobile will allow users to make VoIP calls over their wireless handsets. And Microsoft plans to embed "call-manager" software directly into it next version of Windows, dubbed Vista, in late 2006. "That could make the Windows PC into the best telephone in the world," capable of both displaying your contacts and allowing you to easily reach them all at once, says Frank Dzubeck, president of Communications Network Architects.

Cisco executives play down the threat. To use an analogy, Windows comes with some digital-photography capability, but most people still end up using services from Kodak (EK) and others. Similarly, Cisco's VoIP offerings come preconfigured with all kinds of bells and whistles -- and those will only increase with the new services announced on Nov. 14.

ZAPPING BUGS. "I recall having conversations about this five years ago, but voice is not a simple application," says Marthin De Beer, general manager of Cisco's Linksys small business division. "Just putting a call manager in [the Windows] operating system isn't the answer. I'm much more worried about rivals with point products, rather than Microsoft." Still, some analysts find it noteworthy that Cisco's small-business VoIP offering doesn't work with Windows, as Cisco's past versions did, but with the competing Linux operating system

Security is another potential area for a clash. In recent years, the two companies have tried to generate interest in their visions of how to keep virus-infected devices from getting onto corporate networks. Microsoft's technology, called Network Access Protection, will be bundled into Vista-based servers. In Cisco's Network Access Control scheme, the network hardware does most of the policing. Cisco, which is already selling NAC-enabled products, says this approach is more efficient and would better protect the network from viruses passed on from non-Windows devices, such as cell phones.

While the companies have promised to collaborate, many outsiders see little evidence that either will back off its proprietary approach. Cisco's Scheinman understands the skepticism, but hints that doubters will be pleasantly surprised: "Both companies are working diligently to move towards interoperabity. We haven't shown our hand fully, but the work is going on. When we have something to show, we'll show it."

TEAMWORK PAYS OFF. The general consensus among industry experts is that the best approach is for Cisco and Microsoft to collaborate. That way, Microsoft technology could prevent viruses from getting onto specific PCs or servers, while Cisco technology could stop anything that gets past that first line of defense from getting passed around networks.

"They should work together," says Vernier Networks' Khalaf, whose company supports Microsoft's NAP approach. "At the end of the day, having the leading network-equipment supplier work with the leading application supplier is a good thing for the consumer. Whether it's a good thing for their respective shareholders, though, I don't know."

This isn't the first time the two companies have been on a collision course. Back in 2002, Microsoft launched its own line of wireless fidelity, or Wi-Fi, routers, a market the company finally exited in the spring of 2004 amidst escalating competition from Linksys, a division Cisco bought in 2003. That retreat was quickly forgotten. The same may not be true for conflicts to come.

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