Microsoft and Cisco: Product Promises

The tech giants' new spirit of cooperation is promising, but CEOs Ballmer and Chambers say making the alliance work will be difficult

by Peter Burrows

Cisco Systems (CSCO) Chief Executive Officer John Chambers and Microsoft (MSFT) CEO Steve Ballmer had a clear agenda to bring across as they sat down to an interview on Aug. 20 with PBS talk-show host Charlie Rose before a room full of journalists. Their message: Microsoft and Cisco are committed to having their products work well together.

If the promise proves to have real substance, the spirit of cooperation is encouraging for the technology industry. Both companies are moving aggressively to sell more applications and services that work over the Internet. Among them: Web conferencing technology and tools that help employees collaborate online. Better to have some rules of engagement between these two than an all-out knife fight for market share. While each company has considerable clout in its own right, neither has everything it needs to ensure its technologies work glitch-free.

Meeting of the Minds

For instance, Cisco holds a near-monopoly in the routers and switches that send information around the Net. No company has greater ability to make sure it gets to where you want it, quickly and securely. But Microsoft, far more than Cisco, knows how to make applications that businesspeople and consumers actually use. And if customers think these giants are intent on waging war in the marketplace, they may not buy at all. After all, a Cisco Web-conferencing system that doesn't work well with Windows-based computers would have limited utility, as would a Windows-compatible version that didn't work with Cisco's routers.

It was just the message many customers wanted to hear. While the two companies had in the past tried to ensure some semblance of interoperability among their products, the efforts apparently didn't go far enough to completely assuage customers' concerns. So Chambers placed a call to Ballmer in February to talk about formalizing things—both in terms of the actual work being done, and in how they would explain it to the outside world.

Then, with talk of a coming battle of the behemoths reaching an apex a few months later (see BusinessWeek.com, 5/9/07, "Can Microsoft and Cisco Still Be Pals?"), the two CEOs had what Ballmer calls "the gut-check meeting." After a few hours of discussion at Chambers' office, they went for drinks at a nearby Marriott and decided to move beyond what Ballmer calls "a more casual level of interoperability" (see BusinessWeek.com, 8/21/07, "In Discussion with Chambers and Ballmer").

Who Benefits?

Both CEOs say making this alliance work will be difficult. Chambers describes it as a pioneering experiment into partnering, Web 2.0 style—whereby two companies that can't possibly do all the necessary innovation themselves agree to compete fiercely in some product areas, while working closely to ensure they don't leave customers fuming over incompatibility problems. Says Chambers: "What we're outlining is a model that hasn't been done real well before."

Whatever real accomplishments the two companies achieve, one side has the potential to come away with some extra benefits: Microsoft. I'm not just talking about the potential to enlarge markets by removing fear of a confrontation between two of the biggest players. I'm talking about what the software giant can learn from Cisco.

In recent years Cisco has proven to have an ability to find meaningful growth markets adjacent to its core markets—ones that don't take years to make a profit. While Microsoft has failed to reap financial rewards from the XBox, online services such as Web search, or its Zune music player, Cisco is making hay in markets spanning from cheap wireless home routers to complex corporate phone systems. Its Advanced Technologies unit, which contains these and other businesses, racked up profitable sales of $2.2 billion last quarter—more than Cisco's core router business. In all, Cisco has 13 businesses with more than $1 billion in revenue.

Cisco's Cleverness

What's more, Cisco seems to have figured out how to dominate markets without eliciting the fearsome competitive response Microsoft has engendered. Think about it: There's no vast open-source crusade to unseat Cisco's grip on the router and switch market, as occurred in server software with Linux. (There are companies out there that make open-source routers, such as Vyatta, but they've achieved nowhere near the impact of Linus Torvald, Red Hat (RHAT) or other Microsoft rivals.)

On the contrary, Cisco has managed to be hypercompetitive when it comes to winning business—but without becoming the focus of government antitrust suits. Chambers insists that "I don't focus on competitors; I focus on market transitions." Sounds a bit goody-two-shoes, but where's an example of a company that claims to have been unfairly put out of business by Cisco? Indeed, many analysts credit Cisco with helping to forge new markets, by popularizing new capabilities around open Internet standards. "John understands that ecosystems organize to counter the power of the gorilla in the market," says Geoffrey Moore, a management consultant who has advised Cisco in recent years. The best way to prevent that is through "strategic acts of generosity," says Moore.

That certainly doesn't mean Cisco will generously back away from markets where it overlaps with Microsoft as a result of today's news. But along with any technical advances these two giants may be able to make, customers could also benefit should Microsoft pick up some pointers from its partner to the south.

Burrows is a senior writer for BusinessWeek, based in Silicon Valley.