Microsoft's Office-Phone Foray

Bill Gates says today's systems are like mainframes before PCs and software changed everything. Cisco agrees—and aims to win the race

by Aaron Ricadela

The way Bill Gates sees it, Microsoft has the chance to upend business communications the way it did when the PC supplanted centralized computer systems in the 1980s.

On Oct. 16, unveiling new Microsoft (MSFT) software that can tie together phone calls, e-mail, and video conferences, Gates drew an analogy to IBM's once-popular mainframe computers: All the features are built into a single product, controlled by a single company. The situation is similar, he said, to the traditional office telephone systems sold by Cisco Systems (CSCO), Avaya Communications (AV), Nortel Networks (NT), and NEC (NIPNY). "We've seen this before. This is just like the computer industry before the personal computer came along," said Gates. "This has been its own world, untouched by the power of software."

To capitalize on this purported opportunity, Microsoft is looking to exploit the dominant position of its Office suite, providing extensions to those business-productivity tools to perform many of the same tasks as traditional phone systems at perhaps three-quarters the cost. To spur uptake, it's encouraging partners—including Dell (DELL), SAP (SAP), Ericsson (ERIC), and even traditional phone-system vendors such as Nortel—to create their own compatible software and sell installation services for the new products, dubbed Microsoft Office Communications Server and Office Communicator.

Instead of selling an end-to-end system that directs calls to the proper extensions, stores an employee directory, and connects conference calls, Microsoft will embed those features in the new software to interact with its e-mail, word processing, and mobile-phone applications, as well as programs made by partners. "We've got a very different way of being able to do things," Gates said.

Major Partners

Despite past attempts in this sector, Microsoft has achieved only a limited presence in the market for software that can stitch together various forms of communications. Companies including Boeing (BA), Procter & Gamble (PG), and Intel (INTC) have employed Microsoft programs that let users detect when colleagues are online, then initiate instant-messaging sessions with them.

But Microsoft's new products not only offer workers the ability to know when far-flung colleagues are online, they enable them to call those co-workers or start a video conference from within common programs like Microsoft Outlook and Word. Other features include enabling users to view their e-mail on a cell phone using voice commands. Down the road, Microsoft hopes to extend these features to even more products, including an upcoming version of its customer-management software.

Microsoft says it has lined up 50 partners. Dell plans to test and install the communications software on its PCs and servers as well as tie it into Microsoft's Windows operating system and e-mail software. Microsoft and SAP are upgrading Duet, a previous software collaboration that lets Office programs interact with data from SAP's business applications. The upcoming version of Duet will include the ability to click on a person's name to initiate a phone call. And Ruchi Prasad, a Nortel general manager, says that company is doubling its investment in consulting services aimed at Microsoft's new Office software.