Cisco, Microsoft: Cozy competitors

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The companies have already seen some success with this new strategy in the security market. About three years ago, Cisco and Microsoft introduced their own versions of security architectures to prevent viruses and worms from infecting networks. Cisco came up with its network-based solution called Network Admission Control, or NAC, and Microsoft began pushing for its client-based solution known as Network Access Protection, or NAP.

Customers were interested in the new architectures, but they were upset by the lack of interoperability, said Bob Muglia, a senior vice president at Microsoft. Microsoft and Cisco committed to working together to solve this issue and in the process discovered that their products could compliment one another.

While the companies do not sell the solutions together, executives from both companies admitted that their sales teams recommend pieces from the other's solution for certain implementations.

"At first we believed we could solve the whole problem ourselves," said Charles Giancarlo, Cisco's chief development officer. "And Microsoft said the same thing. But we quickly realized that the solutions were complementary."

But it wasn't until Cisco and Microsoft started pushing into "unified communications" that Ballmer and Chambers saw the need for even deeper collaboration between their companies. Within the past year, Cisco and Microsoft have announced competing versions of communications products that allow business customers to make phone calls directly from their desktops, message one another, and see if co-workers are available or not all from a single unified communications client.

While the market for unified communications is still relatively small, Ballmer and Chambers each acknowledged the potential is huge for each company. But it's also the market where the companies are likely to butt heads the most. In fact, Microsoft has partnered with Cisco rival Nortel Networks to provide hardware pieces to the solution.

Zeus Kerravala, a vice president with the Yankee Group, said this market will likely test the budding partnership more than any other sector.

"There will definitely be pockets of collaboration between the companies," he said. "But unified communications is one area where I think it's going to be highly competitive and difficult for them to manage this relationship. This is a customer-facing application, and they each want to own it."

The consumer market will also likely present challenges. While Microsoft has its Xbox and media center platform to serve up Internet content to televisions, Cisco has the Scientific Atlanta set-top boxes and the yet to be released consumer set-top box from its Kiss acquisition that will also help people warehouse and view media. While wireless technology from Linksys will likely be used to help shuttle media from these boxes to the TV, Cisco and Microsoft would each like to see their devices used in homes.

"I have a lot of respect for Cisco as a competitor," Ballmer said. "But I've got more respect for us. If they want to compete, we'll say, 'Bring it on.' And I'm sure John would say the same thing. And that's okay. We've learned to say that to each other in a respectful way."

Chambers agreed that the companies will vigorously compete. And he admitted it would be difficult, but he said Cisco and Microsoft have no other choice but to work together.

"Steve and I are both sales guys at heart," he said. "And the customer comes first. So we have to find a way to make this work."