Cisco and Microsoft's tricky partnership

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supplying software for servers in the data center."

But this isn't the first time that Cisco and Microsoft have been slow to pair on major initiatives. Neither company mentioned the other when both announced new security architectures last year. The proposed architectures were not interoperable, and customers feared they would be forced to choose between a Cisco implementation or one from Microsoft.

In October, months after the announcements, the companies publicly said they'd be working together. But they've been vague on specifics.

"Cisco and Microsoft continue to make steady progress on the coordination of the embedded security capabilities of Cisco's network infrastructure and security features in Microsoft's Windows," Jeff Price, senior director of Microsoft's Windows Server Division, said in an e-mail.

The two companies also appear to be headed for a collision in the IP communications market, as Microsoft adds new voice over IP, or VoIP, features to its Live Communications Server and operating system software.

"Are we both used to leading? Yes. But that won't stop us from dancing together."

--John Chambers, CEO, Cisco Systems

Live Communications Server is messaging software that provides instant messaging and presence information about users. Today, the server works alongside Cisco's CallManager software, which controls how the calls are connected. But analysts say Microsoft might add call control features to its server software, eliminating the need for telephony software from Cisco and other equipment companies such as Alcatel and Siemens.

If Microsoft gets large companies to adopt Live Communications servers the same way they've adopted Exchange e-mail servers, then Cisco's IP PBX business, which provides the call control capabilities, is in trouble, Passmore said.

Microsoft is also threatening Cisco's IP phone business. It has already added to the Windows XP operating system software that uses the Session Initiation Protocol, a technology that can help turn a PC into a "soft phone." And in 2006, Microsoft will embed VoIP capabilities into its long-waited Longhorn OS, making it even easier for people to use their PCs to make phone calls directly through broadband connections. Longhorn will also tie Bluetooth-enabled cell phones into the VoIP network, so Bluetooth phones can be synchronized with PCs.

These new Microsoft features could render Cisco's IP telephony software and IP handsets obsolete.

This would be a major blow to Cisco, since its IP telephone products are expected to generate more than $1 billion in sales in the fiscal year that ends this month. IP telephony also helps Cisco sell its infrastructure equipment. For every dollar spent on Cisco's IP telephony products, the company generates $4 on switches and routers, according to Charles Giancarlo, Cisco's chief technology officer.

"Microsoft is definitely moving into the communications market, which has got to unnerve Cisco," said Zeus Kerravala, an analyst with the Yankee Group. "There's no question that Microsoft is going to have a big say in how this market evolves."

Cisco's Chambers admits the companies may step on each other's toes from time to time, but he downplays it. "Are we both used to leading? Yes," he said. "But that won't stop us from dancing together. Our philosophy is that it's always better to partner than collide. So it's in our best interest to partner with Microsoft."

Microsoft executives agree. "The partnership between Cisco and Microsoft is extremely healthy," said Microsoft's Markezich. "Most customers use Microsoft software and Cisco routers and switches in their networks. So it's important that our products and roadmaps for the future are aligned."

Of course, Cisco is not about to get into the PC operating system business. And Microsoft is unlikely to start selling routing equipment to corporations and telecommunications companies. But Microsoft and Cisco, with $36.8 billion and $22 billion in respective annual sales, have become so large, it's hard to imagine they won't bump into each other with increasing regularity.

"It's unavoidable," said Frank Dzubeck, CEO of Communications Network Architects, a telecommunications consultancy in Washington, D.C. "If Cisco is going to move up the food chain into software and Microsoft is going to expand into new technologies, they're going to overlap into each other's businesses."

[smfriedland]

Microsoft Competition

It was inevitable that Microsoft would come into competition with CISCO. I'm surprised that it took so long. However, even if MS does add IP telephony features directly to XP or Longhorn CISCO shouldn't be counted out.

Microsoft's strong suit has always been its ability to constantly add features; not its ability to create stable and efficient code. CISCO's stong suit is just that - a stable and efficient code base and very high performance software and hardware. CISCO has always emphasized quality over features - which is the primary method it achieved networking dominance today. Its also why it sucessfully moved into Voice communicaitons. Microsoft's software needs to be improved by several orders of magnitude to effectively compete with CISCO's.

The other card CISCO holds is that it makes the networking hardware - and in doing so prevents the unending driver problems of Windows. Microsoft will always be at a disavantage as long as it must run code on someone else's platform. That intersection will remain the major source of problems its always been.

Now, could MS become a communications hardware and software vendor and dominate the communications business as it does desktop computing? Yes. But not quickly or easily; and its not guaranteed as this is new for them.

SMF