June 12, 2003 11:52 AM PDT

Is Ma Microsoft calling?

Learn more about Microsoft's communications plans

When Microsoft executive Peyton Smith recently declared at an industry conference that office phones were destined to "collect dust," audible chuckles rippled through the darkened hall.

Two months later, some smirks still remain. But fewer folks are laughing out loud.

This summer, Microsoft will unveil its much-hyped server software Office Real Time Communications (RTC) Server 2003, officially joining the race to give office communications their biggest makeover since the arrival of e-mail.

Microsoft will begin by offering corporate instant messaging and "presence" features, competing with longtime rivals such as IBM and Sun Microsystems in a hot new communications niche. Presence technology lets IM users detect whether or not a contact is online and is moving onto other platforms such as wireless devices.

That's just the tip of the iceberg: In a move that could shake up the telephony services market, Microsoft eventually plans to add support for video conferencing, cheap Internet voice calls, and complex message-management functions. Those features together aim to make RTC Server 2003 the gateway for all communications in the office, providing a powerful addition to Microsoft's Exchange e-mail server software and its nearly ubiquitous Office products.

"We want to make sure to make the PC and the phone work well together," said Ed Simnet, lead product manager of the Microsoft Real Time Messaging and Platform Group. "We are continuing that trend."

In the past year, companies have begun to seriously explore using secure IM products in the workplace, giving Microsoft a potential Trojan horse to carry a wide range of telephony services to corporate customers. Microsoft also is poised to benefit from improvements in the quality of Internet Protocol (IP)-based technology for delivering voice calls, or voice over IP (VoIP). As voice traffic increasingly moves to systems originally designed to carry data, Microsoft and others see an opportunity to take market share from incumbent equipment makers and service providers.

It's hard to pinpoint the stakes, because the market has not developed products as specific as RTC Server 2003. But the software dips into the budgets of many corporations looking to upgrade their telecommunications services and equipment, on which this year businesses will spend $76 billion, according to market research firm In-Stat/MDR. About $12 billion will be spent solely on voice data, while $33 billion will go to data transport services.

The vision thing
Microsoft is eyeing telephony not only as a lucrative new market on its own, but also as a powerful screw to more tightly integrate its corporate server and desktop applications software--a strategic priority for the company. In a memo to employees last week, Microsoft CEO Steve Ballmer stressed the importance of "integrated innovation" and mentioned how the company is using standards to link systems.

In Microsoft's vision, a company's internal real-time voice and data exchanges will be managed under a network of RTC Server 2003 machines and accessed through devices such as PCs, Internet phones, PDAs (personal digital assistants) and cell phones that run on various flavors of its Windows operating system. In addition, the software will be optimized to interoperate with Microsoft's server software, such as its Exchange e-mail server, as well as its Office desktop applications.

In a recent demonstration, Microsoft Chairman Bill Gates showed off Athens, a prototype PC designed to handle business communications. Gates showed how a picture of a caller and a history of interaction with that caller, including recent e-mail, could all be displayed on a PC. The PC owner could then decide to take the call or, after looking at who is calling, send it to voice mail.

The integration vision that Microsoft has laid out goes beyond just e-mail, IM and voice calls. The Redmond, Wash., software giant also hopes to build VoIP applications that push the use of Web services standards to integrate telephony applications with customer relationship management and enterprise resource planning systems. Because protocols used in most phone systems today are proprietary, it's hard to link phone systems to back-end business systems, giving Microsoft a potential advantage over private branch exchange makers.

Some software developers are already heeding Microsoft's telephony call. Siemens on Wednesday announced the latest version of OpenScape, software that plugs into RTC Server 2003 and allows workers to place calls or send IMs through the same interface. Meanwhile, phone makers are beginning to develop IP phones that can support RTC functionality and communicate directly with PCs.

While Microsoft's vision is grand, analysts and competitors caution that it is just that--a vision.

The software giant faces formidable competition among IM providers, with IBM commanding the largest share of the corporate market through its Lotus SameTime product. Other rivals include enterprise heavyweights Sun and Oracle as well as consumer IM giants America Online and Yahoo.

In addition, IBM, Oracle and Sun have been pushing their own visions of integrated communications services, for example, through Oracle's Collaboration Suite software and Sun's Sun Open Network Environment. Both Oracle and Sun are looking at bundling secure instant messaging into these products.

Even if Microsoft succeeds in selling companies on its IM product, convincing enterprises to swap out their existing telecommunications systems for an unproven IP-based system will be a much harder sell. Many companies and institutions have invested heavily in their internal communications systems, and many rely on established players such as Cisco Systems, Avaya, Alcatel and Nortel Networks to manage their communications systems.

"This talking up about how (office) phones are gathering dust is a bit specious, because it's still vaporware," said Robert Mahowald, an analyst at IDC. "They're having trouble delivering enterprise IM at this point."

The SIP Trojan horse
While Redmond's rhetoric over PC-phone integration has only recently heated up, seeds of this vision were planted many years ago.

In October 2001, Microsoft released its most recent version of its operating system, Windows XP. Microsoft added support for a then-obscure Session Initiation Protocol (SIP), a protocol for servers to exchange real-time data, but its appearance into the code was drowned out by the company's emphasis on XP's splashy new interface and its OS-based instant-messaging client.

SIP is a protocol developed by the Internet Engineering Task Force, a standards body widely believed to be the cornerstone of Net-based phone calling. SIP is a language that software and telecommunications companies alike have embraced, and many of them have begun developing applications using it.

Microsoft sparked these recent development efforts when XP's much vaunted Windows Messenger software supported SIP.

SIP "was suddenly in a market that was going to be distributed to 10 million desktops per month," said David Gurle, global head of collaboration services at Reuters and a former Microsoft executive who influenced Microsoft's decision to

The potential of SIP is not derived just from its ability to allow PCs to call one another. SIP allows many different forms of real-time data exchange, such as phone calls, video conferences and instant messaging, to interact with one another. That has allowed software developers to create programs that let an office worker click on an e-mail address and place a voice call or use a computer-like interface to control voice messages.

Jeremy George, a director of information technology at Yale University, is testing SIP phones on campus as a possible way to reduce the hefty costs of maintaining and upgrading its internal telecommunications system. The SIP tests are limited to a few phones scattered throughout research departments, and they are a far cry from the massive phone system that serves Yale's 20,000-strong faculty and student population.

So far, running a SIP network could cut costs for the process of what he calls "moves, adds and changes." Instead of incurring truck and labor costs in switching out phone lines and moving phone numbers to different buildings, SIP phones just need an Ethernet port to transfer identities.

George has also linked up his rudimentary network with a small loop of phones at the Massachusetts Institute of Technology. SIP phone calls do not incur long-distance tolls.

"It has potential to save more money than you think," George said.

Searching for demand
While the potential for Microsoft's leadership in SIP-based communications looks good on paper, convincing businesses to scrap their existing phone networks remains elusive.

Just as at Yale, many large enterprises have invested heavily in their telecommunications systems and remain entrenched with existing service providers. Universities that run their own campus telecommunications businesses first need to see a return on their investments before considering swapping them for untested equipment, and that cycle comes in eight- to 10-year periods.

Equipment and network companies such as Alcatel are hinging their futures on IP-based communications and are watching Microsoft carefully. Alcatel sells phones that can work on traditional circuit networks or IP-based networks. It also installs internal phone systems that run on an array of networks and protocols.

Like many potential competitors, Alcatel views Microsoft's entry as further validation of its own business. The company said further embracing of IP telephony means more demand for its phones.

"At its best, (RTC Server 2003 will be) a widely distributed client on every desktop with XP," said Jack Jachner, Alcatel's chief technology officer for North America. "I think it will open up our ability to integrate telephony functions with IT functions."

Meanwhile, many companies are already taking a close look at SIP-based voice communications, including telecommunications giants Verizon Communications, MCI and AT&T, to name a few. Most of these companies view Microsoft as a partner rather than a competitor. Telecom companies can provide the pipes into the business and other maintenance services that RTC Server 2003 cannot touch.

Still, despite all the talk about the impending IP-telephony revolution, the market remains at a very early stage. Much of this stems from economic conditions that have cut back spending on IT equipment, which bodes ill for Microsoft and could explain the company's bold evangelism.

All parties agree that IP-based telephony, and the use of SIP as the preferred standard, will one day be pervasive within the enterprise. The issue is stirring up demand. For now, companies including Microsoft are making sure that the pieces are in place.

"No one's spending that kind of money these days in new capital unless there's an overwhelming business case in spending money," said Joe Aibinder, director of business services at AT&T. "We see customers planning to do it over a long period of time, but we don't see customers saying, 'Dam the torpedoes; full speed ahead.'"


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