April 8, 2007 8:41 pm

Cisco and Microsoft on collision course

Could the latest threat to Microsoft’s desktop software ambitions come not from Google, or some other online rival, but from Cisco Systems?

That is the question being pondered by some technology analysts in the wake of Cisco’s $3.2bn deal to acquire WebEx, a web-based conferencing and business collaboration company.

They may have started from different ends of the technology spectrum, but over the past few years, Cisco – the world’s biggest maker of data networking equipment, and Microsoft, the world’s biggest software company – have found themselves increasingly on a collision course in the burgeoning market for corporate telephone, teleconferencing and other “unified communications” services.

Observers say that the market for services that combine business telephony, voicemail, instant messaging, and other forms of business collaboration into a single package for office workers could soon be worth $35bn-$40bn a year.

Microsoft hopes that broadening its business software suite to include office communications tools will help shore up its lucrative desktop software business. That business appears under threat as Google and other companies continue to invest in web-based alternatives to Microsoft Office.

Meanwhile, Cisco’s plans to buy WebEx – announced last month – mark the company’s latest move into the same market being targeted by Microsoft.

WebEx is a web-based service that allows customers to hold teleconferences and share documents over the internet.

Inder Singh, an analyst at Prudential, says Cisco and Microsoft, together with communications groups like Avaya and Nortel, are all rushing to capitalise on the increased importance of software, rather than hardware, as an enabler of communication in the office.

“Everyone understands that it’s about owning the application, and they’re all trying to move into the market dominated by Microsoft,” he says. “This is not going to be an easy battle.”

Charlie Giancarlo, Cisco’s chief development officer, acknowledges that the company’s moves into business communication have led to increased competition with its longstanding partner.

But he says the relationship between Cisco and Microsoft remains one based primarily on co-operation.

“We have a very broad relationship with Microsoft,” Mr Giancarlo says. “It is 90 per cent synergistic and 10 per cent competitive. We are going to be very competitive on unified communications.”

Another area where Cisco and Microsoft are increasingly squaring off is business telephony. Cisco has risen to become the world’s biggest provider of office telephone services, with 24 per cent market share.

Microsoft has also been investing. Jeff Raikes, president of Microsoft’s business group, last month outlined the company’s plans to turn its Microsoft Office business software suite into a communications hub.

“Within three years, more than 100m people will be able to make phone calls from Microsoft Outlook, SharePoint and other Microsoft Office Systems applications,” said Mr Raikes in a company webcast.

Around the same time that Cisco announced its WebEx deal, Microsoft announced plans to buy Tellme Networks, a company that competes directly against Cisco in the market for voice-enabled telephone services.

Bert Hochfeld, an analyst at Hochfeld Independent Research, says that, in spite of their recent moves in unified communications, it would be a mistake to read too much into the budding Microsoft-Cisco rivalry.

“You could easily overstate the amount of revenue overlap that Cisco and Microsoft can compete for,” he says. “There are many areas where they are complementary and will remain so for the rest of the foreseeable future.”

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