Microsoft, Cisco face off over office comms

By Daisuke Wakabayashi and Ritsuko Ando

NEW YORK (Reuters) - Microsoft Corp. (MSFT.O: Quote, Profile, Research, Stock Buzz) and Cisco Systems Inc. (CSCO.O: Quote, Profile, Research, Stock Buzz) agree that work communications -- whether it's e-mail, messaging or phone calls -- will eventually come together and be delivered over Web networks.

The debate begins when the two deep-pocketed technology leaders -- Microsoft in software and Cisco in networking equipment -- argue over whose products will be the platform for the multibillion-dollar transformation of the office phone.

Microsoft is the newcomer, but it sees software playing the central role, while Cisco expects to cash in on years of experience making telecommunications equipment such as switches and routers. More recently, it has sold millions of Web-ready phones.

"It's going to become a battle," Gartner analyst Bob Hafner said, noting the competition between the two gets the most attention but that other companies like Alcatel-Lucent ALU.PA, Avaya AV.N and Siemens AG (SIEGn.DE: Quote, Profile, Research, Stock Buzz) are big companies with large investments in work communications.

Speaking at this week's Reuters Global Technology, Media and Telecoms Summit, executives from Cisco and Microsoft touted their own products to deliver "unified communications," which combines Voice over Internet Protocol phone calls, e-mail, instant messages and conferencing technology.

"Frankly we don't think anyone stands a chance competing with us in this space," Cisco Chief Development Officer Charles Giancarlo said. "We basically invented Voice over IP so we basically know better than anyone else where it's headed."

Cisco has been acquiring various small, niche technology companies to build up its unified communications product line. Over the past year, it agreed to buy online video conferencing company WebEx Communications, messaging security company IronPort Systems and mobile software company Orative.

It is already paying dividends. For its fiscal third quarter ended April 28, revenue at its main routing segment rose 16 percent from a year ago, while its unified communications revenue increased by nearly 40 percent.

The rivalry deepened after Microsoft and Canadian network equipment maker Nortel Networks Corp. (NT.TO: Quote, Profile, Research, Stock Buzz) announced a broad alliance in unified communications last year. They are set to sell more products together.

Cisco, while forging a partnership with Microsoft to offer its customers Office, has also been expanding its alliance with IBM (IBM.N: Quote, Profile, Research, Stock Buzz) to develop unified communications applications.

Microsoft said software will transform VoIP phone systems with click-to-call capabilities right from its Outlook e-mail system and a "presence" feature to see where you are and then decide whether to call, message or e-mail.

"We actually think customers that spend a lot of money on Voice over IP today often times may be making a mistake," said Jeff Raikes, president of Microsoft's business division. "Just changing the underlying plumbing for how you do voice communications is not all that interesting."

Raikes said the power of combining voice, e-mail and messaging onto one communication system can be magnified when coupled with applications found in the Office software suite, which is used by 450 million people around the world.

Microsoft also believes it can lower the overall costs of implementing and running an IP phone system by using its software instead of a total offering from traditional players.

The company plans to introduce its first product in this segment later this year with Office Communications Server 2007 and accompanying Communicator software.

"The reality is that Cisco has been doing this for the last few years," Gartner's Hafner said. "Microsoft has a compelling story to tell, but they don't have too many products to deliver."