Microsoft's Office-Phone Foray

Bill Gates says today's systems are like mainframes before PCs and software changed everything. Cisco agreesand aims to win the race

The way Bill Gates sees it, Microsoft has the chance to upend business communications the way it did when the PC supplanted centralized computer systems in the 1980s.

On Oct. 16, unveiling new Microsoft (MSFT) software that can tie together phone calls, e-mail, and video conferences, Gates drew an analogy to IBM's once-popular mainframe computers: All the features are built into a single product, controlled by a single company. The situation is similar, he said, to the traditional office telephone systems sold by Cisco Systems (CSCO), Avaya Communications (AV), Nortel Networks (NT), and NEC (NIPNY). "We've seen this before. This is just like the computer industry before the personal computer came along," said Gates. "This has been its own world, untouched by the power of software."

To capitalize on this purported opportunity, Microsoft is looking to exploit the dominant position of its Office suite, providing extensions to those business-productivity tools to perform many of the same tasks as traditional phone systems at perhaps three-quarters the cost. To spur uptake, it's encouraging partners—including Dell (DELL), SAP (SAP), Ericsson (ERIC), and even traditional phone-system vendors such as Nortel—to create their own compatible software and sell installation services for the new products, dubbed Microsoft Office Communications Server and Office Communicator.

Instead of selling an end-to-end system that directs calls to the proper extensions, stores an employee directory, and connects conference calls, Microsoft will embed those features in the new software to interact with its e-mail, word processing, and mobile-phone applications, as well as programs made by partners. "We've got a very different way of being able to do things," Gates said.

Major Partners

Despite past attempts in this sector, Microsoft has achieved only a limited presence in the market for software that can stitch together various forms of communications. Companies including Boeing (BA), Procter & Gamble (PG), and Intel (INTC) have employed Microsoft programs that let users detect when colleagues are online, then initiate instant-messaging sessions with them.

But Microsoft's new products not only offer workers the ability to know when far-flung colleagues are online, they enable them to call those co-workers or start a video conference from within common programs like Microsoft Outlook and Word. Other features include enabling users to view their e-mail on a cell phone using voice commands. Down the road, Microsoft hopes to extend these features to even more products, including an upcoming version of its customer-management software.

Microsoft says it has lined up 50 partners. Dell plans to test and install the communications software on its PCs and servers as well as tie it into Microsoft's Windows operating system and e-mail software. Microsoft and SAP are upgrading Duet, a previous software collaboration that lets Office programs interact with data from SAP's business applications. The upcoming version of Duet will include the ability to click on a person's name to initiate a phone call. And Ruchi Prasad, a Nortel general manager, says that company is doubling its investment in consulting services aimed at Microsoft's new Office software.

Helping to pave the way for Microsoft's approach has been the arrival of faster processors and data networks that enable today's PCs to handle audio and video conferences more easily, says Gurdeep Pall, who runs Microsoft's unified-communications group. Also working in Microsoft's favor: The market for corporate phone systems is shifting to gear that transmits voice and data in the language of the Internet, making it possible for them to work seamlessly with PC software. About 65% of new shipments of U.S. phone systems use Internet Protocol for networking instead of the older PBX protocols for connecting to the public telephone network, according to Forrester Research (FORR). With that shift, about 40% of all U.S. phone systems in use are IP-based. "Since it's all software, Microsoft doesn't understand why it shouldn't own the IP telephony features," says Forrester analyst Elizabeth Herrell.

Battle of the Titans

One big roadblock is Cisco's equally strong ambition in the unified-communications market. "Cisco is all about the intelligent network, and Microsoft is saying the desktop is king," Herrell says. Even before the new offensive, Microsoft and Cisco had been trying to outgun each other (, 5/10/07) in the market for unified communications, which analysts say is poised for rapid growth in 2008 and 2009.

Microsoft had already embedded communications features into Windows, Outlook, and other desktop and server software. Cisco, with its Internet routers and switches prevalent in data centers, upped the ante in March when it paid $3.2 billion to acquire WebEx Communications (, 3/16/07), the maker of a popular online application for video conferencing. Also in March, Microsoft reportedly paid $800 million for Tellme Networks (, 3/15/07), a provider of voice-recognition systems.

Cisco plans to make WebEx more attractive to larger companies by extending its technologies for instant messaging, Internet phone calls, and online video conferences to cell phones and TV set-top boxes. One out of every five Cisco engineers works on unified communications, a $2 billion business for the company that is growing by 30% a year, according to Alan Cohen, Cisco's vice-president of marketing for unified communications. "We will be looking at this space pretty aggressively," he says. "It's a strategic initiative. We are extending the office."

Allen Emerick, IT director at Skanska USA Building (SKAB), a commercial builder working on projects including a new NFL stadium at New Jersey's Meadowlands sports complex, uses Cisco's office-phone systems and BlackBerry handhelds from Research In Motion (RIMM). But he's open to hearing Microsoft's pitch on its new communications efforts, which he says are "definitely continued progress in the right direction." Since Skanska uses Microsoft Office, e-mail, instant messaging, and other collaborative software, Emerick says additional integrated features among them might be "a huge advantage."

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