Microsoft Tries to Find Its Voice

In a move to deliver more of its services via the Web, it's teaming up with Nortel to create software to mesh voice and data communications

In case the message wasn't already clear, Microsoft wants a bigger piece of the growing market for Internet-based voice communications—and it's teaming with Nortel to do it. Microsoft and Nortel unveiled on July 18 that they are allying to create software that meshes disparate means of communication—e-mail, instant messaging, conferencing, video, and telephone calls—for executives.

Together, Microsoft (MSFT) and Nortel (NT) will research, develop, and license products, with teams of engineers from Brampton (Ontario)-based Nortel making the trek to Microsoft headquarters in Redmond, Wash. The two companies will collaborate on software for large companies as well as wireless and telephone service providers, and they'll also jointly market and sell the new products.

At stake for Microsoft is a piece of the global enterprise IP telephony market, which according to Synergy Research Group will generate $4.9 billion in sales this year and more than double that by 2009 (see, 7/10/06, "Internet Telephony: Coming in Clear"). "Within the course of the next 10 years, all communications in businesses will move to be IP-based, and that literally means that there are hundreds of millions of people who will be getting a new communications experience," Microsoft Chief Executive Steve Ballmer told reporters.


  For the past half year or so, Microsoft has been moving in the direction of IP-based communications, which are designed to reduce costs by sending voice calls and other information with the same technology that shoots e-mail over the Internet (see, 1/01/06, "Voice over Microsoft Protocol"). On June 26, the company announced five products in the areas of Voice over Internet Protocol, or VoIP, including call processing, conferencing, and new telephony devices.

These products rely on the merging of voice and data networks, where Nortel and Microsoft have respective strengths. "Microsoft has a significant presence in the desktop, and Nortel brings another set of capabilities: A voice legacy, data and networking expertise, and security," says Steve Slattery, president of enterprise solutions at Nortel.

The alliance could create a more formidable competitor for Cisco (CSCO), the world's largest maker of networking equipment. Cisco has long been at the forefront of technologies that move to the network many of the tasks typically handled by Microsoft-style applications. Meantime, Microsoft has become keenly aware of the need to deliver more of its services via the Web (see, 11/15/05, "Microsoft and Cisco: Ready to Rumble?").


  The alliance with Microsoft is a big vote of confidence in Nortel, which is struggling to achieve profitability amid slumping sales and an accounting scandal that led to regulatory probes, financial restatements, and management upheaval. Nortel CEO Mike Zafirovsky said the relationship with Microsoft presents an opportunity to create more than $1 billion in revenue for Nortel over the next three years.

Microsoft says the deal puts Nortel on par with some of its strongest partners. "We've had great partnerships over the years with folks like Intel (INTC), Dell (DELL), and Hewlett-Packard (HPQ), and I view this relationship with Nortel in the voice and unified communications area as very similar to what those partnerships have meant in the PC and enterprise systems integration business," Ballmer said.

Analysts say Nortel's voice experience will bring Microsoft some much-needed expertise. "Microsoft's voice side was a weakness and it's a very important part of unified communications," says Bern Elliot, research vice-president at Gartner (IT). Nortel also offers customers a migration path from traditional phone systems to a newer Microsoft/Nortel unified communications system without requiring them to rip out their old phone networks entirely.

While Nortel perhaps stands to gain the most from access to Microsoft desktops and dealer channels, it's not a risk-free proposition. "It's Nortel's services and expertise that's on the line," says Jeff Snyder, research vice-president at Gartner.

Before it's here, it's on the Bloomberg Terminal.