Cisco, Microsoft face off over UC

An array of recent moves are pitting Microsoft and Cisco Systems in increasingly direct competition with each other for the unified communications, or UC, market, drawing telecom equipment vendor battle lines in the process.

Only days after Microsoft announced it was acquiring Tellme Networks this month, Cisco announced its acquisition of WebEx in a bold shot across Microsoft's bow. WebEx sells conferencing applications largely to small and medium-sized businesses, competing directly with Microsoft's Live Meeting service (now called Office Communications). Tellme sells the voice-recognition software that customers, including Verizon Business (since it was MCI), use for contact centers, and analysts say Microsoft is likely to integrate Tellme's technology into its UC portfolio.

The price Cisco paid for WebEx, seemingly meant to dissuade other potential bidders ($1.4 million per employee, or more than $1400 per subscriber, as one analyst put it), signifies the importance of this race to the router giant. WebEx also aligns down-market from Cisco's ambitions in the telepresence market, where it recently introduced a high-end videoconferencing system. But analysts say it will be some time before Cisco can truly capitalize on WebEx by integrating it with other Cisco gear, giving competitors a time window of opportunity.

Nortel Networks hitched its wagon to Microsoft's star last year, forming a partnership to jointly develop and market UC gear through at least 2010, when the global UC market will surpass $1 billion, according to the Radicati Group. The two vendors unveiled the first joint products earlier this year-combining Nortel's PBX with Microsoft's unified messaging for starters, with conferencing collaborations to follow later this year. Some time within the next few months, the two will begin training channel partners to sell the first joint products.

Nortel has increasingly had its eye on Cisco's lunch since the Canadian-based vendor began reinventing itself in a broad soul-searching effort that its new management undertook shortly after coming onboard in late 2005. Backing out of wireless to some degree while it focuses on next-gen technologies, Nortel will probably push hard into the enterprise market this year and “strive to become a meaningful number two to Cisco,” wrote UBS Investment Research in a recent note. To accomplish that, UBS said, Nortel will need to make more acquisitions, particularly in the enterprise data arena.

The Microsoft partnership is proving to be a good early move, according to Mark Sue, an analyst for RBC Capital Markets. “We're encouraged [Nortel] is making the effort with a major partner such as Microsoft as opposed to electing to purchase broken assets such as Siemens' enterprise segment,” Sue said in a recent note. (In fact, Siemens is a partner to both Microsoft and WebEx.)

To the extent that Nortel hoped to use Microsoft to help beat back Cisco in the enterprise space, the software giant is also helping to wage war against another Nortel rival, Alcatel-Lucent, which has its own well-established UC gear. The same month Microsoft and Nortel unveiled their new UC gear, Microsoft sued Alcatel-Lucent, claiming the OmniTouch UC product Alcatel-Lucent introduced in 2004 violated four Microsoft patents.

As they square off, all these players will need to move aggressively to keep pace with the UC market, which will roughly double over the next four years, according to the Radicati Group. Nortel has said it expects its Microsoft partnership alone to deliver that much over the next four years.