Microsoft and Cisco Agree to Work Together, But Compete

Published: August 22, 2007

by Timothy Prickett Morgan

Right off the bat, when operating system, middleware, and application software giant Microsoft and networking giant Cisco Systems said that they were hosting an announcement in New York, some people starting noodling the possibility of a rumor. And when Steve Ballmer, Microsoft's chief executive officer, and John Chambers, Cisco's chairman and chief executive, took the stage, they immediately quashed any rumors about a potential merger of the two companies.

Microsoft is, of course, looking to build up its alliances as it tries to take on a variety of threats coming at its businesses from different directions. The whole concept of desktop computing is under threat because thin client computing and open source alternatives to the Windows/Office stack are now available and--more importantly--usable. Google, the darling of the so-called Web 2.0 era, has enough money and power to take on Microsoft on several fronts, and sometimes seems to have the open source community on its side and always has the anti-Microsoft zealots on its side. Linux is a threat in the data center, even if Microsoft is the dominant supplier of server operating systems. It doesn't take a historian to remember that only 13 years ago, Windows NT was in a nascent state and was ready to displace a lot of NetWare, Unix, mainframe, and OS/400 workloads. When you are king of the hill, as Microsoft certainly is in many respects in the IT market today, everyone is trying to topple you.

Hence, Microsoft's desire to have strong alliances, particularly those that might blunt any advantages that its competitors might be able to get from their own alliances. As the largest provider of networking equipment in the world, and one that is increasingly interested in managing servers and operating systems as well as networking gear, Cisco is a powerful ally.

Cisco is also a competitor to Microsoft, and visa versa. Cisco wants to sell Voice over IP (VoIP) software, gear, and services, and Microsoft is embedding VoIP into the Windows platform as well. Microsoft is creating a much-improved server virtualization platform than it has with Virtual Server 2005 with the forthcoming "Viridian" hypervisor for Windows 2008; Cisco bought TopSpin in 2005 to get its hands on the VFrame server virtualization and provisioning appliances that company had created. Both Cisco and Microsoft are weaving various levels of security into their products to help fortify IT against threats. (Does security belong in the server, the desktop, the router, the switch--or all of the gear?) Both companies have large aspirations in the network storage area, too. There are many other examples, and perhaps more importantly, as networking, storage, and computing continue on their convergence, there will be even more competitive situations between the companies.

Ballmer and Chambers took the stage with Charlie Rose, the popular interviewer from PBS and CBS fame. And the three talked for a while in very general terms about the decade-long partnership that Microsoft and Cisco have had, and how the renewed alliance between the two would involve cooperation between the two companies on technology standards and interoperability--even in the areas where they compete. (You can read the full transcript of the chat with Rose here and the transcript of the question and answer session that followed here.) The talk was short on specifics, but the basic idea was expressed simply by Ballmer.

"Let me take an example from where we compete, because our customers love the fact we compete. I'm not shy about it, and we don't want to sort of take away from that," said Ballmer. "Customers think it's fantastic, 'Boy, isn't it great, we can get voice over IP infrastructure from Cisco or Microsoft, applications? Yeah, that's great. We have more guys to innovate, more guys to sort of come in and bid on price and this and that, and that's all fantastic.' But what they're saying is, 'If I choose to use some of your stuff, Microsoft, and some of Cisco's stuff, I don't want to be penalized for that. I want that to work in a way that I would expect it to work.' And they're saying, 'So, give me the choice and give me the choice. Don't give me the all or nothing choice; give me kind of the set of choices that I want.'"

According to Chambers, IT vendors really are not being given a lot of choice here. Customers are demanding interoperability and cooperation amongst IT vendors, which of course cuts into account control and profits in the short term. But in the long run, standards always emerge, and vendors have to adhere to them anyway, so maybe collaborating is a better idea from the get-go.

"We really see the next wave of the Internet or whatever you want to see, we see a common global economy, and we see opportunities there that are being customer driven," explained Chambers. "Both of us are sales guys at heart. So, when a customer says, this is what I want you to do, there's a tendency for both of us to say, let's find a way to do it. Secondly, the market has more opportunities than any of us can go after. As you look at these opportunities, if you listen to the customers, they'll tell you where those transitions are going to occur. And it's about to become much easier to use technology and communicating in video and voice, rather than just keying it in through a keyboard, which opens up a whole new set of applications that go with it. Will there be areas where we compete? Yes, there will. Will there be areas that Steve will move into that perhaps we were partnering on initially? Yes, there will. And all I ask is just tell me when that occurs."

So the Microsoft-Cisco alliance bears some resemblance to the Sun-Microsoft alliance announced in April 2004, where the two companies agreed to cooperate on Java distribution on Windows and Sun started selling Windows on its servers and workstations, or the Microsoft-Novell alliance from last November, where Novell got protection from litigation from Microsoft over intellectual property in exchange for cash and Microsoft's selling of SUSE Linux to Windows customers.

The two companies did provide some specifics about where they will collaborate. The first is communications and what they call the "quad play" of data, voice, video, and mobility, all provided through Internet technologies. They will also work on standards for collaboration and Web 2.0 technologies to allow businesses to more seamlessly but securely share data and applications. They have agreed to develop technologies according to existing standards and to work together on developing new standards. And by doing all of this, they ensure that customers can choose either Microsoft or Cisco solutions in one area and they can still link to Cisco or Microsoft solutions elsewhere in the company. To make this all happen, the two companies will have "clear and transparent" product road maps (it's funny how in common usage, these two words do not mean the same thing), will consult with each other's customers to see that interoperability is really happening, and will continue to compete to drive innovation.

While the alliance between Microsoft and Cisco is interesting, and the right thing for the IT industry, it is hard to imagine the consequences of a merger between the two companies. But it is nonetheless fun to think about it in the silly season of summer. As we go to press on Tuesday, Microsoft has a market capitalization of just under $265 billion against sales for fiscal 2007 (ended June 30) of $51.1 billion and net earnings of $14.1 billion. Cisco has a market cap of $182.1 billion, driven by sales in its fiscal 2007 (ended July 28) to the tune of $34.9 billion and net earnings of $8.6 billion. At their current growth rates, a united Microsoft-Cisco would probably break $100 billion in sales in fiscal 2008 (without more acquisitions) and might even bring $30 billion a year to the bottom line. The company would also have $45.7 billion in cash and short-term investments--quite a war chest to truly transform IT.

But, such mergers rarely work out. So don't expect it to happen any time soon.

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