It's Microsoft vs. Cisco for the future of the office phone

Photo: Microsoft. Chairman Bill Gates takes the stage for the company's most important announcements.

Microsoft (MSFT) Chairman Bill Gates on Tuesday kicked off the software giant’s campaign to reinvent the office phone – an ambitious strategy that could be a multi-billion-dollar business for Microsoft, and that will almost certainly lead to a showdown with fellow tech titan Cisco Systems (CSCO).

In Gates’s vision of the future, common annoyances like phone tag and voicemail hell will be eliminated, thanks to software that can tell you when people are available and how best to reach them. In the first real step toward making that vision a reality, Gates launched a family of products that build voice calling and other capabilities into everyday business software.

Gates's gamble

It’s a huge bet, even for a company the size of Microsoft. Practically every business in the world uses a phone – and if Microsoft can make its software an important part of how those phones work, it stands to make a lot of money.

To improve its chances of getting a big payoff, Microsoft is offering tools to help other software companies build advanced communication features into their programs. It is also partnering with companies such as Nortel Networks (NT) and Ayaya (AV) that already provide business phone services. The result, Gates said, will be an explosion of innovation reminiscent of what happened in the PC industry decades ago. Business calling, Gates says, “has been its own world, not touched by the magic of software.”

And really, the Microsoft launch is about more than phone calls. The new software aims to make it easier for people to contact each other and get work done, offering features such as instant messaging tied seamlessly into e-mail, and video conferencing that can be set up by simply clicking and dragging a contact’s name into the right box.

Competition from Cisco

However nifty it all sounds, others won’t sit back and let Microsoft define the future of business communication. Microsoft’s most notable rival might be Cisco. Cisco argues that its networking equipment, not Microsoft’s software, will be the key component that makes business calls and video conferencing more affordable and convenient. (At the same time, the two companies are promising to make their products compatible, for the sake of customers.)

Cisco has important strengths that could allow it to foil Microsoft’s plans for dominance. For starters, Cisco is the leading provider of the gear companies use to move data through their networks – and it’s already an important provider of Internet-based calling services. It has also worked to develop partners who help customers use the equipment.

Still, Microsoft has its Exchange Server software for managing e-mail and other types of messaging, which is already a mainstay of office communication. It also has Office, which includes productivity software including Word, Excel and Outlook. By linking its phone strategy into those programs, which already have loyal customers, Microsoft hopes to get a quick foothold in the market.

A growth market

No matter who wins, both companies would agree that the opportunity is huge. And they also agree that more likely than not, technology will soon transform business calls from the closed model of dedicated lines and specialized equipment into the more open model of Internet-based calls managed by standard network equipment and software.

As an example of the financial benefits of switching to its technology, Microsoft highlighted a study it commissioned from Forrester Consulting. The study estimates that over a three-year period, a company could save $5 for every $1 it invests in moving to Microsoft’s unified communications model.

But those numbers come with a few catches. That 500 percent return on investment assumes companies completely upgrade to Microsoft’s recommended equipment. It also assumes that customers spend $2.1 million on software, and $4.7 million on equipment and training – a number that some IT workers might argue is a little low. And the lion’s share of the savings assume workers are far more productive, travel less, and get work done faster than they would otherwise.

Though the financial benefits might not be clear yet for every customer, early reaction is positive, Microsoft says. The company already has about 300,000 users licensed to use the software, and the feedback from customers has been positive.

Gurdeep Pall, the corporate vice president who leads Microsoft’s Unified Communications group, said Microsoft expects the adoption of Office Communications Server to happen at least as quickly as the adoption of Microsoft Exchange did – “and we have early data points to support that,” he said. And he says universal headaches that have developed names like “phone tag” and “voicemail jail” are proof that office workers are eager for a better way.

For more on Microsoft's strategy, click below to hear part of Jon Fortt's interview with Gurdeep Pall, corporate vice president for Microsoft's Unified Communications group.