The 800-pound Gorilla of Telecom

Microsoft, having achieved dominance on the data side of the enterprise information technology market, is now clearly setting its sights on the voice side. With IP telephony accelerating the convergence of voice and data in the enterprise, the move into telecom was a no-brainer for Microsoft.

The company is building a strategy around its vision of unified communications and presence-based real-time collaboration, and the recently introduced Office networking products that enable these applications. It hopes to leverage the vast installed base of Office desktops and Windows-based servers—and the partnerships it’s now forging with vendors of components that fill gaps in Microsoft’s product suite.

“Microsoft is not seen today as a primary telecom vendor in the enterprise market,” says Yankee Group vice president of enterprise infrastructure Zeus Kerravala. “but moving forward, it will be.”

Traditional telecom vendors are integrating their products with key pieces in the multi-product Microsoft communications solution—products such as Microsoft Live Communications Server 2005 and Microsoft Office Communicator 2005. Kerravala predicts that in future, users will control all kinds of communication from a Microsoft Office user interface, including instant messaging, Web, audio and video conferencing—and telephony.

But analysts like Kerravala speculate that Microsoft may not be content forever to see its products integrated with other vendors’ telecom systems. It will eventually want to compete in the core product segment—the PBX market.

As vendors and enterprise users have long since understood, the PBX (private branch exchange)—the center of the enterprise telecom universe—is really nothing more than software running on a computer. This is especially true in the IP world where vendors such as Pingtel and others offer software PBX products that run on industry standard servers.

How difficult would it be for Microsoft to develop its own software PBX product—or, easier still, acquire an existing developer? Not very difficult at all, analysts say.

Microsoft has already shown it will use acquisition to advance its enterprise communications strategy. In 2003, it purchased PlaceWare, a small provider of business Web conferencing services, which it used to develop its own Microsoft Live Meeting service. Earlier this year, it acquired Groove Networks, a maker of Web collaboration software, to bolster its own offerings in this space.

Brent Kelly, a senior analyst and partner at Wainhouse Research, a Boston-based analyst firm specializing in “visual collaboration and rich media,” believes Microsoft may do the same thing to get into the PBX market quickly. Quite aside from the profits to be earned, there are other compelling reasons why it might want to do this, he argues.

Kelly recently authored a major report from Wainhouse entitled An Analysis of Microsoft’s Presence-enabled Real-time Communications Strategy: What Every Organization Should Know about the 800-pound Gorilla’s Voice, Video and Web Collaboration Solutions and Partner Ecosystem.

The report includes detailed descriptions of the products in Microsoft’s communications suite—Live Communications Server (LCS) 2005, Communicator 2005, Office, Office Live Meeting, Sharepoint—analysis of how they fit together and how they integrate with partners’ products and services, and an evaluation of Microsoft’s strengths and weaknesses.

While Kelly believes Microsoft is “in an excellent position to own a large portion of the enterprise desktop unified communications marketplace,” one of the weaknesses he sees is the absence of voice—other than point-to-point IP voice and video—from Microsoft’s solution.

PBX vendors are lining up to integrate their products with the Microsoft software, and in some cases this may not be terribly difficult to do. Enterprises can integrate Live Communications Server with an existing PBX to take advantage of Microsoft’s SIP-based presence technology, for example, by using a SIP-to-CSTA gateway, available from Microsoft partners such as Mitel. CSTA (Computer-Supported Telephony Application) is an international standard for interconnecting telephony and computing systems.

But enterprise buyers increasingly want pre-integrated, single-vendor solutions, Kelly notes—both to ensure smooth interworking of components and to provide “one throat to choke” in the event something goes wrong.

He believes this presents a golden opportunity for telecom and Microsoft systems integrators who could offer managed unified communications services that include integration of Microsoft and third-party components and management of software and hardware. Enterprises would get all the attractive features of the Microsoft solution and the synergies with existing Office applications—and one throat to choke.

Another distinct possibility, though, is that Microsoft will itself enter the PBX market, Kelly says. Microsoft is currently wooing and currying favor with telecom vendor partners, but that doesn’t mean its strategy can’t change. As Kelly notes in his report, Microsoft is often ruthless in its business strategies.

“Our sense is that if [the IP-based unified communications market] begins to take off and if Microsoft is able to see money to be made—we don’t think they’d hesitate to [enter the PBX market],” Kelly says. Entering the PBX market would likely bring a huge windfall in revenues. Given the size of the market, Wainhouse estimates Microsoft could add another $1 to $2 billion in revenues from PBX sales.

Kelly sees a real possibility that Microsoft will snap up a company such as BroadSoft Inc. or Sylantro Systems Corp., both small VoIP software vendors. It is already partnering with Sylantro on a triple-play offering to service providers.

This is all speculation, of course, but Kelly is not the only one doing it. Yankee Group’s Kerravala also believes it likely Microsoft will make such a move—though not for at least a couple of years, he says. It will wait that long to ensure the technology is mature. “There’s quite a bit of development still required on these products,” he says.

Kerravala sees Microsoft going after Pingtel or possibly Mitel, a Canadian-based traditional PBX vendor that has migrated its product line to IP more quickly than most—70 percent of sales are now IP products. Mitel was also one of the first to partner with Microsoft to integrate the two companies’ communications products.

Microsoft’s vision of unified communications—improving internal and external communication through use of instant messaging, Web collaboration, conferencing and presence—will likely have increasing appeal to enterprise IT managers. Microsoft is by no means the only vendor pushing these buttons, though. And there are others—IBM/Lotus and Cisco, for example—that have or could conceivably evolve similarly comprehensive solutions.

What will it take to vault Microsoft to a position of dominance in this unfolding market? We think buying an existing software PBX vendor might do the trick. And if that happens, watch out!

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