September 26, 2008

In Moving Beyond Internet Hardware, Cisco Intrudes on Customers’ Turf

By Ashlee Vance

Forget the switches and routers that built Cisco Systems into a giant, albeit somewhat boring, company at the core of the Internet.

These days, the company is peddling e-mail software, videoconferencing systems, cable television boxes - even furniture - as it tries to break out of the data center and get its products in front of ordinary office workers.

"Cisco is kind of like the Madonna of networking," said Mark Sue, an analyst with RBC Capital Markets. "It is continuously trying to reinvent itself."

The effort directly challenges a main area of growth for some of Cisco's big customers, including IBM, Oracle and, most pointedly, Microsoft.

The line of business aims to provide a unified set of communication tools that workers can use to make calls, send e-mail messages, hold Web conferences and send instant messages.

Cisco is updating much of its technology behind the effort, including improvements to its TelePresence videoconferencing software and its WebEx collaboration suite.

Cisco's strategy is an obvious outgrowth of its acquisition strategy. Over the past four years, the company, which is based in San Jose, has bought 36 companies, including WebEx, a Web meeting specialist, for $3.2 billion.

In recent weeks, Cisco has acquired PostPath, a maker of e-mail software, and Jabber, a leader in corporate instant messaging. Though Cisco has not yet formally united all of these services into a single suite, the company said it intended to move in that direction.

Microsoft, which makes Windows and Office software, dominates the market for the communications software used by office workers and gets more than $1 billion in annual revenue from its SharePoint collaboration software.

Zig Serafin, general manager of the Unified Communications Group at Microsoft, said Cisco's core business was "under siege," a situation that had forced it into unfamiliar territory as a software player. "They are trying to stick together acquired applications, and the approach they have taken is largely piecemeal," he said.

Nikos Theodosopoulos, an analyst at UBS, said Cisco's move could have consequences. "We'll see if Microsoft will try to do more business with Cisco competitors like Juniper or Nortel or whomever," he said.

The unified communications initiative is still a small part of Cisco's $40 billion annual revenue. Cisco hopes it will become significant in its own right, but more important, executives hope to drive more network use and related sales of the company's Internet hardware and software.

The flashiest part of Cisco's effort is TelePresence, an elaborate videoconferencing setup that includes video cameras, huge displays and even the surrounding desk and leather chairs. For about $299,000 a room, a company can smoothly conduct a virtual meeting across the world.

Cisco will now extend that technology through a program it calls Expert on Demand. Customers or employees will walk up to a videoconferencing terminal, press a button and be routed to the person they desire.

"You could telepresence into a bank where you might have a loan officer shared between multiple branches," Donald Proctor, senior vice president of Cisco's software group, said before the formal announcement was made on Wednesday. "This allows that one loan officer to meet with people in various locations or for someone to punch 'home loans' or 'auto loans' and be directed to the right person."

Although its rivals offer some videoconferencing ability, none of them is quite as elaborate on that front. Google is focusing on offering cheap collaboration tools over the Internet, Oracle just announced a new suite of software called Beehive that meshes with its database applications, and Microsoft integrates its tools into Outlook and Exchange.

The rise of software that is so tied to the basic communications functions delivered by the Internet has resulted in some peculiar changes in the technology landscape. Google, famous as an Internet search and advertising company, makes its own servers and switches while going after everything from corporate e-mail to mobile phones., which grew up shipping books and vacuum cleaners to consumers, now rents out its data centers.

Cisco, which sells more and more switches to power these services, could soon end up pushing its software into homes via the television set-top box. The company bought Scientific-Atlanta, a maker of cable television boxes, for $6.9 billion in 2005, and Cisco has publicly said it is thinking about ways to take advantage of that entryway.

"Go forward a couple of years, and I believe we'll be sitting watching TV with instant-message windows open to our friends and Webcam images of them in a sidebar," said James Governor, a software industry analyst at the open-source research firm RedMonk.

Originally published by The New York Times Media Group.

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