By Raphael Barone, Research Analyst, Enterprise Communications Group, Latin America and Mohamed Alaa Sayed, Research Analyst, Unified Communications Group, North America

A few years ago, no enterprise would have thought to entrust its phone system to a software company. The name Microsoft however has proven to go well beyond that categorization to be currently considered one of the main catalysts of future enterprise communication under the unified communication vision. The truth is Microsoft is on its way of becoming a major IP telephony player. When this will be achieved? The answer is no far from now. How it will achieve it, it is yet to be seen. While the main structure of the puzzle has been already put together, the software giant won't reveal the details. After all, the clearer it is about its plans, the fiercer the competition it will run into from established IP PBX vendors like Avaya, Cisco and Nortel whose cooperation is fundamental at the moment.

Still, signs and evidences are left everywhere, and everyone tries to catch the ideas behind each Microsoft's new product announcement, strategic partnerships and multiple joint vendors.

Microsoft has positioned itself less against its traditional rival – namely IBM – and more against the upstart in the application world, Cisco. Unlike IBM, which has publicly stated it intends to leave the telephony management to the telephony experts, Microsoft has always considered real-time voice to be a possible extension to their existing soft-solutions. As traditional telecommunication companies accelerated their moves to IP, Microsoft also set its sights on VoIP.

Initially, many traditional telephony vendors didn't take Microsoft seriously as a potential entrant in the voice communication business. They didn't perceive a possible threat in a company that produced software and applications; the possibility of customers replacing their hardware PBXs with Microsoft's voice communication solutions seemed remote, at best.

But by October 2007, when Microsoft announced its release of Microsoft Office Communications Server 2007 (OCS) and Microsoft Office Communicator 2007 (MOC), the industry had changed. Even telephony vendors that have historically sold hardware are reinventing themselves as software providers. Microsoft's OCS is a SIP-based communications platform that manages VoIP, presence, audio and video conferencing across different services, devices and applications; Microsoft Office Communicator works in conjunction with OCS to deliver presence, instant messaging and enterprise VoIP softphone capabilities. It can act as an IP-PBX on its own, or coexist with traditional telecommunication systems providing VoIP capabilities without the need to tear out legacy telephone networks.

Microsoft expects companies to start deploying OCS as an addition to their existing PBX, testing the platform's voice capabilities. Once companies are ready to replace their legacy systems, they can use the Microsoft's voice capabilities instead of purchasing a new IP PBX, effectively deploying it as their new telephony solution.

Today, however, the product is short of being a perfect alternative. Although Microsoft appears headed in the right direction, the newly released OCS 2007 doesn't deliver all the required system capabilities and call control functions prevalent in today's PBXs. For this reason, Microsoft will need to cooperate and partner with major telephony vendors, and it is indeed doing so.

Microsoft is also targeting small businesses, which do not always need a full-sized PBX, with a less expensive and less complex alternative to VoIP that can be used with pre-certified IP desk phones. For instance, in June 2006, Microsoft announced a new wave of devices that connect the workplace phone to email, instant messaging, real-time presence information, conferencing, VoIP and mobile communications: Fifteen new devices from nine manufacturers (GN Netcom, Tatung, LG-Nortel, NEC, Plantronics, Polycom, Vitelix, Samsung and Asus) were stamped OCS Enterprise Voice Ready.

After a slow start in the Latin American market, Voice over IP is gaining traction in the region. By 2007, the enterprise voice communications industry in Latin America – comprising enterprise IP-converged systems, IP PBX systems, TDM systems and IP gear such as IP phones - was estimated to be around US$ 682 million, and is expected to reach more than US$ 1.1 billion in just four years. That's a compound annual growth rate of 11.6%; IP solutions systems are expected to see a CAGR of 15.2%.

Although the region's IP adoption lags behind that of the European and North American markets (85% of the installed base in Latin America was still TDM in 2006), the growing political stability of country members like Brazil, Mexico, Chile and Argentina, the continuous investment in infrastructure, and the competitive push by major telecom vendors are all driving the demand for IP telephony. This translates to a great opportunity for leading telephony providers to grow and explore new regions with IP solutions.

The regional market is dominated by global competitors, an area that Microsoft knows well. Although the region has some strong local telephony players, such as Intelbras, Leucotron and Digitro, their impact is likely to fade through market consolidation and/or technology change. This should open the market for Microsoft, which will likely look for the same market share in Latin America as it has in more developed markets.

On the demand side, the adoption of IP telephony is more common among large enterprises, either due to budget capacity, IT development, or business requirements. Small and medium sized companies also are becoming a targeted market and will prove to be a profitable client as long as products are adapted to their needs and return over the investment justified. One of the biggest challenges there is to show the return beyond the cutting-cost benefit of the solution deployment. Nonetheless, as companies evaluate the possibility of improving the efficiency in their highly paid employees with integrated solutions, the IP telephony solution is adding a whole new value to the companies' business environment.

Microsoft's voice communication products were launched in Latin America a few weeks after they hit Europe and North America, but since then there's been strong speculation about the future of the traditional players in the region. Meanwhile, the company isn't wasting any time getting its message out; it has publicly stated that it has come to stay, and that it will be an aggressive competitor right from the start. Being responsible for most of computer software gearing in Latin America, by integrating the new solution to its installed base, the company certainly enters the market with a significant advantage.

Since Latin America's market still has a vast base of TDM systems, it's critical that OCS works along with traditional enterprise telephony platforms; that will allow customers to leverage their original telephony investments with better features and then gradually migrate to Microsoft stand-alone solutions should the need and desire arise. Such future-proofing considerations are especially important in the region. Still, while Microsoft's approach seems to be taking these concerns into account – on several occasions the company's Vice-President in Latin America, Hernán Rincón has emphasized the company's efforts to cut costs – it must prove its product is as good as those from traditional telephony vendors.

In the end, what still remains is not really about Microsoft brand recognition in the market but its real capabilities of entering the enterprise voice market where many competitors have been investing large amounts of money for the past decade. On the other hand, the idea of integrating Microsoft's desktop solutions with its new voice capabilities seems interesting, and for some players in the market a major challenge, as they are still investing in other side of the platform.

Both in Latin America and in the rest of the world, Microsoft has already gathered a lot of experience in the enterprise communications market, originally through partnerships, and now through its own products, where they can take advantage of their own best practices. In a market where many of their original partners have been competing within themselves, MS will have to deal with competition, interoperability and especially with disbelief coming from end-users directly.

However, Microsoft has the resources to rapidly become a major voice communication player physically shaping and transforming businesses' perception on unified communication. The question is not really if Microsoft will succeed but when it will. The world is already starting to feel the impacts and the enterprise voice communications market seems to be entering a new era where Microsoft will not fall behind.