Cisco & Microsoft: IPTV War Ahead?

Cisco Systems Inc. (Nasdaq: CSCO) and Microsoft Corp. (Nasdaq: MSFT) consider each other partners in IPTV now, but Cisco's ambitions in the space may eventually put the two at odds, industry sources say.

Microsoft and Alcatel (now Alcatel-Lucent (NYSE: ALU)) have over the past two years won a string of large carrier accounts with their end-to-end, and some say rather proprietary, video distribution platform. Alcatel provides the hardware and integration, while Microsoft provides virtually all of the video processing software under the name "middleware." (See Microsoft, Alcatel Renew Deals.)

Behind the scenes, Cisco is assembling a wide-ranging IPTV solution of its own, sources say. But it's got more work to do, and it is only just now bringing that offering to the attention of service providers. (See Sources: Cisco Forming IPTV 'Ecosystem'.)

Right now, Cisco and Microsoft play parts in each other's IPTV "ecosystems." Scientific Atlanta encoders and set-top boxes are used as part of the Microsoft/Alcatel solution at AT&T Inc. (NYSE: T). Cisco considers Microsoft TV Edition middleware a compatible piece of its own IPTV ecosystem. Cisco says it's willing to build a distribution system around whichever IPTV middleware platform the carrier customer is partial to.

Despite peaceable public statements from both companies, Cisco's friendly posture toward Microsoft TV probably won't last too much longer. "I see them becoming more direct competitors as Cisco builds out its end-to-end video solution, although I wouldn't expect any directly opposed positioning from either party, at least not in the next 12 months," says Heavy Reading analyst Rick Thompson.

"They’ll definitely be competing; they [Cisco] are a partner with Microsoft in some areas now and they compete with Microsoft in others," says Pacific Crest Securities Inc. analyst Tim Daubenspeck. "Of course, there will be situations at carriers where Cisco is the incumbent and Microsoft is the incumbent, so they'll have to work together, but Cisco is definitely looking to do more of it in-house."

On the hardware side (where Cisco competes with Alcatel), Daubenspeck points out that Cisco has in recent months retooled several of its products for video, including the Catalyst, 12000, and 7600 lines. "Ultimately, down the road, Cisco will be going head-to-head with Alcatel, and so Cisco will then be competing with Microsoft on a number of different levels," he says.

Sources say Cisco wants to provide an alternative to Microsoft and Alcatel's monolithic, we-do-it-all approach to building video networks. Cisco, sources say, is preparing to offer carriers a video distribution system featuring its own hardware and software, where possible.

Cisco has spent around $7.2 billion since the summer of 2005 acquiring key pieces of that system. These include the encoder and set-top box maker Scientific Atlanta ($7 billion in cash), the networked digital video recording (nDVR) company KiSS ($61 million in cash), and the VOD server company Arroyo Networks ($92 million in cash). It also invested an undisclosed in the DRM and conditional access company Widevine Technologies Inc. (See Scientific-Atlanta: Cisco's Sweet Deal?, Cisco KiSSes Up to Telco TV, Cisco Fertilizes Widevine, and Cisco Snatches VOD Vendor Arroyo.)

The body of Cisco's IPTV Distribution system is something called the "Content Delivery Platform (CDP)." The CDP comprises a decentralized system of networked VOD servers that work together to ingest, store, and stream all kinds of video including live broadcast. Cisco says it got the technology in its August acquisition of Arroyo Video Solutions. (See Cisco Snatches VOD Vendor Arroyo and Cisco Acquires Arroyo.)

Cisco's Scientific Atlanta encoders would be used to inject video into the system at the headend, and SA set-top boxes would receive the video at the TV. Cisco might also deploy Widevine conditional access and DRM to protect the video content.

In the near term, sources say, all those pieces might be glued together by middleware from Microsoft TV's main challenger, Myrio Corp. , a division of Siemens AG (NYSE: SI; Frankfurt: SIE). Sources say Cisco and Siemens/Myrio have been working together, but the relationship has not firmed up to the point of making any public announcements. (See Siemens: IPTV Game Not Over.)

Heavy Reading's Thompson says even that state of affairs may be short lived. "In the long-term, Cisco will likely define its IPTV middleware strategy more clearly than it is today, meaning that they will do things (acquire) beyond strategic partnerships with others that aren't Microsoft (e.g., Siemens/Myrio, etc.)," Thompson writes in an email to Light Reading. (See Will Cisco Make an IPTV Middleware Move?.)

With ownership of (or a strong partnership for) a proven middleware system to anchor its IPTV solution, Cisco seems well positioned to challenge Microsoft and Alcatel. The main reason for that is presence -- Cisco gear already exists in large numbers in networks around the world, and many of them are getting set up for video.

As Thompson says, both Cisco and Microsoft are, for now, keeping up appearances as allies, rather than foes.

Cisco frames the relationship as follows: "There are no homogeneous networks or software applications, and therefore both Microsoft and Alcatel have agreed to work with each customer based on their specific requirements," Cisco's Craig writes in a statement to Light Reading. (See Cisco Catches Integration Fever.)

"We do consider them [Cisco] a very important and close partner; we have regular meetings with them," says Microsoft TV spokesman Jim Brady.

Asked to comment on the possibility that Cisco will one day line up against Microsoft TV, Brady says: "We're not going to comment on speculation and rumor; we work closely with Cisco, and we expect we will continue working closely with them."

— Mark Sullivan, Reporter, Light Reading