Cisco has a new partner in its ingenious but risky cloud plans: Microsoft

Cisco and Microsoft on Wednesday rolled out a joint product that will help sell both of their most important products.

The partnership will combine Microsoft's Amazon-competitor cloud, Azure, and Cisco's fastest network switch, the Nexus 9000, which includes Cisco's "software-defined-networking" software.

The two are selling a package to cloud service providers that will instantly give those service providers game in a hot up-and-coming market called "hybrid computing."

Hybrid computing is when a company uses its own data center for some of its tech needs, and uses a rented public cloud for the rest of its tech needs - in this case, Microsoft Azure - and the two clouds work perfectly together. This what most huge enterprises want and there's a fierce battle going on among every major IT vendor to own this market: IBM, HP, Microsoft, VMware, and Red Hat are all big players in hybrid computing.

With this new partnership, a cloud service provider buys and installs Cisco's Nexus 9000 (its fastest switch) with its Application Centric Infrastructure (ACI) software; and something called a Windows Azure Pack. And voila! It has a hybrid cloud that works with Microsoft Azure.

Every time a customer bites, Cisco gleans a customer for its software-defined networking product, something the industry is closely watching.

A crop of SDN startups and Cisco's former close partner VMware are offering new ways to build corporate networks that they say work better and cost less than Cisco. ACI is Cisco's answer to them and Wall Street is carefully watching how well it sells.

Meanwhile, Wall Street is also closely watching how well Microsoft Azure, does as Microsoft shifts itself from an old-school software company into a cloud powerhouse.

This is an extension to the agreement the two companies announced last summer in which they made it easy for cloud companies to use Cisco's servers with Microsoft Windows and Azure.

All of it is part of Cisco's bold $1 billion "Intercloud" plan, an initiative Cisco launched last summer to help all the smaller cloud providers compete with giants like Amazon and Google.

Cisco wants to these cloud providers to become an interlinked community and to standardize on Cisco equipment. In this way, Cisco hopes to build a giant worldwide cloud in which a company's data can fly between different service providers' clouds as it needs to.

As we said when Cisco launched this plan, it was an ingenious solution to one of Cisco's big problems. As enterprises increasingly choosing to rent tech from cloud companies rather than buy and install it all themselves in their own data centers, Cisco was being left out.

Many of the biggest cloud cloud providers like Amazon and Microsoft don't buy much Cisco equipment. They buy cheaper alternatives that can cost 50 to 60 percent less, sources say. Google even builds its own network hardware.

And the Facebook-led Open Compute Project is making it easier for more cloud providers to do the same. On Monday, it launched an entirely free and open source alternative to Cisco hardware. (Microsoft, ironically, is a big member in OCP.)

Cisco has also been particularly struggling with service providers, it says. Its service provider video business - the only service provider product category it breaks out - was down 19% last quarter over the year-earlier quarter.

In its last earnings report, Cisco generally characterized its service provider sales as "challenging" because of "reduced spending by our service provider customers" which it doesn't expect to improve for "at least a few quarters."

So this high-profile partnership with Microsoft is a good thing for Cisco, and for Microsoft.

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