Voice over Microsoft Protocol?

Its purchase of PC-to-PC call provider Teleo laid the groundwork for integrating VoIP into various MSN applications

Microsoft (MSFT) kicked the rumor mill into high gear in August when it acquired San Francisco-based startup Teleo, a provider of PC-to-PC phone calling. Was Microsoft Chairman Bill Gates plotting a foray into the booming market for voice over Internet protocol (VoIP)? Would the software giant be going toe-to-toe with such VoIP providers as Vonage and Verizon Communications (VZ)?

More like Google (GOOG) and Yahoo! (YHOO). Far from aiming to displace your mother's phone company, Microsoft wants to harness Teleo's PC-to-phone calling capabilities in a bid to kick-start growth at its MSN Web business.

Microsoft has yet to make public its plans for Teleo, but BusinessWeek Online has learned that the software maker plans to weave Teleo's bells and whistles into a number of applications, such as Hotmail and instant messaging. Microsoft also hopes to integrate VoIP into its new paid-search platform, which is being rolled out worldwide, as well as a planned classified-ad service.


  The VoIP efforts are aimed at gaining traction in online advertising, where growth has been stunted by the outfit's anemic Web-search share. Microsoft debuted its own search engine, MSN Search, last year. Yet its share of searches slipped in the second half, as Google and Yahoo carved out bigger slices of the pie. In November, 2005, MSN accounted for 11.4% of all searches, vs. 12.2% in June, according to consultancy Nielsen/NetRatings.

Other parts of MSN are under pressure, too. Visits to MSN's Instant Messenger site, where users can download Microsoft's IM software, have dropped since the summer, according to Web consultancy Hitwise. Meanwhile, traffic has grown for a rival IM service from Skype, the Internet-based calling company snapped up by eBay (EBAY) last year. Skype, which offers a wider range of IM features than Microsoft, has more than 75 million registered users, up from some 54 million in September.

VoIP entrepreneur Jeff Pulver says Microsoft is losing IM users to Skype. Traffic woes were a major reason for MSN's September management restructuring, says Matt Rosoff, an analyst with consultancy Directions on Microsoft.


  As Microsoft tries to fight back, VoIP will be one of its major technology weapons this year. The software giant will roll out the various VoIP capabilities between February and August, sources tell BusinessWeek Online. Brooke Richardson, Microsoft's group product manager at MSN, confirms that the company is considering adding VoIP functionality to many of its applications and services. "Voice is becoming not a nice-to-have, but a must-have" feature, she explains.

Here's how it's expected to work. Microsoft will add PC-to-phone calling capabilities to its IM and e-mail services. That means Hotmail or IM users, for instance, will be able to place calls directly from their e-mail or IM address books. Microsoft plans to introduce Windows Live Messenger, or LM, offering such features this year. It's currently in limited beta trials.

The LM service could help Microsoft defend itself against Google, which is beta-testing a VoIP application called Google Talk. "So far, [the uptake] has exceeded our expectations," says Mike Jazayeri, product manager for Google Talk. To increase Google Talk's attractiveness, it plans to integrate VoIP with its social networks and Gmail. "We are going to look at all our properties," says Jazayeri.


  For its part, Yahoo is looking to incorporate VoIP into Yahoo Mail and Yahoo Games. It's not clear when VoIP calling will be available to Hotmail customers, though sources say Microsoft is working full speed on Hotmail enhancements that include linking VoIP voice mail with e-mail.

VoIP technology is also a crucial part of Microsoft's push into paid search, a $10 billion global market that Piper Jaffray predicts will grow 41% in 2006. This year, Microsoft will integrate VoIP into a new search capability, adding what’s called a click-to-call feature. Find an ad that interests you? Just click on a link to talk to the advertiser via phone.

One-third of advertisers surveyed recently by JupiterResearch said they would be interested in the adCenter service. Users might feel more comfortable talking to lawyers, mortgage companies, and real estate agents on the phone, rather than through e-mail or IM. Click-to-call may become a big revenue generator. While a typical keyword costs advertisers less than $1, a typical click-to-call keyword could cost as much as $75, figures Mary Hunt, an analyst at ad consultancy Classified Intelligence.

Yahoo and Google are both trying out the feature (see BW Online, 1/19/06, "Google's Search for the Advertising Edge"). Microsoft is not yet in trials, says MSN's Richardson. "But we do think this is a really compelling opportunity to make the connection between advertiser and consumer a lot more meaningful," she adds.


  Finally, VoIP technology will come in handy as part of Windows Live Expo, an upcoming classifieds service from Microsoft that's expected to jump-start an era of social-networked search. Use of the Expo site will be mostly free. It will allow people to find buyers and sellers who are connected, even if distantly, to their social network of IM buddies or e-mail friends. For example, a user could see if a pal or member of another friend's social network has a sofa for sale.

Where VoIP comes in: In addition to e-mailing the sofa seller, the Live Expo user can lob a call directly from a PC. Currently in an internal trial, Expo will enable Microsoft to compete with classifieds services Google Base, currently in beta tests, and Craig's List, one of whose investors is eBay. Yahoo is placing a big bet on social search as well (see BW Online, 1/23/06, "Yahoo's Social Circle").

Microsoft's VoIP plans even reach beyond the PC. The company is also angling for a piece of the mobile-search pie. Though it involves tiny screens -- consumers can use cell phones or personal digital assistants to search the Web -- this market has huge potential. It's expected to rise to $1.4 billion in 2010, from $90 million last year, according to consultancy Visiongain.


  Microsoft could eventually transfer the VoIP calling capabilities onto advergames played on its Xbox gaming console and TV search. In January, Microsoft demonstrated this capability: The viewer watching a sitcom can click on a character's shirt to find out where it's sold and for how much. In the future, users might be able to buy the shirt directly from the screen -- or by calling the store right from their TVs.

Microsoft's VoIP plans are nothing if not ambitious. And the software behemoth faces an uphill climb, especially when it comes to Google. On the Web today, "you have to advertise on Google," says Nate Elliott, an analyst at Jupiter. And even up-and-coming markets like mobile search are crawling with new entrants -- a potential problem for Gates & Co.

While Microsoft may have a leg up because its IM and operating system are already used on mobile devices, Google may not be far behind. Handset maker Motorola (MOT) announced in January that it will incorporate a Google button, linking directly to the search site, onto some of its phones this quarter.


  Microsoft IM competitors like Skype are pushing ahead, too. "We had a two- to three-year lead in technology and building out our network," says Saul Klein, vice-president of marketing at Skype. Now Skype is working to integrate the VoIP service with popular online-payment site PayPal, also part of eBay. The company also is incorporating the service into a myriad of Web applications, such as customer-relationship management software from Salesforce.com.

Still, the VoIP search battle is far from over, and Microsoft is clearly pulling out the big guns.

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