Microsoft's Expansive Plans for Tellme

The software giant clinches the deal for phone voice-recognition powerhouse Tellme Networks. Expect a lot more than mobile search

As it loses ground against Google on the Net, Microsoft is moving to make sure it won't lag too far behind as Web search moves to mobile phones. The software giant Mar. 14 announced plans to buy Tellme Networks, a leader in voice-recognition services over the phone.

The deal, rumored for several days, gives Microsoft a leg up in the growing market for finding services on the go. Mobile-phone users looking for a nearby Starbucks (SBUX), for example, could soon be able to call up Tellme services from a phone and get a map on their phone screen with directions to the nearest location (see, 8/9/06, "Tellme Tries a New Trick"). Microsoft already has extensive relationships with mobile-phone carriers that use its Windows Mobile technology, and now it can make the most of Tellme's ties with wireless carriers including AT&T (T) (see, 2/8/07, "Surprise: That Mobile Is Running Windows").

Elbowing Out Rivals

Google (GOOG) wants to compete in mobile search but has little market position on which to draw. "This acquisition puts Microsoft and the carriers in the position of defining the U.S. mobile-search experience," says Matt Booth, a program director with the Kelsey Group, an industry research firm.

What's more, Microsoft (MSFT) could combine mobile search with its Web advertising technology, dubbed adCenter, to enable carriers to provide free mobile-phone services that consumers until now have paid for—think directory assistance (see, 5/8/06, "The Counterattack on Google"). Tellme, which currently handles nearly half of all directory assistance calls in the U.S., could dish up ads to mobile-phone screens along with requested phone numbers to provide the service without charge.

Terms of the deal weren't disclosed. But Credit Suisse (CS) analyst Jason Maynard estimates that Microsoft will pay more than $1 billion for Tellme. Microsoft expects the deal to close in April. Tellme will remain in Mountain View, Calif. Its 320 employees, including top managers, are expected to remain with Microsoft.

Going Beyond Mobile Search

The deal traces its roots to a January jog Microsoft Chief Executive Steven Ballmer took with Hadi Partovi, a member of Tellme's founding management team who served two stints at Microsoft before leaving last October to become president of the music discovery service The chat with Ballmer led to Tellme co-founder and CEO Mike McCue flying north for an hour-long Friday meeting with Ballmer that stretched into a Super Bowl weekend powwow, where the framework of the deal was sketched out.

That Ballmer got involved suggests that Microsoft's vision for Tellme extends beyond mobile search. Indeed, Tellme isn't even being brought into the Microsoft group that's home to the mobile-phone business. Tellme will be part of Microsoft's business division, the group responsible for its widely used Office spreadsheet and word-processing software, as well as its newer collaboration technology.

The reason: Microsoft will be able to sell Tellme's customer care services, already used by clients such as FedEx (FDX), Domino's Pizza, and American Airlines (AA), to its customers. And it will integrate Tellme's voice-command technology into Office applications, giving users the ability, for example, to access a contact list in Outlook and place a conference call with a simple voice command. "We fundamentally see voice as a way to improve the interaction with productivity software," says Microsoft Business Division President Jeff Raikes.

And Raikes intends to preach the gospel of Tellme's voice technology to other Microsoft units as well. Microsoft interactive television efforts, for example, could benefit from a Tellme-powered feature that lets users record, say, The Daily Show, without having to scroll through menus to initiate the recording (see, 2/7/05, "Microsoft May Be a TV Star Yet").

Microsoft's automotive software could use Tellme's technology, in conjunction with a global-positioning-system service, to find the nearest gas station and give directions. "This gives us the opportunity to take our basic vision and be able to make that work not just on phones but in cars, on TVs, on your MP3 player, and on your PC," says Tellme's McCue.

Former Rivals Unite

Microsoft's Tellme acquisition could also kick off a round of voice-related acquisitions by the Redmond giant's rivals. "More and more companies will be turning their attention to how they can leapfrog or catch up with Microsoft, and we'll see a lot more mergers and acquisitions," predicts Craig Hagopian, president of speech-services provider V-enable.

The deal brings McCue into a company he once fought tooth and nail. In the 1990s, McCue was vice-president for technology at Web browser pioneer Netscape Communications. Microsoft illegally used its Windows operating system monopoly to wrest control of the market from Netscape, which ultimately led the upstart to sell itself to America Online (TWX). "As competitors, I really had a tremendous amount of respect for them, and they were beating us up pretty good," McCue says. Now, he'll work to give a whupping to a new foe, Google.

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