It’s True: Microsoft Acquires Tellme

Microsoft announced today that it has agreed to acquire Tellme, a Mountain View, California-based voice search provider. Yesterday, Microsoft and Tellme briefed The Kelsey Group about the pending acquisition. Neither side would disclose the size of the deal, but we have learned from credible sources that it is worth at least US$800 million. This figure matches the number reported yesterday by The Wall Street Journal as well. The size of the deal would mean the Tellme acquisition is the fourth-largest acquisition in Microsoft’s history and the largest the company has made in five years. The price viewed in the light of Microsoft’s deal history suggests the importance voice search plays in the future across a broad range of applications.

Microsoft’s acquisition of Tellme has the potential to alter the mobile local search landscape. However, the deal offers a broader range of possibilities.

Enterprise and International Markets
During a briefing on the acquisition yesterday with the two companies, Kim Akers, Microsoft’s general manager of unified communications, reminded us that Microsoft has been investing in speech for a long time.

“Over the past decade, Microsoft has had efforts in speech,” she said. “Speech capabilities are built into Exchange Server and the Vista operating system.”

On the enterprise side, Microsoft will give tremendous lift to an already successful business division within Tellme. Tellme has deep enterprise relationships with American Airlines, FedEx, Fidelity, Orbitz and many others that use its voice search application to power branded consumer applications.

Currently, Tellme does not operate outside the United States, and this is an area where Microsoft will play an important role.

Mobile Search Applications and Pro-Carrier Deals
On the consumer application and search side, Microsoft and Tellme executives were adamant that beyond some high-level discussions a product integration roadmap has not been developed.

Regardless, it’s worth pointing out that Tellme is a major player in several important markets like mobile local search.
Microsoft Chief Executive Officer Steve Ballmer has cited the mobile market opportunity as the next big search and monetization opportunity.

“The leading edge battleground between us and Google in local search really will come on the phone,” Ballmer told The WSJ back in May 2006.

TKG believes the intersection of mobile local search and Microsoft adCenter, combined with Tellme’s multi-modal products and its deep carrier relationships, will push Microsoft/Tellme to the forefront of U.S. mobile services.

In terms of local search, Tellme handles more local requests on the phone than Yahoo! and Google combined. Tellme currently handles about 40 percent of the U.S. directory assistance calls.

Nearly all carriers believe advertising has a place in mobile search and DA. After carriers’ initial concerns about the combination with Tellme wane, Microsoft will be able to deliver something truly remarkable to them: a fully integrated local voice search service, complete with a robust ad servicing platform backed by adCenter and Microsoft applications for the handset.

If a company like AT&T Wireless, for example, wants to insert its own advertisers in its free DA service, this platform would satisfy that requirement. Tellme has already built Internet products such as personalization applications around voice search. Deployment will be a boon for companies like AT&T as well as for Microsoft.

In an interesting way, this deal puts Microsoft and carriers in the position of defining the U.S. mobile search experience. (It is worth noting that historically both Microsoft and Tellme are very pro-carrier.) A list of Microsoft applications, everything from Windows Mobile software to Microsoft Maps, will begin to appear as part of larger carrier deals. In a similar vein to Internet distribution deals, carriers can deliver the audience and Microsoft can bring the applications plus an ad serving network to give the carriers incremental revenues.

Tellme Management Staying Put and Reporting to Jeff Raikes
Mike McCue, CEO and founder of Tellme, and the management team are expected to stay. Tellme will remain at the Mountain View office and report to Jeff Raikes, president of Microsoft’s Business Division. This diverse division includes products and services such as unified communications, VoIP, conference products, Office client products, Great Plains and Office Live.

Clearly, we’re on the cusp of some big market changes