Behind Redmond's Tellme deal

How a spilled drink and a skipped Super Bowl led Microsoft to its biggest purchase in years.
Written by Ina Fried, Contributor
It was only a few hours before kickoff on Super Bowl Sunday, but Microsoft CEO Steve Ballmer wasn't at home getting ready to watch the Bears take on the Colts.

Instead, the Microsoft chief executive was in his conference room inside Microsoft's building 34, the main executive offices, with a room full of colleagues and executives from speech recognition company Tellme Networks. Ballmer peppered Tellme executives with questions about their business, entering the answers into an Excel spreadsheet he had started from scratch.

Steve Ballmer Steve Ballmer

Three-and-a-half hours later he had built a complete business model, and one thing was clear: an acquisition made a lot of sense. Although both companies had invested plenty in speech recognition, the market was heading in new directions and neither company had all the technology it needed. The deal wouldn't be finalized for another five weeks, but Tellme Networks CEO Mike McCue left the meeting convinced that being part of Microsoft was a better option than trying to take his company public or linking up with another large company, such as Google.

His intuition panned out Wednesday as Microsoft announced it was buying Tellme, with plans to integrate the Mountain View, Calif.-based company into Microsoft's Business Division, the unit that includes Office, Exchange and Microsoft's expansion into the world of business telephony.

Mike McCue Mike McCue

Although there are many areas of Microsoft's business that may benefit from speech recognition--particularly mobile search--it is the Business Division led by its president, Jeff Raikes, that has been the most vocal about the company's need to invest in technologies that bring together the worlds of voice and data.

In many ways, the February 4 meeting helped solidify the realization that Microsoft needed more investment in that area. Ballmer had already come out of a recent annual strategy review convinced that speech recognition is going to be key to many areas the company is headed into. But Microsoft already had quite a bit of its own technology; Ballmer had to be sure Tellme is really what the company needs.

At one point, Ballmer had the dozen executives in the conference room track down one of Tellme's general managers at a Safeway grocery store in Sunnyvale, Calif., where the manager was buying some last-minute items for a Super Bowl party. Ballmer wanted an estimate of the size of the market for the kinds of voice-activated systems that businesses use to handle routine customer inquiries.

The more Ballmer heard, the more animated he became. At one point, the effusive CEO became so animated after a demonstration of Tellme's technology, that he absent-mindedly knocked over a can of sparkling water, dousing McCue and his cell phone.

McCue's phone survived. In fact, the spill actually helped convince McCue, a former Netscape executive, that becoming part of Microsoft was the right way to go.

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Water spill
Tellme CEO Mike McCue recounts getting doused with a drink by an excited Steve Ballmer.

Instant business model
McCue recalls how Ballmer turned a blank Excel spreadsheet into a complete business model in a few hours' time.

"One of the things that got me very excited was how excited Steve was," McCue told CNET News.com on Wednesday. "It was just one of those great meetings."

Although Microsoft did not disclose how much it is spending to buy Tellme, it is one of its biggest purchases in years. Several media outlets estimated the deal at $800 million, while one Wall Street analyst claimed the purchase price topped $1 billion.

Microsoft's bets on the potential of voice recognition go well beyond Tellme. The company has spent years building its own voice interface into products like Windows and Exchange Server. Speech recognition has also been a longtime priority for Microsoft's research unit. Kai-Fu Lee, the Chinese executive whose departure for Google sparked a multiple-state legal battle, is among those who have focused on voice recognition work at the company.

"We're big believers in speech as the natural interface that is going to open up computing and the potential of computing to literally billions of people," Microsoft's Raikes said Wednesday.

Mobile search is an area in which speech seems like it might be particularly useful because the lack of an easy way to enter information has been a barrier to handling search tasks on a phone.

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Microsoft gets a voice--literally
Context surrounding the biggest acquisition Microsoft has pulled off in more than a few years--its purchase of Tellme Networks.

"With little, little screens (and) bad keypads, speech is just a natural," said Steve Chambers, president of the speech division at Nuance Communications, a company that is both a rival and partner to Microsoft and Tellme in the speech business. Last month, Nuance announced it was buying BeVocal, a company that helps mobile carriers handle customer care.

Tellme recently started testing several mobile products. With one service, for example, people can send a text message to find the nearest Starbucks and receive a text message with a link to a map to get there.

Raikes also pointed to the benefits that speech technology can provide in the world of mobile search.

"The research that we looked at...suggests that more than 35 percent of mobile search users would be more likely to use search if voice were added," Raikes said. And that's just the beginning.

"We think of that as extending even beyond the mobile environment: how you interact with your television, how you interact with your automobile, how you interact with other computing devices," Raikes added.

"It's like a national holiday, but we were all holed up in Microsoft conference rooms.
--Mike McCue, CEO, Tellme

For his part, McCue had also been envisioning a bigger role for speech and knew it would be difficult for his company to tackle that on its own, even though it was profitable.

"If you look at any IPO scenario, there is no way that it can compare to the kind of opportunity we have to try and take our technology to billions of consumers across any sort of device globally," McCue said. "An IPO is just one step along the way. It takes years and years to really gain critical mass."

The pot of money there for the taking could be enormous. The market for voice-enabled systems at large businesses alone is probably $5 billion, McCue said, with even larger amounts to be made from consumer services such as directory assistance and local search.

McCue had already brought in bankers from Morgan Stanley and Goldman Sachs to help sort through the possibilities. The company had wide-ranging talks with other companies and also explored the possibility of using the proceeds of a stock offering to fuel an acquisition binge of its own.

The day before the Super Bowl, executives for Microsoft and Tellme including Ballmer and McCue, spent most of the day talking. But Ballmer, clearly looking for more details, called McCue at 11:30 a.m. on Super Bowl Sunday asking for another go around. As quick as they could, McCue and his team left the posh Hotel 1000 in downtown Seattle, ran to their Ford rental car and sped across the Lake Washington bridge toward Redmond, Wash.

Though certainly worth the effort, McCue said it was a bit odd to spend the biggest football day of the year in business meetings. "It's like a national holiday, but we were all holed up in Microsoft conference rooms," he recalled.

By the time the executives left the conference room that evening, they knew they were on to something.

"We had already been talking to Microsoft across multiple areas, but this is really when it started to really come together," McCue said. "It became clear this was a serious opportunity for both companies. The next few weeks were largely spent making sure those intuitions--and the numbers on Ballmer's spreadsheet--checked out.

"That was done at a very, very athletic pace," McCue said. Of course, that's coming from a guy who missed the Super Bowl.

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