Microsoft yesterday announced that it is set to acquire Tellme Networks, a web-based voice-technology company. Analysts say that Microsoft hopes to use Tellme's capabilities to close the gap on Google's search revenues.

The Wall Street Journal reported earlier this week that Microsoft would purchase the privately-held Tellme for approximately $800m. However, Microsoft and Tellme executives have refused to name the financial details.

"We see speech as a universal, simple capability to open up the potential of computing," said Jeff Raikes, president of Microsoft's business group. "Tellme allows us to expand our speech platform and build on our vision of software plus services."

Tellme, which was founded in 1999 by a pair of former Netscape executives is best known for speech-recognition technology and services that let callers obtain information from the internet. However, it also offers voice-driven directory assistance and is beta-testing web-data retrieval via text messaging. The company claims to handle several billion calls each year.

"The great thing about this acquisition it that Tellme's impact won't just be within the business group," said Raikes. "It will extend across the company" to Microsoft's search, mobile and other teams, he said.

Raikes repeatedly hammered home the point that it was Tellme's hosted platform - its services are delivered by data centers, not on the customer's premises - that most attracted Microsoft. "Tellme has the best hosted platform to date, the number one in the world," he said. "Their investment in speech and voice recognition will enhance our own, open it up to more partners and [independent software vendors], and take advantage of enterprise IVR [Interactive Voice Recognition]."

Peter Pawlak, an analyst at research firm Directions on Microsoft, said the Tellme buy looks like a smart move. "Tellme is almost 100 percent service; the heavy lifting is done at the data centre," said Pawlak. "Microsoft is all on-premises. Microsoft had no services built around [speech recognition] yet, so if they tried to build this out themselves, I think they'd feel they would be missing the market. In those terms, the acquisition would make some sense. Tellme clearly has some good technology, but they're unable to grow. They just didn't have the wherewithal to go international, for example."

While Raikes would not venture into specific product offerings that might arise from the Tellme purchase, plans would be divulged within 90 days, assuming the deal moves forward. Independent software vendors, meanwhile, would get a Tellme-Microsoft development road map in the next few months.

Among the developers Raikes said would be targeted are those inside the company. He promised that key Tellme engineers would work with Microsoft development teams to extend current speech products - such as Office Communications Server 2007 - and build entirely new applications. "We will follow up with ideas and clarify and make real how we expect to use this in things like Office, or mobile and local search," Raikes said.

Search may well be one of the areas that Microsoft sees Tellme adding to its portfolio, agreed Pawlak. But he wondered whether adding voice capabilities to, say, local search on mobile phones was an effective counter to Google's huge lead - and revenue - from web-based search.

Last May, Microsoft CEO Steve Ballmer pinpointed local search as an area where Microsoft could take on Google. "The leading-edge battleground between us and Google in local search really will come on the phone," Ballmer told The Wall Street Journal.

Raikes wouldn't go that far, but he did praise Tellme's services. "One of the key attractions was using [Tellme's] technology in mobile search," he said. "Frankly, today, Tellme does more mobile search than Google and Yahoo combined."

"I'm still generally skeptical that voice can become this universal interface, but Tellme gives Microsoft a lot of respectability," said Pawlak. "Tellme already has lots of large customers."

And, according to Pawlak, the deal meets the two criteria that Microsoft always requires of an acquisition. "One, there aren't any platforms involved that Microsoft doesn't support, like Linux. They don't have to worry about that, since it's a service," he said. "Second, the company wasn't fully valued."

Most important, however, is that the acquisition gets Microsoft into a business where it will be paid for each and every transaction. During the news conference, Tellme CEO Mike McCue said, "We handle billions of calls every year, and we're paid for each of those calls."

That had to sound like a siren song to Microsoft, Pawlak said. "They've always wanted services where they could get per-transaction payments," he said. "Microsoft wants those kinds of services and has been building out data centers to handle them."