Behind Redmond's Tellme deal

How a spilled drink and a skipped Super Bowl led Microsoft to its biggest purchase in years.

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.

"One of the things that got me very excited was how excited Steve was," McCue told CNET 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.

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