By Matt Rosoff [bio]
Posted: Sep. 12, 2005

• Chart: VoIP Services at a Glance
• Sidebar: MSN Messenger Gets Minor Update

The following is the full text of an article published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. Each month we make one or more key articles available to non-subscribers.

Positioned Against Skype

Teleo was founded in 2003, and in Mar. 2005 the company began beta testing a subscription-based service and associated PC client software that offered the following features:

• Voice calls between PCs with Teleo clients at no extra charge
• The ability to receive calls on a PC from the public switched telephone network (PSTN, the traditional phone system) in the United States and some other areas at no extra charge; users were guided through the steps necessary to assign a regular phone number to their PC
• The ability to place calls from a PC to PSTN-based phones (including cell phones); extra per-minute fees applied, and varied based on the country being called
• Integration with Internet Explorer (IE) and Outlook: if users right-clicked a phone number on a Web page or Outlook Contact, "Call With Teleo" appeared as a menu item.

All calls were encrypted against eavesdropping, and the company eventually planned to offer conference calling and voice mail.

The beta version of Teleo's service cost US$4.95 per month (or US$2.95 per month with no inbound calling) after a 30-day free trial. However, Teleo discontinued the beta in June after beginning acquisition negotiations with Microsoft. Teleo was a private company with fewer than 25 employees, most of whom will work for MSN. Terms of the acquisition were not disclosed.

Teleo's main competitor was Skype, which offers a similar combination of free and subscription-based VoIP services and PC client software. (On Sept. 12, online auction giant eBay said it intends to purchase Skype for approximately US$2.6 billion.) Unlike Skype, however, Teleo used the Session Initiation Protocol (SIP) for setting up and routing calls. SIP is gaining widespread industry support: it's used by messaging products from Microsoft (Live Communications Server) and IBM (Sametime), and companies such as Cisco and Siemens support it within hardware (such as Internet Protocol private branch exchanges [IP-PBXs], SIP-to-PSTN gateways, and SIP handsets) that can be used by corporations to replace traditional PBX systems with IP-based telephony.

Teleo also faced competition from MSN Messenger and the other public instant messaging (IM) networks, all of which offer PC-to-PC voice communications within their networks. To a lesser extent, Teleo was up against hardware-based VoIP services, which use adapters to let users place VoIP calls with regular phones, and are being offered by cable broadband providers and other companies, such as Vonage. (For a comparison, see the chart "VoIP Services at a Glance".)

How Teleo Might Fit

MSN was responsible for the Teleo acquisition, and Microsoft has said only that Teleo's technology will be used in unspecified MSN applications. The most likely candidates are as follows.

MSN Messenger. MSN Messenger 7.5, released just before the Teleo acquisition, includes updated echo-cancellation technology for improved sound quality on PC-to-PC voice calls. (For more details on the new release, see the sidebar "MSN Messenger Gets Minor Update".) This improvement and the Teleo acquisition pave the way for MSN Messenger to support voice calls to and from PSTN phones—perhaps as soon as the next version, which is expected by the end of 2005.

However, the public .NET Messenger network used by MSN Messenger is not based on SIP. Therefore, to enable PC-to-PSTN calls on Teleo's network, the next version of MSN Messenger would either have to add a SIP stack atop its proprietary MSN Messenger stack (becoming a multistack client like Windows Messenger) or use a gateway to bridge the gap between the networks (similar to how MSN is using Live Communications Server to enable MSN Messenger interoperability with Vodafone's SIP-based IM network).

PC-to-phone capabilities could increase the popularity of the advertising-supported MSN Messenger client, which trails AOL Instant Messenger (AIM), is approximately even with Yahoo Messenger, and faces threats from the rapid growth of Skype (which also offers IM) and the Aug. 2005 introduction of Google Talk. MSN might introduce subscription fees for some new telephony functions, but the division's top executives have emphasized advertising rather than subscriptions as MSN's main source of future revenue.

MSN Messenger has offered PC-to-phone calling in the past through partners such as Deltathree and Net2Phone, but Microsoft let these partnerships lapse and eliminated the feature from the MSN Messenger interface in Aug. 2004. MSN says it ended these partnerships because of poor sound quality and lack of consumer readiness for such features (e.g., low broadband penetration), but changing business priorities may also have played a part. For example, Net2Phone had disagreements with both MSN and Yahoo over PC-to-PSTN pricing in 2001, and no longer partners with either company. (Net2Phone is now focused on selling VoIP services to businesses and cable broadband providers.) By acquiring Teleo and bringing its technology in-house, MSN can make improvements and set pricing unilaterally.

MSN adCenter. MSN is rolling out adCenter, a set of tools for smaller advertisers to place paid search listings on MSN Search, and expects to have it in place by mid-2006. (MSN currently contracts this function out to Overture, a division of Yahoo.) AdCenter might eventually offer pay-per-call capacity, in which advertisers display a phone number rather than a link to their Web site. This is useful for small businesses that cannot set up an e-commerce site, and it helps larger advertisers appeal to consumers who are reluctant to order online.

Yahoo currently offers pay-per-call on some e-commerce sites, and search engine marketer Ingenio resells pay-per-call placement on AOL Search and other sites. However, these services currently require a regular phone. If MSN incorporates Teleo's technology into both adCenter and MSN Messenger, then MSN Messenger users would be able to initiate a VoIP call to an advertiser with a single mouse-click, which could result in higher call rates.

Business applications. Microsoft's Real-Time Communications Group, which oversees Live Communications Server (LCS) and the associated Office Communicator client, had no part in the Teleo acquisition and deferred all questions about Teleo to MSN.

Nonetheless, this group has already begun to add VoIP features to its products. For instance, companies can use Communicator, LCS 2005, and a third-party gateway to let employees call other extensions on an internal PBX system or call PSTN numbers. Given this fact and Teleo's SIP support, future LCS customers might be able to route voice calls over the Internet and through Teleo's PSTN endpoints, enabling those customers to bypass long-distance charges.

This feature would probably be offered as a subscription service—LCS already offers a subscription service to connect to public IM networks (such as AIM and the MSN/.NET Messenger service), and the company says it intends to roll out new subscription services for businesses.

Another option would be to sell Communicator to small businesses on a stand-alone basis and offer a subscription service that combines hosted LCS (for IM, video calls, PC-to-PC voice calls, and so on) and the Teleo-based service for PSTN calls.

Microsoft might also duplicate Teleo's integration with Outlook and perhaps extend it to other Office applications—for example, whenever users right-click a phone number in Outlook or Word, they might see a "Place Voice Call" menu item.

Resources

MSN Messenger is at messenger.msn.com.

Microsoft's planned push into subscription services for businesses is covered in "Renewed Interest in Subscription Services" on page 24 of the Sept. 2005 Update.