MCI (in the midst of being acquired by Verizon) has signed a multiyear deal with Microsoft to provide PC-to-phone Voice-over-IP (VoIP) capabilities for the upcoming Windows Live Messenger (formerly MSN Messenger) service and client software. Live Messenger, a completely revamped version of its predecessor, has just gone into beta and will launch in mid-2006. This marks Microsoft's second attempt to offer PC-to-phone services to consumers; Microsoft had partnered in the past with Callserve, Deltathree, and Net2Phone to allow MSN Messenger users to make PC-to-phone voice calls, but these services were later dropped.

MCI Web Calling for Windows Live Call

When it goes into full service under the unwieldy name of "MCI Web Calling for Windows Live Call," Live Messenger can be used to place VoIP calls from Internet-connected PCs to conventional and cellular phone networks in more than 220 countries. Callers will pay per-minute charges that are deducted from prepaid accounts with MCI, which will manage customer registration, account management, support, and billing. At this stage, MCI and Microsoft intend to offer PC-to-phone calling only, although both companies are evaluating the market demand for phone-to-PC service (which is more complex because each PC user needs to be assigned a dedicated phone number).

During the beta program, which will initially be available in five markets—the United States, France, Germany, Spain, and the United Kingdom—rates will start at US$0.023 per minute and will vary by market. Final pricing will be determined when the product launches later in 2006.

What About Teleo?

The MCI announcement comes just three months after Microsoft acquired Teleo, a small startup that developed PC-to-phone and phone-to-PC technology based on the Session Initiation Protocol (SIP), which is steadily gaining ground as the lingua franca for instant messaging (IM), VoIP, and network teleconferencing.

Microsoft claims that it acquired Teleo mainly for its approximately 20 developers (who have since been relocated to Redmond) and for some core elements of Teleo's technology, which is only now being absorbed into Microsoft products and will not go into the first release of Live Messenger, MSN Messenger 7.5's successor. The company said that it always planned to use partners to provide VoIP connections to the public switched telephone network infrastructure and related management functions, and that it has never intended to go into the phone business directly.

Teleo technology will find its way into future versions of Live Messenger.

Feeling Heat from Skype, Yahoo

Even though Microsoft and Yahoo dabbled with PC-to-phone calling in 2001—2003, the services were plagued by poor sound quality and dropped calls (at that time most consumers were still using dial-up Internet access), firewall traversal problems, and an uncertain business model. Because of these problems, both Microsoft and Yahoo dropped the service and limited users to PC-to-PC calls only.

However, new factors, such as the following, have renewed interest in broader VoIP services:

• Buzz around consumer VoIP services, such as Vonage
• EBay's recent pricey acquisition of Skype
• Yahoo's plans to give Yahoo Messenger users both PC-to-phone and phone-to-PC calling capabilities in 180 countries worldwide. (It will launch a seven-country beta in late 2005.)

With network and technology improvements and major telecom providers such as MCI/Verizon getting into VoIP, both Microsoft and Yahoo clearly feel the time is now ripe to make VoIP calling capabilities a competitive weapon in the race to win subscribers and lure advertisers.

Unlike the Microsoft/MCI plans, Yahoo (which didn't disclose any partnering agreements with telecom providers) will offer phone-to-PC calling from the outset. This service will initially cost users US$2.99 a month to rent phone numbers, and users can choose a phone number in a country different from where they actually reside. When a user expects that most conventional and cellular phone calls to his PC will come from a particular country, this capability will let callers from that country reduce their long-distance charges by calling a more local number. With this capability, plus PC-to-phone pricing in the US$0.01-0.02 per minute range, Microsoft should expect stiff competition from Yahoo if Yahoo's quality is even close to that of Microsoft's.

Resources

The Live Messenger beta is described at ideas.live.com/programpage.aspx?versionId=0eccd94b-eb48-497c-8e60-c6313f7ebb73.

Microsoft's restructuring of MSN into Windows Live is described in "Services Emerge Under 'Live' Brand" on page 25 of the Dec. 2005 Update.

More on Microsoft's acquisition of Teleo can be found in "Voice over IP Startup Acquired" on page 28 of the Oct. 2005 Update.