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TechWeek: Microsoft Makes Search Sense

Bill Snyder

When it comes to search, Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks) has been playing David to Google's(GOOG Quote - Cramer on GOOG - Stock Picks) Goliath. But this week's acquisition of Tellme Networks will give the software giant a solid base in the nascent market for mobile Web search.

Privately held Tellme is the engine behind speech-enabled customer service telephone lines for the American Airlines unit of AMR(AMR Quote - Cramer on AMR - Stock Picks), E*Trade(ETFC Quote - Cramer on ETFC - Stock Picks), FedEx(FDX Quote - Cramer on FDX - Stock Picks) and a raft of telecom carriers.

Indeed, analysts estimate that half the directory assistance calls made in the U.S. are handled by Tellme's software.

Think how easy calls to a Tellme-enabled site are, and then think about how difficult it is to surf the Web via the tiny keyboards found on most mobile devices.

Microsoft has already placed its Windows Mobile operating system inside phones and other handhelds cranked out by manufacturers including Samsung, Palm(PALM Quote - Cramer on PALM - Stock Picks) and Motorola(MOT Quote - Cramer on MOT - Stock Picks).

It's not much of a stretch to envision numerous voice-enabled applications running on top of Windows Mobile. Want a pizza? Tell your phone you're looking for a Domino's(DPZ Quote - Cramer on DPZ - Stock Picks) (a Tellme customer) within a few miles of your present location, and get back a map and directions to the nearest stores, and perhaps an ad served up by Microsoft's adCenter technology.

Future applications aside, Tellme has already built a solid business. Credit Suisse analyst Jason Maynard says the company is profitable, has positive cash flow, and has annual revenues of more than $100 million. He estimates that Microsoft will pay more than $1 billion for the company, although other analysts figured the price tag at closer to $800 million.

In any case, the price isn't material to Microsoft. Even if it were, says Cowen analyst Walter Pritchard, Microsoft needs to open its wallet and start making acquisitions in newer technologies. "In order for MSFT to trade at a higher multiple over the long term, the company must show it will not be left behind by powerful technology trends such as software as a service and advertising-based consumer services." Credit Suisse has a banking relationship with Microsoft; Cowen does not.

That's a great point, but staying abreast of those trends costs money. And Wall Street doesn't always like that. When Microsoft last year announced a $2 billion bump in spending to beef up its lagging Internet units, investors had a hissy fit.

Sorry, but you can't have it both ways.

When Smart Guys Say Dumb Things

Microsoft Chairman Bill Gates, a man of little tact or patience, has been known to wither underlings who don't measure up to his standards of smartness by saying, "That's the stupidest thing I've ever heard." Well, this week Gates let Advertising Age columnist Bob Garfield goad him into saying something incredibly, well, stupid.

According to a transcript of the interview, Garfield asked, "This is based on pretty much zero data, but it doesn't seem to me that either Vista's or Zune's campaign has so far generated a whole lot of buzz. Are they generating any business?"

That's a pretty good question, especially when you remember that exactly one month ago Microsoft CEO Steve Ballmer warned Wall Street that some of its expectations for Vista-driven revenue were "overly aggressive." Moreover, there are indications that Vista (which will ultimately be a success) has gotten off to a relatively slow start.

Given that, you'd think Gates would measure his words carefully. Instead, he said: "Vista's the most-used piece of software there is in the world."

Excuse me? Vista has been on the market for less than a full quarter, while XP and earlier versions of Windows are installed on something like 90% of the PCs in the world. There's no algorithm (as the chairman would say) on the planet that would make sense of Gates' incredible statement, so I won't even try.

Man the Lifeboats?

When CA(CA Quote - Cramer on CA - Stock Picks) spun off Ingres into a private company in late 2005, there were high hopes that a nimble, open-source database company could make a good living stealing market share from mighty Oracle(ORCL Quote - Cramer on ORCL - Stock Picks).

Since it's not public, it's hard to know how Ingres is doing, but in the last three months, there's been an unsettling exit of top talent.

Gone are the highly respected Chief Technology Officer Dave Dargo; Mike Coney, the head of sales; Don Mukherjee, the chief marketing officer; and Oracle vet Jim Finn, who handled communications.

Dargo left for personal reasons and still maintains a blog on the Ingres home page, but the others apparently left in a snit. One former executive says, "This was a great idea, but Ingres isn't getting traction in the marketplace." He also says there was a good deal of tension between COO Roger Burkhardt and the rest of the executive team.

CFO Tom Berquist, a one-time sell-side analyst, is very much still in place. "We had a crazy first year. It was very stressful, and some people left for opportunities that were probably less stressful," he says.

How is the company doing? "We beat our first-year plan. Our plan for this year is aggressive -- it calls for 60% [top-line] growth," he says.

Unlike some of his brasher rivals in the open-source database business, Berquist makes no pretense of beating Oracle into the ground. "Oracle is at the top of the pyramid; we're at the bottom. But there is a lot of room at the lower end of the market."