Dial Tone 2.0: The Phone Talks Back

For all those true believers who are still certain that the Web is the greatest thing ever to come along, Mike McCue wants to set the record straight. "The Internet is man's second most important communications invention," explains the wiry, effusive former Netscape-browser team member. "The first is the phone."

Hello? Well, McCue, CEO of the pioneering Silicon Valley voice portal Tellme, which he co-founded with a few old foes from Microsoft, has a big stake in Alexander Graham Bell's 19th century wonder. Although McCue previously helped devise a cool Web-surfing experience, he's now betting that people want an easier way to tap the Net's vast resources--without booting a PC or grappling with the tiny screen and keys of a PDA.

And what could possibly be easier to use or more ubiquitous than the phone? Thanks to recent advances in voice-recognition software, callers can dial up Tellme, talk to the phone and listen to it talk back--announcing everything from stock quotes, sports scores and flight schedules to news, weather, traffic, horoscopes, entertainment listings and restaurant reviews. Not surprisingly, countless other brash Silicon Valley entrepreneurs have joined Tellme in the latest, hysterical high-tech land grab. Today an estimated 4 million callers in the U.S. use dozens of voice portals--from BeVocal and HeyAnita to Audiopoint.

The past six months have been a real wake-up call. The voice portals initially talked VCs and other investors out of about half a billion in start-up money. But the sophisticated equipment required for advanced voice systems doesn't come cheap. Powerful players like AOL, Yahoo and Lycos have also rolled out voice services for their members. And consumers have about as much patience for audio advertising--banner ads for your ears--as they have for telemarketers. Throw in the NASDAQ slump, and it's no wonder most voice portals have given up building a consumer brand and put their IPO dreams on hold. Tellme, with $240 million in funding, is the only one spending on marketing.

Nevertheless, McCue is shifting Tellme's focus to concentrate more on helping other, more established businesses find their voice. Fortunately for him and these other operators, there's no shortage of prospects in the telephone industry. As brutal price wars devastate their bottom lines, telco giants are desperate to find new sources of revenue. They're joined by automakers that, with states increasingly clamping down on drivers' use of cell phones, are following the lead of General Motors to design hands-free, voice-activated systems for making calls and checking e-mail. FORTUNE 500 firms are looking to give roving workers an easier way to access critical data, while many businesses see voice applications as an affordable means of upgrading shoddy customer service.

"Companies have made lots of investment in the Web," says Steve Ehrlich, vice president of marketing at Nuance, which, along with Speechworks, is among the leading voice-recognition software makers. "[Voice technology] lets them leverage that to reach a much broader range of customers." How broad? Nuance's sales shot up 170% last year, to $51 million. And by 2005, according to the Kelsey Group, a Princeton, N.J., research firm, the annual market for the panoply of voice applications and equipment could be $75 billion, up from a few hundred million today.

The voice-portal specialists don't have the lucrative receiver to themselves. A host of techies, from wireless software players like Openwave and Infospace to voice infrastructure start-ups like Telera, TalkTwo, NetByTel and Voci, as well as equipment providers like Lucent and Nortel, are picking up the same lines. "Our 800 number is just a continuous, live beta test," says Amol Joshi, co-founder of BeVocal, a Silicon Valley start-up that partnered with Qwest Wireless to launch its own portal. "We want to be the 'Intel inside' for phone companies."

The telcos could certainly use one. Now that their basic voice business is becoming a commodity, wireless and other struggling carriers are, in the words of telecom analyst Jeff Kagan, "looking for someone to throw them a life preserver." By the end of the year, many carriers may be offering unified audio messaging (Would you like to hear your e-mail, voice mail or faxes?) or enhanced directory assistance (Driving directions to the nearest Home Depot, anyone?). With the help of location-sensing technology like embedded gps chips in cell phones, you won't even have to explain where you are.

AT&T; has invested $60 million in Tellme, while Sprint PCS is pushing its new voice-activated dialing and is expected to launch a voice portal of its own later in the year. These services have an added benefit: with subscribers in search of the latest, greatest calling plan hopping around like credit-card customers, personalized features like voice dialing, e-mail and contact managers help people stay put. Says Mark Plakias, senior v.p. at the Kelsey Group: "By the time you've loaded up a voice-dialing system, you don't want to do it again."