Microsoft has bought Teleo, a provider of internet telephony software and services, just days after arch rival Google waded into the sector.

The acquisition signals Microsoft’s intention to lead the new generation of telecoms providers that allow customers to make voice calls over the web for a fraction of the cost of traditional services.

The world’s largest software company did not say how much it had paid for the privately held Teleo, which was founded two years ago. The company had been seen as a likely target because of the way its products fit with Microsoft’s.

Microsoft has offered users of its MSN internet portal the possibility of making voice calls between PCs using VoIP (voice over internet protocol) calls for around two years. It actually withdrew a service that allowed customers to call from a PC to a conventional phone 18 months ago.

The technology giant could now be ruing its decision to soft pedal in the sector. MSN Messenger, which includes Microsoft’s VoIP service was re-launched last week, but was eclipsed by Google’s launch of a competing product, Google Talk. Yahoo, AOL, Vonage and Skype all also offer internet telephony services and Microsoft now faces the challenge of making a mark in an increasingly crowded marketplace.

"AOL, Yahoo and MSN have for some time featured audio and video messaging but have not pushed them as hard as they could have. Now we are seeing a renewed impetus in the wake of a trail blazed by Skype," said Ian Fogg, senior analyst at Jupiter Research.

Skype, which has 51 million registered users and more than 2 million customers who pay for services such as voicemail and connections with traditional landlines, is the internet telephony market leader. The company has said that the biggest threat it faces comes from large internet portal sites such as Yahoo and Microsoft’s MSN.

Will Collins, global product manager for MSN, told Times Online: "The acquisition of Teleo is a logical piece of the jigsaw in our overall VoIP strategy.

"Other companies in the market are being pretty proactive and the competition between customers is a great for consumers. Meanwhile, this acquisition will give Microsoft access to Teleo’s technology and its expertise."

Microsoft could now add "click-to-call" features to Outlook, its e-mail software, or Internet Explorer, its internet browser, so users can call online contacts using only a mouse. Teleo also specialises in technology that allows users to make calls from their computers to ordinary telephones, an aspect at present missing from the Google Talk offering announced last week amid a welter of coverage.

A software package that allows users to make calls from a PC to a conventional phone was withdrawn from a public testing by Teleo today. Microsoft expects consumers to see the first pieces of Teleo technology in its own products by the end of the year, but is not expected to launch PC-to-phone services until later.

Analysts believe that seamless PC-to-phone connections will be needed if VoIP providers such as Microsoft are to pose a threat to large conventional telecoms companies such as BT.

John Delaney, principle analyst at Ovum, the telecoms and technology specialists said: "Companies such as Google and Microsoft don’t pose an immediate threat to incumbent telecoms players, but they do have powerful brands and could encroach on BT’s turf in years to come."

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