Nuance recently announced that it has acquired parts of IBM’s speech recognition technology; namely, the source code from IBM’s research and development team, which will enhance its speech capabilities in the areas of network-based and embedded text-to-speech (TTS), and advanced speech recognition (ASR). Nuance intends to combine the source code with its own over the next two years to improve the performance of its speech recognition engine.
Despite initial speculation that IBM will no longer compete in this market, the company will continue to develop its speech capabilities independently in these areas. It has sold Nuance a past release of its code for its embedded ViaVoice software and its WebSphere Voice Server middleware. The key motive for IBM in making this transaction is to gain some return on investment for its speech recognition technology, which is not unusual as it regularly sells patent licenses to other vendors.
Nuance has been expanding its portfolio in speech rapidly over the last few years by making numerous acquisitions. Most recently it acquired SNAPin Software in October 2008 and Philips Speech Recognition Systems (PSRS) in September 2008. Nuance is clearly focused on becoming the leading speech provider in all markets (PC-based, network-based and embedded) as well as expanding into complementary areas such as transcription and mobile care.
Although combining IBM’s source code with its own will be challenging, Nuance has experience in integrating additional technologies from its many acquisitions. The purchase of IBM’s technology reinforces Nuance’s aims to develop leading speech technology. However, it has also led to speculation that IBM’s technology was in fact superior to Nuance’s; if true, Nuance’s decision to acquire this technology was a prudent one.
Nevertheless, the company’s continued acquisitions do appear to come at a cost. Despite a sizeable revenue stream of over $800m in fiscal 2008, Nuance has not been profitable for a number of years. However, Nuance also announced in January that Warburg Pincus, a global private equity firm, has invested $175m in Nuance stock, showing continued support for the business.
For the moment, Nuance and IBM will continue to compete in the fields of network and embedded speech. Although the added code and improvements to its speech technology could help Nuance to gain better quality software, IBM still has a much larger cash flow and customer base, which it has gained from its other business divisions, including IBM Global Services and its hardware solutions. However, Nuance is currently the most renowned speech solutions provider, being the only competitor to offer PC-based, network and embedded speech, and it has the advantage of being solely focused on the speech industry. For IBM, speech is a very small part of its business, so Nuance is likely to remain a leader.
While there is currently uncertainty regarding whether there will be a strategic partnership between the two companies aimed at developing speech or a joint go-to-market strategy, such a relationship would mainly benefit Nuance, as it would gain access to IBM’s global customer base and reputation as one of the world’s largest systems integrators. If IBM did engage in a strategic relationship with Nuance, it could indicate to the market a backing down of its position.
However, a partnership could also result in a conflict of interest regarding which company would provide the services to speech customers; this may mean cannibalizing their services revenues, leaving such a close partnership seeming unlikely. In addition, the fact that IBM sold some of its speech technology to its largest competitor indicates a possibility that it may decide to exit this market at a later date, rather than try to compete.
Although Nuance will be able to strengthen its speech technology and gain a stronger market position through this acquisition, there are still opportunities for its smaller competitors to grow in the network and embedded speech spaces, and they will be able to compete with Nuance on competitive pricing. Although Nuance is dominant in North America and recently acquired PRSR to gain market share in the healthcare market in Europe, it has a weaker presence in Europe for network and embedded speech.
Aside from IBM, Loquendo and OnMobile in India, which recently acquired Telisma, are Nuance’s leading competitors in network-based speech. On the embedded speech side, SVOX and iFLYTEK are emerging competitors that have also been investing in their speech technology: SVOX acquired Siemens’ ASR in January 2009 to add ASR to its TTS solutions, and iFLYTEK recently developed ASR for the Chinese market, therefore making them more viable competitors.
In the short term, Nuance’s acquisition of IBM’s speech code will have little impact on the market. However, in the next couple of years, if it can successfully incorporate the IBM code, Nuance will gain better recognition accuracy as well as an insight into IBM’s position. The addition of IBM’s technology will help Nuance to develop its speech recognition technology faster and potentially enable it to restructure its R&D resources. Nuance’s competitors should continue to focus on their strengths in language capabilities and pricing in order to succeed.
The deal can only benefit Nuance’s customers, who should see gradual improvements in the technology, and Nuance will gain a strong position to compete against IBM. Regarding IBM, on the other hand, it is too early to tell how the company will proceed and whether it will remain in the speech recognition market.
