Microsoft's decision to spend $19.7 billion to purchase Nuance Communications took a number of industry analysts by surprise.
The second-largest in Microsoft's history, the price tag amounts to 13 times Nuance's yearly revenue. In justifying the amount, Satya Nadella touted Nuance as a "pioneer" in the field of conversational AI for health care and highlighted the impact its tech would have on establishing Microsoft as a leading vendor in the sector.
But the rationale seems to lie beyond trying to own just one industry. Instead, Nuance could fill a critical void that would help Microsoft compete more fiercely against rivals like AWS.
To be sure, the health care component is a big deal and gives Microsoft access to a critical sales channel at a time when competing vendors are also pivoting quickly to industry-specific products. Nuance already has big-name health care customers like Epic, Cerner, Humana and Cleveland Clinic. Paying (albeit, a major premium) for that user base allows Microsoft to side-step the tedious task of building it out independently.
"This is a rolodex play," Valoir analyst Rebecca Wettemann told Protocol.
But one just has to look at how fast Nuance was able to succeed in health care, a notoriously difficult industry when it comes to the adoption of new software, to understand the bigger opportunity. In 2013, Nuance was known as the backbone of Siri. Just three years later, the company made a big pivot with the release of Dragon Medical One, its speech-to-text AI engine. Nuance touts metrics like a 77% adoption rate among U.S. hospitals as evidence of the success to-date. And now, bolstered by the purchase of Saykara in February, the company is turning its sights beyond just speech transcription to more powerful capabilities, like automatically ordering prescriptions for a patient after overhearing a doctor suggest it.
The speed with which it penetrated the market is noteworthy, according to industry analysts, particularly given how much some users hate Dragon — or, at least, hate Siri. Ultimately, that's why the acquisition is much deeper than just speech transcription. Nuance was able to upend health care in just a few years. With Microsoft's backing, expanding deeper into the sector, as well as into other markets, could be much quicker.
Microsoft needed to make a big move to establish itself in the health care sector. (Microsoft Cloud for Healthcare was released just last May.) So it makes sense that the company would devote much of its publicity push around that. But buried deeper in the release, as well as in accompanying comments from Nadella and others, is the broader impact this could have on Microsoft's product suite. Nadella, for example, briefly mentioned Nuance's "cross-industry enterprise AI" capabilities in a call with Wall Street analysts. Only when viewed in that context does the sky-high purchase price make sense, some analysts say. Microsoft declined to discuss its broader ambitions for Nuance beyond health care.
"There is a health care component that you can't ignore," said Gartner senior director Gregg Pessin. But "the crown jewel that they bought is the AI engine. Microsoft can make that part of its base capabilities."
Speech recognition software is in high demand, everything from analyzing customer service calls to allowing consumers to control home appliances with their voices. Microsoft's big offering in this space was supposed to be Cortana. But the company has struggled with building out the tech, particularly when compared to rivals like Amazon. Now, Microsoft is ending support for the program on iOS and Android, instead doubling-down on Cortana's capabilities as a virtual assistant within Office 365 — basically Clippy 2.0.
Without Nuance's tech, that could have been more difficult. To be fair, Microsoft has access to robust natural language processing software given its partnership with OpenAI's CPT-3. But the acquisition potentially changes the game. The company will be able to deploy the software across its products, adding a much-sought-after capability that could fix what are currently some lackluster offerings from Microsoft compared to competitors, analysts say.
Neither Microsoft nor Nuance, for example, are big players in call center tech. But it's a key area of expansion for Nuance. And the addition of a more powerful AI-backed voice assistant could help Microsoft expand its market share, especially given the rush among companies to deploy speech recognition software to customer service agents. It's one reason why AWS has been so successful with Connect; even rivals use its AI.
"Microsoft really isn't in the contact center space today, but if you combine what you have with Teams and what you have with Nuance, maybe," said D.A. Davidson analyst Rishi Jaluria. "That's how I see them integrating it."
It's why the deal is much more than just a health care push. Viewed in that context, the price tag seems more justified.
Interpreting medical language "is very difficult from an NLP perspective and [Nuance] figured that out," Pessin said. "Those mechanisms can be applied to many, many other places and provide lots of good solution sets for Microsoft."