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Protocol | Enterprise

Why did Microsoft spend $19.7 billion to purchase Nuance? The answer may lie beyond health care.

Nuance could help Microsoft plug key holes in its tech that would position it to better compete against rivals like AWS and Google.

Microsoft CEO Satya Nadella

Photo: Microsoft

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."

Protocol | Policy

Senate infrastructure bill: Who’s winning and losing in tech?

The $1 trillion bill covers everything from cyber to electric vehicles. But who's best positioned to seize the opportunity?

The $1 trillion infrastructure bill includes $550 billion in new spending.

Photo: Al Drago/Bloomberg via Getty Images

There's a little something — and in some cases, a lotta something — for everyone in the bipartisan infrastructure bill that's currently getting hammered out in the Senate.

The $1 trillion bill includes $550 billion in new spending, of which tens of billions of dollars will go toward broadband expansion, low-income internet subsidies, electric vehicle investments, charging stations, cybersecurity and more. The outpouring of federal funding gives anyone from telecom giants to device manufacturers a lot to like.

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Issie Lapowsky

Issie Lapowsky ( @issielapowsky) is Protocol's chief correspondent, covering the intersection of technology, politics, and national affairs. She also oversees Protocol's fellowship program. Previously, she was a senior writer at Wired, where she covered the 2016 election and the Facebook beat in its aftermath. Prior to that, Issie worked as a staff writer for Inc. magazine, writing about small business and entrepreneurship. She has also worked as an on-air contributor for CBS News and taught a graduate-level course at New York University's Center for Publishing on how tech giants have affected publishing.

When the COVID-19 crisis crippled societies last year, the collective worldwide race for a cure among medical researchers put a spotlight on the immense power of big data analysis and how sharing among disparate agencies can save lives.

The critical need to exchange information among hundreds of international agencies or departments can be tough to pull off, especially if it's medical, financial or cybersecurity information that is highly protected by regulatory guardrails.

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James Daly
James Daly has a deep knowledge of creating brand voice identity, including understanding various audiences and targeting messaging accordingly. He enjoys commissioning, editing, writing, and business development, particularly in launching new ventures and building passionate audiences. Daly has led teams large and small to multiple awards and quantifiable success through a strategy built on teamwork, passion, fact-checking, intelligence, analytics, and audience growth while meeting budget goals and production deadlines in fast-paced environments. Daly is the Editorial Director of 2030 Media and a contributor at Wired.
Protocol | Workplace

Silicon Valley has a new recruitment strategy: The four-day workweek

Everything you need to know about how tech companies are beta testing the 32-hour week.

Since the onset of COVID-19, more companies have begun to explore shortened workweeks.

Photo: Matteo Colombo/Getty Images

At software company Wildbit, most employees are logged off on Fridays. That's not going to change anytime soon.

To Natalie Nagele, the company's co-founder and CEO, a full five days of work doesn't necessarily mean the company will get more stuff done. She pointed to computer science professor Cal Newport's book, "Deep Work," which explains how a person's ability to complete meaningful work cuts off after just about four hours. That book, Nagele told Protocol, inspired the company to move to a four-day workweek back in 2017.

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Sarah Roach

Sarah Roach is a reporter and producer at Protocol (@sarahroach_) where she contributes to Source Code, Protocol's daily newsletter. She is a recent graduate of George Washington University, where she studied journalism and mass communication and criminal justice. She previously worked for two years as editor in chief of her school's independent newspaper, The GW Hatchet.

Power

The game industry comes back down to Earth after its pandemic boom

Game company earnings reports this week show a decline from last year's big profits.

The game industry is slowing down as it struggles to maintain last year's record growth.

Photo: Cyril Marcilhacy/Bloomberg via Getty Images

The video game industry is finally slowing down. After a year of unprecedented and explosive growth due to the COVID-19 pandemic, big game publishers and hardware makers are starting to see profits dip from their 2020 highs and other signs of a return to normalcy.

This week alone, Sony and Nintendo both posted substantial drops in profit compared to this time a year ago, with Sony's operating income down more than 40% and Nintendo's down 17%. Grand Theft Auto maker Take-Two Interactive saw a dip in revenue and said its forecast for the rest of the fiscal year would not match last year's growth, while EA posted a revenue bump but an operating income decline of more than 43% compared to this time a year ago. Ubisoft, which reported earnings last month, saw its sales and bookings this past quarter drop by 14% and 21%, respectively, when compared to a year ago.

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Nick Statt
Nick Statt is Protocol's video game reporter. Prior to joining Protocol, he was news editor at The Verge covering the gaming industry, mobile apps and antitrust out of San Francisco, in addition to managing coverage of Silicon Valley tech giants and startups. He now resides in Rochester, New York, home of the garbage plate and, completely coincidentally, the World Video Game Hall of Fame. He can be reached at nstatt@protocol.com.

Allocations wants to make it easier to invest in startups as a group

Now valued at $100 million, it's emerging from stealth to challenge Carta and Assure in the SPV market.

Kingsley Advani, CEO of Allocations, wants to make it easier to form SPVs.

Photo: Allocations

Software is eating the world, including the venture industry. Carta and Assure have made it easier than ever for people to band together on deals. AngelList's venture arm debuted new ways to create rolling funds. But the latest startup to challenge the incumbents in the space is Allocations, a Miami-based startup that's making it easy to create and close special purpose vehicles, or SPVs, in hours.

"If you look at Pinduoduo and group shopping, SPVs are group investing," said Kingsley Advani, Allocations' founder and CEO. Instead of one investor having to cough up millions, multiple people can write smaller checks in an SPV and invest as a cohort. It's a trend that's taken off in 2021 as investors compete to get into hot startups.

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Biz Carson

Biz Carson ( @bizcarson) is a San Francisco-based reporter at Protocol, covering Silicon Valley with a focus on startups and venture capital. Previously, she reported for Forbes and was co-editor of Forbes Next Billion-Dollar Startups list. Before that, she worked for Business Insider, Gigaom, and Wired and started her career as a newspaper designer for Gannett.

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