Why Nuance Is Giving It Away

In 2009, Nuance Communications (NUAN), one of the largest players in voice recognition software, licensed its technology for use in a small mobile app. That app was Siri, which Apple (AAPL) bought in 2010 and turned into a major feature in the latest iPhone, allowing users to speak all types of questions and get answers from a virtual personal assistant. Although the terms of Apple’s arrangement aren’t public and neither side will share details, it was clearly a big win for Burlington (Mass.)-based Nuance, which now powers voice recognition on millions of devices.

That success has given Nuance, which also sells its voice recognition software to health-care and financial companies and is known for being a hard bargainer, a new respect for the value of freebies. In September, Nuance started offering free tools to mobile developers for building applications using Nuance’s speech recognition software. That’s triggered a wave of new apps where users can shop, search, play games, or otherwise use their phones through voice alone. “It’s a way to seed the market with our technology,” says Matt Revis, a vice president at Nuance Mobile, which makes money when appmakers upgrade to plans that offer customer service or more features. Siri is an example of “the types of situations we are looking to develop: smaller companies using us becoming big.”

Until the new rules kicked in, Nuance charged mobile developers about a penny each time the users of their apps tapped into voice recognition features. Startups had to charge customers a per-use fee—a very unpopular model—or cover the tab on their own. “If your app was too popular, the costs would explode,” says entrepreneur Alexander Marktl, whose startup, Sonico Mobile, makes a foreign-language translation app. “As a small app developer, it’s too dangerous.” And for iPhone devel-opers in particular, there were few other options. Google (GOOG), for instance, makes high-quality voice recognition software available to appmakers for free, but it only supports apps built for its Android operating system.

One beneficiary of Nuance’s change in strategy is Sonico. The Austrian startup’s iTranslate Voice, which made its debut on May 10, is the seventh-most popular paid app in Apple’s App Store, ahead of hit games such as Walt Disney’s (DIS)Where’s My Water? and Rovio’s Angry Birds. A user can say a sentence in one language, and the software repeats the phrase in any one of 30 other languages. The 99? app has been downloaded more than 500,000 times. Sonico selected Nuance’s most expensive service plan, but pays a flat rate for every app that’s downloaded instead of a per-use fee. Nuance’s new rates “made it possible to sell apps for cheap,” says Marktl.

Sonico’s app is one of about 140 new consumer mobile apps created by third-party developers that make use of Nuance technology, which also powers Amazon.com’s (AMZN) Price Check app, a way for shoppers to check online prices while browsing in physical stores. The app Voice Actions, made by Pannous, taps Nuance software to let users set alarms and reminders, get news, and do image searches. Revis says thousands more Nuance-powered apps are in the pipeline. Daniel Ives, a managing director at investment bank FBR Capital Markets (FBRC), estimates that Nuance’s revenue from mobile software will double, from about $250 million today to $500 million, over the next three to four years.

Globally, sales of voice recognition software for wireless devices should reach $21.3 billion by 2018, up from $3.5 billion last year, according to tech analysts WinterGreen Research. “Since the launch of Siri, the industry has had a lot more interest in speech,” says Revis.

The bottom line: More Siri-like smartphone hits could help Nuance’s mobile-software revenue double, to $500 million, within three to four years.

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Nuance Plays Hardball in Voice Recognition

By Peter Burrows

When rumors swirled on May 7 that Apple (AAPL) might acquire Nuance Communications (NUAN), shares of the software company rose 10 percent to $22, within pennies of an all-time high. The assumption was that Steve Jobs gets what Steve Jobs wants.

A safe bet—unless you know Nuance Chief Executive Officer Paul Ricci. In speech-recognition technology, which Nuance dominates, the soft-spoken Ricci is considered every bit as powerful as Jobs. Since leaving Xerox (XRX) to join the company in 2000, Ricci has bought 43 companies to build the largest independent maker of software that lets devices understand you as you dictate a memo to your laptop, say, or tell your smartphone to find the nearest sushi bar. "People had been knocking away at speech recognition since the 1960s," says Bill Janeway, a partner at Warburg Pincus, Nuance's largest shareholder. "Paul turned it into a billion-plus business that makes technology used by hundreds of millions of people."

Ricci's critics say he's lawsuit happy and uses strong-arm tactics to weaken innovative rivals so he can buy them on the cheap or put them out of business. Over the past decade, Nuance, based in Burlington, Mass., has sued eight companies over alleged patent infringements. It hasn't won any judgments and lost one. On at least four occasions, it purchased smaller companies it had sued. "Competing with Nuance is like having a venereal disease that's in remission," says Dave Grannan, CEO of Vlingo, a speech-recognition startup that's involved in five Ricci-related lawsuits. (Nuance has four suits against Vlingo; Vlingo has one against Nuance.) "We crush them whenever we go head-to-head with them. But just when you're thinking life is great—boom, there's a sore on your lip."

Vlingo's adventures with Ricci began in 2008, soon after Yahoo! (YHOO) chose Vlingo software over Nuance. Three months later, Grannan learned from a Boston Globe reporter that Nuance had filed a patent suit—without contacting the company to discuss royalties. "It was clearly an effort to hurt our business," says Grannan, who expects to spend $15 million on legal fees. Nuance spokesperson Rebecca Paquette said neither Ricci nor the company would comment on specific lawsuits against Vlingo or others. "In these highly technical fields, many companies attempt to gain advantage by simply using Nuance's inventions rather than developing their own," she wrote in an e-mail. "We have a duty to our stockholders to preserve the value of the company and its assets."

By summer 2009, with Vlingo running out of cash, according to Grannan, Ricci approached him about an acquisition. On Sept. 21, they met in San Francisco for a 14-hour negotiation. No agreement. Two days later, Ricci surprised Grannan and Vlingo co-founder Mike Phillips by calling to offer two more alternatives. First, Ricci promised to pay them and co-founder John Nguyen $5 million each if they could persuade their board to sell at his price. If that failed, and the three execs agreed to jump ship to Nuance, he'd pay them the amount they would have received in an acquisition—plus another $5 million if they stayed with the company for two years. As Ricci talked over speakerphone, Grannan says he looked at Phillips, mouthed "What the f---?", and asked Ricci to repeat. Ricci, who speaks in the measured tones of an academic, obliged. After notifying Vlingo's board of the offer, Grannan called Ricci back to express the board's displeasure. "I was flabbergasted," says Vlingo board member Bob Davoli. "I've been on 55 boards in my career and been a CEO twice—but I've never heard of anything like this."

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