Why Apple Should Buy Nuance

Updated. Earlier today, our little corner of the web (aka the blogosphere) lit up with rumors that Apple (s AAPL) was buying Nuance (s NUAN), a Burlington, Mass.-based company that makes voice recognition software. The reports were based on some comment made by Apple co-founder Steve Wozniak. Some of our friends were quick to dismiss those rumors, and rightfully so. Update: Woz himself admitted that he got the story wrong.

That said, the sentiment behind those rumors –- Apple buying Nuance — makes perfect sense. There are three reasons why I think so.

  1. Apple typically buys companies with technology depth and technology leadership position.
  2. Apple’s software development kits presently lack voice recognition capabilities.
  3. After multi-touch, voice is generally viewed as part of any future mobile user experience.

In comparison to Apple, both Microsoft (s MSFT) and Google (s GOOG) have their own in-house voice recognition technologies. Remember Microsoft bought TellMe for about $800 million, back in March 2007. Google used now-defunct service like 1-800-Goog-411 to build its own voice recognition technologies. Both Google and Microsoft have been quite public in their desire to use voice as a key part of their mobile OS experience.

At an event earlier this year, Google showed off some voice-based applications that gave us a glimpse into their ambitions. One of these apps, Voice Search for Android, was essentially a voice-to-mobile interface that allows you to perform about 12 actions including search, text messaging, looking up music online and playing it back using your favorite service, writing emails, looking up locations, and placing calls to those locations.

The voice-to-mobile interface means that Google now can offer an infinite amount of computing on their mobile devices, as it makes using the cloud more effective. It can do that because it has built its own voice recognition technologies.

Apple, which bought Siri in April 2010, can build a similar compute-in-the-cloud experience and use it as a way to pack more punch in its platform. Apple already hinted at this last year.  Of course, it could license voice recognition technologies, or it could just go out and buy Nuance, which is the king-maker in the world of voice recognition technology.

From GigaOM PRO: How speech technologies will transform mobile use

Nuance owns numerous (and more important) patents that give it a massive leg up over rivals. The company has been pretty aggressive in defending those patents, and it makes perfect sense for Apple to own these patents and voice recognition technology. Further more, Apple would be getting access to technologies that are fairly mature and are in use by many iOS app developers.

Owning a major part of the speech-related technologies would allow Apple to dominate what GigaOM Pro analyst Dr. Phil Hendrix likes to call “speech as a platform” (SaaP) market. In his research report, “How Speech Technologies Will Transform the Mobile Use,” Dr. Hendrix points out two main reasons why speech’s time has come on the mobile:

  • Mobile devices now have more powerful processors and expanding memory, so new mobile devices are capable of running speech-enabled apps that just 2-3 years ago required a PC.
  • The most sophisticated speech technologies require enormous computing power and ubiquitous wireless connectivity, which makes it possible to do all these complex tasks in the cloud.

Now that I’ve laid out a case for Apple to buy Nuance, will it happen? I haven’t the foggiest, but one thing working against the deal is the price –- Nuance has a market capitalization of $5.22 billion. In order to buy the company, Apple would have to pay a premium: somewhere between 30-50 percent over closing price. That’s assuming that none of the other companies — Google and Microsoft included — won’t make a play! Nuance would be one expensive purchase for Apple, even with their big cash hoard.

There are other aspects of Nuance’s business that Apple would need to deal with. Nuance is a big player in desktop speech recognition software, medical transcriptions, and speech-to-text business for carriers and handset makers. There’s no way Apple wants to get its hands dirty handling those non-core technologies. Of course, Apple could buy Nuance and then spin out all these product lines by selling them off to a private equity group. In other words, this deal could be distracting and messy — something Steve Jobs might abhor.

Still, if there’s one company they should be looking at, Nuance could be the one.