As you may have heard, Microsoft announced today that it will acquire voice and AI company Nuance Communications for $19.7 billion. This makes the deal the second largest in Microsoft’s history, behind the $26.2 billion acquisition of LinkedIn 2016. But the bigger question is why? What are the drivers for this deal?
Nuance helps achieve a few things for Microsoft: advancing its voice and AI efforts, and giving it a more substantial foothold in healthcare, where Nuance has established strong positioning over the past few years. In both cases, it’s about accelerating Microsoft’s ambitions which often requires buying rather than building.
Taking those drivers one at a time, accelerating Microsoft’s voice and AI ambitions has been a big priority since it has become evident in Redmond that Cortana isn’t living up to expectations. This reminds of Apple/Siri in that a late realization set in that voice processing and AI are much harder than they look.
For that reason, Microsoft has been backpedaling from Cortana over the past few years and sunsetting many of its integrations with other Microsoft products. The difference here between Apple and Microsoft is that the former appears to be sticking with its (largely dysfunctional) voice and personal assistant engine.
What Microsoft gains in Nuance is, again, tech acceleration. By buying best-of-breed capabilities, it fills the large gap left by Cortana’s deficiencies. And Nuance is just that: best of breed. Its Dragon line of speech to text processing is a leader in its class, especially in specific verticals it targets.
That brings us to the second big driver in this deal: to go deeper into the healthcare vertical. Microsoft sees this as a greenfield, given the pandemic-driven shift to telemedicine. It wants to position Microsoft Teams at the center of that shift, and better speech-to-text processing helps fill out its tech stack.
More specifically, Dragon is already embedded with 10,000 healthcare customers and targeted use cases like physician dictation. That and other footholds create an installed base for Microsoft to start its penetration in healthcare from the 50-yard line. Microsoft CEO Satya Nadella said as much during the announcement.
“AI is technology’s most important priority, and healthcare is its most urgent application,” he said. “We will put advanced AI solutions into the hands of professionals everywhere to drive better decision-making and create more meaningful connections, as we accelerate growth of Microsoft Cloud in Healthcare.”
The transaction has already been approved by both companies’ boards, and Microsoft expects it to close by the end of the year. Meanwhile, Nuance has 6,000 employees in 27 countries. In its most recent quarterly earnings, it reported $353 million in revenue, and its current revenue run rate is $1.4 billion.
We’ll keep watching closely as Nuance is integrated and Microsoft raises its voice and AI game.