The Impact of the ScanSoft-Nuance Merger

The ScanSoft-Nuance merger, with ScanSoft agreeing to purchase the outstanding shares of Nuance and use the name Nuance for the merged company, will send shock waves through the companies' partner networks and end-user customers. A long-time ScanSoft customer emailed me, "If this had come out on April 1st, I would have never believed it."

The merger has its greatest impact on the telephone market segment. While the Nuance merger makes the telephone sector an even more dominant share of ScanSoft revenues, ScanSoft reported healthy revenue growth in the PC (dictation) and embedded speech sectors as well, and indicated that it will continue to invest in those sectors.

Several constituencies have intense interest in the merger, including: (1) investors; (2) partners that use the companies' telephone speech technologies in platforms, applications, and hosting services; (3) companies that use the companies' telephone speech technology in their contact centers; and (4) competitors licensing speech technologies. Investors should be comfortable with the prospects for the merged company: The two companies have by far the largest market share of deployed systems in a growing market and can reduce the cost of administration, research, and marketing by integrating their efforts over time. Paul Ricci, ScanSoft chairman and CEO (who will hold the same position for the merged company), said in a public teleconference that he expects combined revenue to exceed $315 million in ScanSoft's fiscal year ending September 2006.

Partners and end-users shouldn't be concerned whether the particular speech technology they are using will continue to be supported. ScanSoft has a good track record in supporting existing technology and providing transition options with previous acquisitions (e.g., speech technology from SpeechWorks and Philips). Peter Mahoney, ScanSoft vice president of worldwide marketing, confirmed that both Nuance and ScanSoft technologies will be fully supported and customers' investments protected. With both ScanSoft and Nuance being enthusiastic supporters of standards such as VoiceXML and MRCP (a vendor-independent interface to speech engines), any eventual integration of the technologies should be relatively smooth for customers.

Partners and end-users will also be concerned that licensing costs will increase without competition between the companies, who sometimes bid against each other. In the teleconference discussing the merger, Chuck Berger, president and CEO of Nuance (who will join the merged companies' board of directors when the transaction closes), said that he was seeing increased competition from Microsoft and IBM, citing in particular a recent announcement between IBM and Cisco of a joint offering in the call-center space. Both Microsoft and IBM offer core speech technologies with a long history of research behind them and are aggressively marketing telephone speech technology. Microsoft and IBM in particular are motivated to use telephone applications as leverage in increasing adoption of their infrastructure products (Windows/.Net versus WebSphere computing environments), and thus can gain strategic benefit without charging high licensing fees for their speech technology. ScanSoft and Nuance are certainly motivated to emphasize the competition while the merger—as required by law—is examined for anti-competitive implications; but the presence of Microsoft and IBM in the marketplace—along with a number of other smaller core-technology suppliers, such as Acapela, Loquendo, Lumenvox, NSC, and Telisma—make it unlikely the merger will be blocked on antitrust grounds. The merger may in fact insure the long-term survival of Nuance and ScanSoft by making it easier to compete with the giants entering the marketplace. The smaller core technology players may see their business increase as customers position themselves to maintain competitive alternatives.

Mahoney said that the ScanSoft and Nuance, when they competed directly, didn't tend to compete on price. Mahoney indicated that most pricing pressure comes from other competitors that don't have as large an installed base. The merger will certainly eliminate any competitive discounts between the companies, but is unlikely to allow an increase in list prices.

Partners offering platform solutions (e.g., IVR system vendors) will also be concerned about whether the merged company will compete with them by offering a platform alternative, as Nuance does with its Nuance Voice Platform (NVP). ScanSoft has enjoyed a competitive advantage with platform providers by not offering a competitive platform. The recent quarterly reports by the two companies suggest that ScanSoft was at least temporarily gaining some advantage while Nuance transitioned to a direct sales force, with ScanSoft's network speech revenues and growth higher than Nuance's. Without revealing detailed product plans, the companies suggested in their announcement teleconference that ScanSoft's partner-friendly approach would prevail. That policy was confirmed by Mahoney.

Nuance's current NVP customers will be supported. The long-term position of NVP is under review, but it is likely that, if not supported by the merged company in the long-run, it will be transitioned to a partner. ScanSoft, for example, passed on support and evolution of its open VoiceXML interpreter to another company, rather than leaving users of that product without support.

The merger has emphasized that, today, Nuance and ScanSoft are at the bottom of an inverted pyramid, providing a foundation for growth areas in many companies. The merger should allow the companies to continue to support that growth while the base of the industry broadens.

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