Nuance, nuisance to some competitors

Speech tech leader Nuance is basking in some positively stellar publicity lately, mostly riding on the buzz about Apple’s upcoming iOS 5, Mac OS X “Lion” and the mega data center situated in a remote North Carolina town. The latest Apple mobile and desktop operating systems are said to have some deep integration to speech services from Nuance.

After years of mergers, acquisitions, and lawsuits, Nuance has finally struck gold with the Apple partnership. Forget telecom and IVRs — mobile consumer technology is where the bling is. Smartphone and tablet sales will no doubt exceed that of IVRs and speech servers.

Nuance and the speech industry in general have an intriguing history.

Things really took shape when four major players emerged in the 1990s: Lernout & Hauspie, Nuance, ScanSoft, and SpeechWorks. Back then the Internet was just blossoming, CPU, RAM, and storage were still expensive, and nobody’s heard of cloud computing yet. Speech innovation was highly dependent on the Ph.D. talents and R&D money. So naturally, companies with the thicker cash stash gained an advantage.

ScanSoft picked up some notable deals: Lernout & Hauspie (December 2001, filed for bankruptcy; Dragon Systems was acquired previously by L&H), SpeechWorks (August 2003), and LocusDialog (January 2004). In the span of three years the industry consolidated to just two big players: Nuance and ScanSoft.

Then in September 2005 a merger was announced between them, and the new entity to be called Nuance Communications.

Now came an acquisition binge, thanks to CEO Paul Ricci. Since 2000 there were 43 acquisitions. Some of the better-known buys included: Dictaphone (March 2006), Tegic Communications (August 2007), Jott Networks (July 2009), Spinvox (December 2009), and MacSpeech (February 2010).

Growth through M&A was just part of the story. Nuance was also busy in the courts fighting its up-and-coming, lesser-known competitors. One such unlucky competitor was Vlingo. According to a BusinessWeek article in May by author Peter Burrows:

“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.”

Vlingo’s board later accepted a $15 million investment in the company, after Ricci suggested that such a deal would align their interests and lead to a cessation of hostilities, says Davoli. “That was wishful thinking,” he says. Rather than drop the lawsuits, Ricci stopped taking Grannan’s phone calls. When Vlingo’s board stopped admitting a Nuance-appointed director to its board meetings, Nuance sued for the right to attend.

And guess what? Nuance is still knocking at Vlingo’s door: TechCrunch recently reported a new patent infringement lawsuit.

Tellme Networks also found itself enduring the wrath of Ricci in 2006:

In late 2006, Ricci took a run at a customer—Tellme Networks, which made an automated telephone-response system. Ricci had just purchased a company that made speech software used by Tellme. Mike McCue, Tellme’s then-CEO, says he was contacted by Ricci, who declared he’d sue Tellme, introduce a competing product, and refuse to sell it more software unless Tellme’s board agreed to sell to Nuance at Ricci’s price. “It was an all-out attack on every front,” says McCue, who now runs Flipboard, maker of a popular news app. McCue did sell the company in 2007—to Microsoft (MSFT), for a far higher price. (Press reports had it at around $800 million.) A court later dismissed Nuance’s patent claims as invalid. “We were able to outlast Nuance,” says McCue. “But a lot of companies can’t handle the pressure and give in. It’s happened time and again.” Ricci declined to comment on dealings with Tellme or Vlingo.

Nuance’s aggressive tactics aren’t just reserved for U.S. companies, either. The founder of an Indian speech company told me a story about his ordeal with Nuance. After being contracted to develop an application for Nuance, it poached the co-founder to work as an employee. (He left for Nuance within two months after being his business partner for nine years.) To add insult to injury, Nuance pre-emptively served legal notice in fear of a lawsuit going after this co-founder and his new employer. Efforts failed to negotiate a more reasonable, smoother transition for the co-founder to jump ship.

David vs. Goliath in the speech industry. David usually loses. From bleeding money and resources.

Indeed, from the BusinessWeek article:

Nuance’s Paul Ricci built the dominant speech-recognition company with engineering, acquisitions—and a lot of lawsuits.



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