Apple May Not Have Bought Nuance But…

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This past November, the blogosphere was briefly set on fire when a comment Apple co-founder Steve Wozniak made in passing stated that Apple had acquired the voice recognition company Nuance. Wozniak quickly came out and corrected that comment, and most believed that he had simply confused Nuance with the company he mentioned right afterwards, Siri — a company that Apple actually did acquire in April 2010. But as it turns out, Wozniak’s comment, whether he knew it or not at the time, may not have been as off as it seemed.

Apple has been negotiating a deal with Nuance in recent months, we’ve heard from multiple sources. What does that mean? Well, it could mean an acquisition, but that is looking fairly unlikely at this point, we hear. More likely, it means a partnership that will be vital to both companies and could shape the future of iOS.

For those in the know, this shouldn’t be too surprising. Buried under all the original bluster about Apple/Nuance was a very important fact: Siri relies on Nuance technology for its services. While they initial used Vlingo after launch, Siri quickly switched to Nuance for a number of reasons — one being that both came out of Stanford Research Institute, the other being that Nuance is just considered to be better. They used Nuance up until the Apple acquisition, and in fact, they’re still using Nuance right now.

This matters because as we first reported in March, Siri technology is expected to be a big part of iOS 5. By extension, that means that Nuance technology will be a big part of iOS 5. Well, unless Apple ditches them and goes with another option — but again, Nuance is considered the best. The other big player here getting praise is Google. But well… Yeah.

The other option is for Apple to build the technology themselves. And some recent job postings suggest they may be thinking about that. But to get to where Nuance is today it would take a long, long time. Perhaps more importantly, it’s well known in the industry that Nuance holds key patents for their technology and is very aggressive in protecting them. Even Apple would have a hard time dancing around this if they did go it alone.

(As an interesting sidenote, you may wonder how Google has been able to develop their technology while dancing around Nuance’s patents?Well, it certainly helps that Mike Cohen, an original co-founder of Nuance who worked there for 10 years, went on to create the voice-recognition technology for Google. If anyone knows how to navigate those waters, he’s the guy. And it has worked.)

So why doesn’t Apple just bite the bullet and buy Nuance? Well, for one thing, the company is very expensive. Nuance is a public company whose stock just so happens to be near its all-time highs. At the time of the original Apple/Nuance talk, their market cap was around $5 billion. Now it’s $6 billion. And it would take considerably more than that for Apple to buy them.

Of course, as we’re all well aware, Apple has the cash to do that. With $60 billion or so lying around, a Nuance deal would make a dent, but Apple would still have more cash than just about every other company after such a deal. The bigger issue, it seems, is that Nuance are very hard bargainers.

After Apple acquired Siri, they had to renegotiate deals with all of Siri’s partners to ensure the service remained alive and vital. That was easy to do with most of them (companies like OpenTable, for example). But one held out. And from what we hear, they’re still holding out. Guess who?

Nuance CEO Paul Ricci can be as hard of a negotiator as Apple’s own Steve Jobs, we hear. And so there has been a standoff, and negotiations have been ongoing for months.

Again, from what we’re hearing, all types of possibilities are still on the table, including an acquisition. But again, that’s not as likely as an expansive licensing agreement at this point. In buying Nuance, Apple would immediately screw over several other competitors that use the technology and it would bolster their position. And given what Google has been building, it seems unlikely that the government would have a big problem with the buy.

It would also give Apple something they always desire when possible: complete control over the technology on their devices.

But those who know Apple, and Jobs in particular, will know that they’ll be damned if they’re going to overpay for something. And they’d have to for Nuance. Much of Nuance’s value is derived from the licensing deals they have in place, and if Apple bought them, those deals would dry up. Apple would have to think of it as a strategic investment rather than a value play.

So maybe instead they do an expansive licensing deal now and perhaps quietly work on their own stuff in the background — sort of like what they did with Skyhook/Google for location services. (And what they’re now believed to be on the verge of doing to Google for maps.) But that’s pure speculation on my part.

Regardless, the fact remains that Apple needs Nuance for what they’re believed to be working on for iOS 5. And while the OS isn’t likely to appear until the fall, as we first reported last month, it is likely to be unveiled or talked about with developers at WWDC next month. You’d think Apple would want to have any deal with Nuance to be done by then.

And the truth is that Nuance needs Apple too. Not only are they also threatened by Google, but Nuance technology is simply not very meaningful without apps that utilize it like Siri. And many of those apps are appearing guess where: iOS.

While Siri has been categorized by many as a voice recognition service, that’s not actually the case. Technically, that element is on Nuance’s end. Siri are the ones that do the cool stuff with the transcriptions Nuance creates. Nuance, of course, knows this and has been trying to expand their offerings into the “brain” end of things. And it should surprise absolutely no one that they had tried multiple times to acquire Siri before Apple eventually did.

That’s not to downplay Nuance though. As one source puts it, “voice recognition done well is actually non-trivial, and although it is just ‘input’, you win or lose on it.”

In other words, both sides need each other. Nuance needs Apple. And Apple needs Nuance.

“I think voice recognition is going to become more and more a big part of these machines. Apple’s probably thinking the same way,” Wozniak said immediately before he dropped the Nuance bomb last November. From what we’ve heard, Apple is indeed thinking that way. And so are many others, including main rival Google. Nailing this on the technology side of things is going to be very, very important.

So while Wozniak may have misspoke, he may have done so with slightly more knowledge than he let on. Expect to hear a lot more about Apple and Nuance soon.

UpdateApple’s Massive New Data Center Set To Host Nuance Tech; Partnership Announcement Due At WWDC