Microsoft Steps Deeper into Healthcare with Nuance Acquisition

The deal is expected to deliver new cloud and AI capabilities

On Monday, Microsoft announced that it will acquire speech recognition company Nuance Communications for $19 billion. This is Microsoft’s largest acquisition since it bought LinkedIn in 2016 for more than $26 billion.

Nuance, based in Burlington, Massachusetts, has been a pioneer in speech recognition and artificial intelligence (AI) technologies for several decades. In fact, in my first job, fresh out of university in the early 2000s, I was a research consultant for a voice recognition start-up in Germany that aimed to compete with Nuance — that’s how long the company’s been around for!

Nuance became much more popular when it was announced that its software formed the basis of Apple’s Siri voice assistant in 2013, before Apple switched to an in-house version. Nuance currently sells medically relevant tools using its speech recognition and processing solutions, such as its Dragon Medical One platform, which allows doctors to easily document patient information into their electronic records.

Its products also include PowerScribe One for radiology reporting, and Nuance also has solutions relevant outside the healthcare sector such as in interactive voice recording and biometric authentication for the finance sector. Its solutions run on the Azure cloud platform as well, thanks to a partnership with Microsoft announced in 2019, capitalizing on the industry’s shift to the cloud, which has picked up steam during the pandemic. For example, revenue from Nuance’s healthcare cloud products grew 37% in its fiscal 2020 alone, according to the firm.

A “$500 Billion” Opportunity

Why did Microsoft choose to snap up a partner for an impressive amount of cash? On a call for analysts, CEO Satya Nadella emphasized the $500 billion opportunity the healthcare market poses for Microsoft and said that “Nuance provides the AI layer at the healthcare point of delivery” and is a pioneer in the real-world application of enterprise AI. He added that “AI is technology’s most important priority, and healthcare is its most urgent application”.

The change in the sector over the past 12 months has certainly accelerated the opportunity for Microsoft, particularly in cloud migration, data transformation and AI adoption. As one of the long-standing players in AI for healthcare, Nuance claims 77% of US hospitals, 75% of US radiologists and 85% of Fortune 100 companies as customers. This presents an attractive list of real-world deployments in AI, which in itself is a huge bet for Microsoft, but most importantly, Nuance brings deep knowledge and process expertise in the healthcare market, which has been the missing ingredient for many of Microsoft’s AI solutions for the sector until now.

It’s also worth noting that Microsoft already has its own speech recognition products, including desktop speech-to-text services in Windows and on Azure as well as Cortana, despite recently shutting down some products featuring the AI voice assistant. These have largely been horizontal technologies in the natural language processing, text-to-speech and speech-to-text domains of AI, and customers haven’t fully customized and applied them at scale to areas where Nuance has excelled, such as in patient care, clinical intelligence, transcription of medical notes, document processing, image detection and fraud detection.

Microsoft’s Biggest Bet Yet in Vertical Cloud

The deal is a shot in the arm for Microsoft’s vertical strategy, which has accelerated rapidly in 2021 (see Microsoft’s Innovation Happened at the Intersections at Ignite 2021), and healthcare is emerging as one of the leading segments for the cloud provider. In October 2020, it made its HIPAA-compliant Microsoft Cloud for Healthcare generally available as part of a broad push into the sector that started in 2019, when it first partnered with Nuance (see Microsoft Tackles Medical Burn Out).

We’ve long argued that 2021 would be the year that cloud providers invest heavily in industries, and so far, this is certainly turning out to be the case. But Microsoft’s acquisition is the biggest bet we’ve seen in this important trend. The structural change brought on by the pandemic has meant that enterprises are demanding more from the cloud giants, particularly when it comes to domain expertise and industry solutions, and this is what may have forced Microsoft’s hand in buying Nuance.

Although it’s early days in this major emerging area of cloud computing, industry depth is going to be a big part the cloud race over the next few years. An angle that in my view has been overlooked about this deal is the competitive pressure from the likes of IBM, Google Cloud and Amazon Web Services (AWS), which have all made big investments in vertical markets, especially in solutions based on AI.

IBM has bought industry specialism in data sets specific to healthcare as part of Watson Health division, despite rumours that this division is up for sale. Google Cloud has been hiring has been hiring big-hitters from various industries and pushing an AI-centric approach to its vertical strategy, especially in retail, where it’s bringing many of its parent Alphabet’s assets to bear including search, ads and maps for retailers. It also has Verily, an independent subsidiary of Alphabet in the healthcare and life sciences research arena. And AWS recently sharpened its focus on industrial manufacturing with a number of important AI solutions (see re:Invent 2020 Reveals a Step Change in Amazon’s AI Strategy).

Microsoft may have felt it had to move quickly to bring Nuance’s assets in-house to advance its AI strategy, and to gain an immediate landing pad to target a broader set of cloud and AI solutions against these rivals.

Nuance only made $29 million in net profit in 2020, after several years of losses and changes to its strategic direction. Its revenue has sunk by more than a quarter since peaking above $2 billion in 2018. And although questions remain about the role that partners play in Microsoft’s industry strategy now that the company is on the acquisition hunt for AI-based industry solutions, the deal puts pressure on rivals operating a similar playbook.

In the long run, the advantage for Microsoft is Nuance’s track record, solutions, data sets and proprietary algorithms, all of which will help set Microsoft’s cloud apart. I expect we will soon see a similar strategy unfold in other industry sectors such as finance, as the race for industries heats up.