Why Apple Won't Buy Nuance

 | Oct 24, 2011 | 1:00 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

aapl

,

nuan

,

goog

Siri is a hit with the Apple (AAPL) iPhone 4S. It's now the star of mainstream TV commercials. It works better than any voice recognition system I've seen in the past 11 years ... and I used to work for a start-up in the industry 10 years ago.

What's been an even bigger hit since Siri was announced is Nuance's (NUAN) stock: It's up 37% in the past month vs. 7% for the Nasdaq. Nuance is the voice rec technology behind Siri.

Many have speculated that Apple (AAPL) will now buy Nuance, because Siri has shown itself to be a hit and Apple would want to keep Nuance's speech rec technology out of Google's (GOOG) hands.

I disagree.

I don't think Apple will buy Nuance. Why?

Apple bought Siri in April 2010. The company has likely known since then that Siri would be a hit. Until the last month, Nuance's stock has traded between $20 and $15. In July 2010, Nuance's stock traded below $15, making it worth a little over $4 billion instead of its current market cap close to $8 billion.

If Apple was convinced Siri would be a game-changer, why not buy Nuance back then? Yet Apple was instead entering into licensing agreements with Nuance, with the plans to bring Siri to market in a future iPhone.

I suspect that Apple negotiated strict covenants into any licensing deal with Nuance. Think of it: The deal was a huge coup for Nuance. Not only that, with Apple bringing Siri to market in a future iPhone, Nuance would know that this would be the biggest marketing initiative for the voice recognition industry ever. It will sell a lot of voice rec licenses in the next decade because of Siri.

So what would Apple have gotten in exchange from Nuance by partnering with it? Likely patent licenses and strict protections if Nuance is ever acquired. No way Apple is going to leave itself vulnerable if Google buys Nuance.

If you're Nuance, you sign whatever deal Apple puts in front of you because ... it's Apple.

What about the people who say Google might buy Nuance and replicate Siri? Sorry -- the magic behind Siri doesn't live at Nuance, it lives in Siri, the AI piece behind the technology. Nuance is the speech rec part. There are a lot of smart people at Nuance, but this is the commodity part of the application.

Siri is a perfect example of what Apple calls its place sitting at the intersection of the humanities and technology.

I know the folks at Nuance. They're nice. But they don't live at this intersection (except for maybe a few apps people). The company is a roll-up of basically every speech rec company that's existed in the past 10 years.

I'm not sure if I will short Nuance, but I do plan on selling some premium on this recent move up.

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.