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WHY MICROSOFT’S NEW AI ACQUISITION IS A BIG DEAL

Ben Dickson@BenDee983 April 17, 2021 10:25 AM
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Microsoft’s recent shopping spree reached a new climax this week with the
announcement of its $19.7 billion acquisition of Nuance, a company that provides
speech recognition and conversational AI services. Nuance is best known for its
deep learning voice transcription service, which is very popular in the health
care sector.

The two companies had already been working together closely before the
acquisition. Nuance had built several of its products on top of Microsoft’s
Azure cloud. And Microsoft had been using Nuance’s Dragon service in its Cloud
for Healthcare solution, which launched last year in the midst of the pandemic.

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TOP ARTICLES

The acquisition is Microsoft’s biggest since the $26 billion purchase of
LinkedIn. And it tells a lot about Microsoft’s AI strategy.

AI IN HEALTH CARE

Most of the focus in the announcement was on AI in health care, which makes
sense because Nuance is a leading provider of AI services in the sector.

“Nuance provides the AI layer at the health care point of delivery and is a
pioneer in the real-world application of enterprise AI,” Microsoft CEO Satya
Nadella said. “AI is technology’s most important priority, and health care is
its most urgent application.”

One thing I like about Nuance is its laser focus, which is in line with the
current limits and capabilities of deep learning algorithms. Deep learning might
not be very good at general problem-solving or causal inference, but it can be
extremely efficient at narrow tasks. Nuance has chosen one application (voice
transcription) and has narrowed down its focus to one domain (clinical
settings). This has enabled the company to train its machine learning models on
tons of data in that specific field and make sure that its AI solutions have
peak performance and reliability.

Nuance has a series of AI products tailored for clinical settings, including a
virtual assistant for electronic health records, a multi-party conversation
transcription service, and a deep learning language model that converts clinical
conversations into structured notes for integration into health records.

Documentation is one of the main pain points for clinics and one of the
lowest-hanging fruits for AI in health care. Nuance’s AI technology is helping
save time and improve the patient experience. According to the acquisition
announcement, Nuance’s AI solutions are currently used by more than 55% of
physicians and 75% of radiologists in the U.S. and used in 77% of U.S.
hospitals. The company has also seen a 37% year-over-year growth in the revenue
of its cloud service, though that is probably due to the shifts caused by the
COVID-19 pandemic.

“The acquisition will double Microsoft’s total addressable market (TAM) in the
health care provider space, bringing the company’s TAM in health care to nearly
$500 billion,” according to Microsoft’s announcement.

MICROSOFT’S POSITION IN HEALTH CARE

Nuance’s reach in the health care market suggests Microsoft will recoup its
$19.7 billion investment in a relatively short term. But being able to address
this market is not a simple feat.

Other big tech companies, such as Apple and Google, already have health care
initiatives that are much older than Microsoft’s. But Microsoft is especially
well-positioned to take advantage of this new acquisition because of its
business model.

Google and Apple are consumer companies. Microsoft, on the other hand, gets most
of its revenue from enterprise customers. Its Office suite and its collaboration
tools were already being used in many hospitals even before it announced its
health care solution. That’s why it was already in a good spot to penetrate the
market.

And if you look over at the Cloud for Healthcare page, the company has done a
great job of integrating its health solution into tools that many health care
workers were already used to working with, such as Outlook, Teams, Office, and
messaging apps. The real advantage is the infrastructure Microsoft has built,
the integration of all these services with clinical applications, and terrific
data engineering that makes it possible to deploy machine learning models and
data analytics tools that span various data sources.

This is the perfect infrastructure on top of which Microsoft can build an AI
factory, where it creates machine learning models that provide ways to improve
existing products and build new ones. The acquisition will enable Microsoft to
accelerate its growth by leveraging Nuance’s reach in the health care sector.
Now every Nuance customer will also be a Microsoft customer.

BEYOND HEALTH CARE

Before the acquisition, Microsoft was already using Nuance’s Dragon AI
technology in its health care solution, transcribing virtual visits, taking
notes, and integrating information into patients’ health records. Now, with the
acquisition of Nuance, Microsoft will also have full access to its technology
and will be able to take its new AI transcription power beyond health care.

“Beyond health care, Nuance provides AI expertise and customer engagement
solutions across Interactive Voice Response (IVR), virtual assistants, and
digital and biometric solutions to companies around the world across all
industries,” Microsoft says in its blog.

It will be interesting to see how Nuance’s technology will be integrated into
other Microsoft enterprise products.

One thing that is also worth watching is how Microsoft will be able to combine
Nuance’s AI with other technologies it’s experimenting with. For instance,
Microsoft already has an exclusive license to OpenAI’s GPT-3 language model.
Nuance’s transcription technology and GPT-3 might become a powerful combination
for the enterprise.

MICROSOFT’S AI STRATEGY

Microsoft might not be able to predict which company will be successful in five
years’ time, especially in a field as volatile as AI. But it’s banking on the
one constant that is always needed in the field: compute power. Microsoft uses
its huge Azure platform to develop ties with companies, often providing them
with subsidized access to its cloud-based machine learning tools. It also makes
many of its investments in Azure credits, ensuring companies it invests in will
be locked into its platform. This puts Microsoft in a position to both help
those companies grow and learn from them. And the investment pays off when the
company’s technology and business model mature.

Earlier this year, I wrote about Microsoft’s investment in the self-driving car
startup Cruise, which also made Microsoft Azure the preferred cloud of Cruise
and its owner General Motors. I noted at the time that Microsoft’s success is in
maintaining a safe distance from developing sectors. Instead of making one big
acquisition, Microsoft casts a wide net by making smaller investments in several
companies.

This gives it a good foothold into many innovative sectors. As these sectors
mature, Microsoft is gradually entering partnerships with the more successful
startups. And when the time is right, it will acquire the company that gives it
the best leverage in the market.

We can see this exact cycle with Nuance as Microsoft evolved from being Nuance’s
cloud provider to its partner to its owner. And this evolution tells us a lot
about Microsoft’s AI strategy, which I think is very smart, given how fast
things can change in the AI industry. The enterprise AI sector has come a long
way toward creating applications that can solve real-world problems. But we
still haven’t figured out many things. And as new technologies and companies
continue to develop, Microsoft will be watching and picking winners.

Ben Dickson is a software engineer and the founder of TechTalks, a blog that
explores the ways technology is solving and creating problems.

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