Leading voice recognition firms merge

Lernout & Hauspie announced today it has agreed to purchase Dragon Systems for 5.4 million shares of Lernout & Hauspie stock, valued at about $593 million. The merger is intended to jump start voice technology among so-called Internet appliances, as well as cell phones and PDAs, presumed to be the successor to the desktop PC as the most popular way to access the Internet.

The acquisition makes sense because both companies excel in different areas, analysts say. L&H software, for instance, is easier to use than Dragon's but is not as accurate, according to Steve McClure, a research vice president at International Data Corp.

"From the point of view of L&H, they're making a whole series of strategic moves to expand their market presence and accelerate revenues," McClure said, adding that the company dominates the speech technology telephony and retail markets. "Overall, they continue to strengthen their position."

The combined companies' competitors, which include Philips and IBM, face a formidable rival now, McClure added. "The other companies have very deep pockets, but this increases the level of competition for them. It will intensify the competition."

Philips upped the ante today by announcing that its speech processing unit and One Voice Technologies had signed a cooperation deal to work together on projects, licensing and marketing. The alliance will combine the speech recognition technologies of the two firms to develop speech recognition technology in 16 languages for personal computers, wireless and consumer electronics devices, Philips said in a statement.

L&H was primarily interested in Dragon's 170 engineers and research scientists, the companies said, although no immediate layoffs are expected. Dragon's Naturally Speaking will continue to be developed and marketed. Janet Baker, Dragon Systems co-founder and chairman, will join L&H's board of directors.

"We came to an agreement that it made sense to combine our resources, particularly our human capital resources, to achieve our goals quicker," said Bill Destefanis, senior director of product management for L&H, noting that commercial products have only been available since 1997, when Dragon released its first version of Naturally Speaking. "Frankly, it's an emerging technology, with an enormous upside."

The combined company will aggressively target the Internet appliance market, not just because of the expected growth of the area but also because cell phones and PDAs do not yet offer an easy way to input data, Destafanis said.

"Internet appliances have a problem in that they have a very constrained user interface capability," Destefanis said. "With wireless application protocols, you can publish information and push it down to PDAs and cell phones, but just try interacting with it-(and) you're limited to simple, binary responses."

The market for these devices is expected to grow from 11 million units shipped in 1999 to 89 million units in 2004, according to International Data Corp. The market will grow from revenues of $2.4 billion last year to $17.8 billion in 2004, according to IDC.

Speech recognition has been touted as a more intuitive and natural way to navigate software and interact with the PC, but the technology has been held back by a number of factors. Despite high profile support--Microsoft and Intel are major investors in L&H--from the PC industry, PC customers have shunned the expensive software because of its perception as difficult to use and ineffective.

The technology also faces challenges, with both PCs and more limited Internet appliances.

To work well, voice recognition software requires high-end hardware, with ample processing power and storage capacity. The advent of super-fast processors from Intel and AMD coming simultaneously with drops in memory prices was expected to boost sales of software from L&H, Dragon and their competitors, including IBM, which markets speech recognition software under the ViaVoice brand.

But PC users haven't yet flocked to the technology, and promised support in the consumer version of Windows has not yet materialized. For PDAs and cell phones, the challenges are in the hardware: It's not yet clear whether or when the smaller, less expensive devices will offer the resources to adequately run speech software.

In addition, high-profile industry figure Jeff Hawkins, who co-founded Palm and designed the original PalmPilot, has come out against speech technology, saying he doubts PDA users will ever speak to their devices as the primary method of data input.

For its part, Lernout & Hauspie says Internet appliances are ideal for speech recognition, especially data-enabled cell phones, because the keyboards are so cramped and difficult to use. The company has developed a prototype device, code-named NAK, which runs on the StrongARM chip from Intel and the Linux operating system, and is more than adequately powered to run the software, the company says.

"That's only a temporary roadblock," Destafanis said. "The point of NAK was that it used commercially available hardware. There will be many devices which will ship with the processing power, the storage capacity, and the operating environment to run speech software."

The combined companies will also target PC users, Destafanis said. "From a business opportunity, the numbers are very supportive. I can speak a lot faster than I can type."

Reuters contributed to this report