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Speech-recognition technology poised for a comeback

Like an echo from the 1980s, investors are once again singing the praises of speech-recognition technology.

Like an echo from the 1980s, investors are once again singing the praises of speech-recognition technology.

As PC sales took off in the 1980s, venture capitalists poured millions of dollars into voice-recognition technology on the expectation that it would become a "killer application" for people intimidated by complicated operating systems and applications.

But investor enthusiasm fell on deaf ears, as the technology proved too inaccurate and slow to be useful for ordinary consumers.

Today, however, a convergence of events--dramatic improvement in PC processor speed, the popularity of the Web, and surging use of mobile phones--once again has investors interested in speech technology. It's too early to tell whether the hype is outrunning the reality, but the early returns have been sweet for some investors.

Last week, for example, the debut of shares in SpeechWorks soared nearly threefold on the company's first day of trading. Priced at $20, the shares jumped to $56.75 and closed last Friday at $99.

Meanwhile, shares of Nuance Communication, another speech technology company, are up more that 700 percent since their debut several months ago. Nuance shares priced at $17 in April and now trade around $158.

Despite a strong performance by Nuance and SpeechWorks, some speech-recognition companies are facing less-than-stellar results.

Shares of Lernout & Hauspie Speech Products have fallen nearly 50 percent from their 52-week high of $72.50 last spring. Lernout & Hauspie, which closed at $35.38 on Friday, develops its technology for computers but has recently expanded into devices.

"When we invested in SpeechWorks in 1995, it was basically two guys out of MIT (Massachusetts Institute of Technology). I was very aware, when I did the deal, that for the last 15 years people who had funded speech companies had lost their money," said Axel Bichara, a general partner with Atlas Venture. "It was not an obvious category to invest in."

He was able to set aside his concerns when considering Moore's Law--that processor speed doubles every 18 months. It also helped that when he tried SpeechWorks' technology, it accurately interpreted his words, despite a heavy German accent.

"I believed that when the technology is ready and the applications are there, there would be a big market opportunity," Bichara said.

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Tom Hitchner, a general partner at Questmark Partners and an investor in SpeechWorks, said some concerns still dog speech technology, though they are easing. He noted that some late-stage investors and even high-profile investment banks expressed little interest in the SpeechWorks IPO.

"I'm sure in the back of their minds they were thinking this has been tried before and failed. I don't think they realized how far the capabilities had come," Hitchner said.

Not only has improved processing speed yielded more accurate results, but the popularity of the Internet and wireless phones is opening the door to new speech applications.

For example, Sprint PCS said Thursday that it is launching a service to allow nationwide voice-activated dialing from its mobile phones. Customers will be able to place calls by simply speaking a person's name or phone number.

Meanwhile, companies such as Tellme Networks have launched "voice portals" that allow people to talk into their phones to retrieve information on restaurants, movies, airlines, news and stock quotes.

"In the past 12 months, voice-portal deals have been coming out of the woodwork," said Hitchner, who estimated there are about 10 to 15 players in the market.

With the strong debut of SpeechWorks and Nuance this year, investors said they wouldn't be surprised if some of the voice portals are taken public soon.

"There may be a number of companies that try to take advantage of the success of the platform companies," Hitchner said. "Hopefully investors will be able to differentiate between the two."