Benjamin Farmer, analyst, Datamonitor

Q How has the global market for speech recognition changed in the last quarter?
A One of the most notable changes has been the restructuring that has become pervasive in the industry. In the US alone, SpeechWorks and Nuance reduced their headcount by 17% and 23% respectively, Intervoice and Syntellect underwent reorganizations, BeVocal gave up its hosting business, and General Magic closed its doors. Essentially, these restructurings, as well as various M&A activity, are a result of market players trying to isolate their value proposition and shed or purchase assets to achieve the desired product or service offering. In that sense, this is good news for the industry. Of course, we cannot overlook the fact that much of the impetus for this self-examination has been poor revenue performance. Similar activity is occurring across the globe. For example, vendors are increasingly taking on financial risk to secure deployments, to include performance-based pricing. We have also seen a slowdown in the number of full deployments. Many more customers are taking a wait-and-see attitude or pursuing a toe-in-the-water approach to speech technologies. This is much more the case in the enterprise space. While this represents a strong potential customer pipeline, it produces minimal short-term revenue. On the other hand, telcos worldwide are cash-strapped, and those that do invest in speech solutions usually deploy them across their network in the hopes of realizing incremental revenues. Q How does the rest of 2002 look?
A Not as good as we first expected, but not as bad as the first half of the year. Revenues through the end of Q2 were disappointing in the US, and guidance for Q3 is weak. The percentage rise in revenues from non-US markets that many vendors reported in Q2 are as much a reflection of the weaker US market as they are a reflection of higher growth rates outside the US. There are pockets of higher growth globally, including Germany, Italy, the Nordic Region and China. Nevertheless, we still expect to see only a modest uptick in global H2 revenues over H1, and therefore a minor increase in global 2002 revenues over 2001. Q Which countries are the strongest growth markets for speech recognition solutions?
A Well, as I alluded to, there are some short-term growth opportunities in Germany, Italy, the Nordic Region and China. That, of course, is not to say that these are the best markets for voice business vendors to enter. In the long term, we are very optimistic about the potential of the large call center bases in Europe and the unmistakable opportunity that 1.3 billion Chinese represent. Several other countries offer great potential for those vendors who have already set-up shop, but simply aren't worth investing in for those not already present. On a macro level, the US is and will remain the largest market for voice business, the large European service economies will fuel strong growth there as well, and China has the potential to experience remarkable voice business growth, if it can maintain its impressive overall growth rate. Q What important regional differences have you uncovered?
A One of the most interesting regional differences we uncovered was cultural reaction to voice user interfaces (VUIs). In two European countries end-users simply do not react as expected to voice prompts. This has required several vendors to dedicate extra resources to developing VUIs that match regional speaking patterns and expectations. Another very important regional difference is route-to-market. This differs country by country. In some cases, global systems integrators have a strong position in the market and are a good partnership opportunity. In other markets, voice business vendors have to do all the legwork, but also maintain ownership of the customer. Other routes-to-market include global IVR players, local IVR players, local SIs, local outsourcers and local telcos. We found that route-to-market was one of the fundamental unique aspects of each market. Q List a few speech applications from non-US markets that you found to be most interesting.
A Ah, the fun part. There are certainly some creative applications on the market. For instance, we are impressed by the number of voice authentication applications in place in Brazil. While Datamonitor doubts Brazil will be the largest market for this technology, Brazilian banks in particular seem to be eager early adopters. One niche, but successful, application is the automated taxi reservation system VeCommerce has deployed a few times in Australia and New Zealand. This application is most interesting because it represents the wide range of enterprises that can benefit from VUIs. Also interesting, there has been a resurgence of infotainment voice portals in Italy, which, now that the content better matches the populations' interests, will be interesting to keep an eye on. Finally, in the future we are expecting some interesting multimodal applications to emerge in Japan, as 3G services slowly become a reality. Q What one mistake should vendors who are seeking to increase their international presence avoid?
A Well, the first thing to remember is that every market is unique. Certain markets may share a common language or have similar commercial bases, yet each market requires a specialized approach to achieve success. With this in mind, there is essentially one mistake that can set an entire market back, and one mistake that can stunt a particular vendor's success in any new market. To date, at least four markets have been tainted by poor applications that were deployed without taking into account the cultural factors of that market. Korea and France come to mind, for instance. In both countries, vendors deployed applications that simply were not successful, and in doing so these vendors tainted public and corporate perceptions of the benefits of a VUI. Only now, in both countries, is speech starting to regain momentum. Regarding individual voice business vendors, to ignore local players is to shoot oneself in the foot. Not every multinational speech vendor needs to partner with a local speech engine vendor or IVR vendor. However, close relationships with local vendors can yield improved knowledge of local human factors and local credibility. Local vendors are not always an important route-to-market, however they are vital to succesful internation expansion. Q Who should speech vendors be partnering with to enter new geographic markets?
A Well, frankly, it differs country by country. I've already mentioned the usual suspects: global SIs, local SIs, global IVR vendors, local IVR vendors, local telcos and local outsourcers. Of course, in each market, only one or two of these routes will yield success. The key is knowing which one. There are also some blips on the map. For instance, in at least one market local multinationals are the only route-to-market. They have the existing local relationships without which a non-local voice business vendor is simply out of luck. Q Tell me a little bit about where the global market is headed.
A It's growing, which is good news. It is also going to become less US-centric, which creates a myriad of new opportunities for those who can successfully become multinational voice business vendors. Moreover, as markets grow, many local voice business vendors will not need to look beyond their borders to realize sufficient revenue. Of course, certain markets are going to remain volatile, and macroeconomic factors may inhibit uptake of voice business solutions. One obvious example is Brazil. Overall, The US is clearly the largest voice business market globally and will remain so through 2007. However, the rest of the world will not ipso facto follow the leader. Local factors will create significant opportunities for those vendors who understand how to take advantage of these conditions on a country-by-country basis. Benjamin Farmer covers the voice business market as an analyst with Datamonitor in New York. He can be reached at bsfarmer@datamonitor.com. If you have further questions or would like detailed information about the report, please contact Sarah Person at sperson@datamonitor.com.