Creating a successful company in any industry is a challenge, but the unique characteristics of the Internet make it particularly difficult.
Still, e-health is considered by many to be the most promising hope for the information- and service-driven healthcare industry. Due to its sheer size, even a small increase in efficiency can produce billions of dollars in savings.
Since the Internet has only existed in its current form for about 7 years, there is tremendous uncertainty about how to create a profitable Internet business. Popular trends wax and wane, and a company lucky enough to catch one can see tremendous, albeit temporary, success. What will support a start-up in the long term are its fundamentals.
We have identified 4 fundamental factors that seem to be the most important in predicting the success or failure of an Internet company.
These are: (1) a compelling value, (2) an unambiguous revenue model, (3) competitive barriers to entry, and (4) organizational structure for cost control.
A Compelling ValueSuccessful Internet companies need to offer many times more value than traditional alternatives. The entire Internet economy is in a constant state of flux, with products and services rapidly changing. This creates a tremendous uncertainty for consumers because of rapid vendor and service turnover. As a result, Internet consumers are very risk averse and often prefer to adopt a wait-and-see attitude before buying. This can be devastating for a young company because it slows sales and adds to sales overhead. To overcome this, start-ups must ensure that their product has clear, compelling, and undeniable value. A product that is merely an improvement isn't enough to overcome consumer skepticism. A successful product needs to be a quantum improvement above anything else available.
Internet music-swapping service Napster is a good example of how compelling value drives growth. The service allowed users to download and listen to thousands of music files. The music files were of high quality, could be downloaded quickly, were available in great diversity, and were free. The alternative was a trip to the music store, which took more time, offered less selection, and was more expensive. For consumers, Napster was clearly superior. This compelling value accounted for the success of the service, which grew from 1.1 million to 6.7 million users in only 6 months.The service was later found to violate copyrights and was shut down by court order. Nonetheless, it is still a fine example of how compelling value can drive Internet growth.
Of the industry segments analyzed in this article, health information portals and comprehensive health sites did well at offering compelling value. These companies are providing patients and doctors with information and services that were unavailable before the advent of the Internet. During the recent anthrax scare, the Internet was the first place many people went for information about this formerly obscure bacterium.
By contrast, online drugstores failed at providing compelling value. They never gave consumers any reason to abandon their corner drugstore. For potential customers, breaking off a relationship with a pharmacist, having to wait days for delivery, and having to worry about online credit card security were sacrifices too great to justify the slight cost savings.
An Unambiguous Revenue ModelReliance upon unproven and risky revenue models contributed greatly to dot-com bankruptcies after 1999. Executives thought they could give away costly services for free and recoup losses with questionable revenue sources like banner ads. Not only did these companies fail, but they also conditioned a generation of Internet users to expect free services, making the business environment much more challenging. To succeed in this environment, tomorrow's executives must have a clear and unambiguous revenue model. They must diligently investigate their industry, know exactly where and how they intend to earn revenue, and understand the interests and incentives of their customers and competitors.
The online pharmacies and the health information portals failed here. The pharmacies did not understand that insurers are involved in 80% of prescription purchases and therefore viewed the start-ups as competition. The information portals revenue model was based on banner advertisements and depended on huge amounts of traffic and high banner rates. When rates dropped, the fates of these companies were sealed. The exception, of course, is MDConsult.com, which relies on subscriptions instead of ad revenue.
The strongest example of sound revenue models is the comprehensive e-health site WebMD, which has diversified revenue streams and thus protects itself from financial disaster should any one source of income disappear. The core revenue sources, physician practice management and transaction processing, are relatively stable once secured. Furthermore, revenue is based on licensing and/or service fees that are unlikely to change much with time.
Competitive Barriers to EntryAn enterprising entrepreneur can launch a Web-based company with a few thousand dollars and a good idea. With start-up requirements so modest, it is a virtual certainty that any successful Internet company will face hordes of copycats unless it can implement some form of lasting competitive advantage. Internet directory Yahoo is a fine example. Built by human beings, it differs from machine-generated directories and has a unique usefulness. Any would-be competitor must hire thousands of employees to surf the Web and build the directory manually. The longer Yahoo is in existence, the bigger its directory, and the larger the capital outlay for any new competitor. After nearly 6 years and millions of Web sites evaluated, such a task is nearly impossible.
Most of the companies discussed succeeded with this factor. The health information portals assembled a staff of knowledgeable medical writers who could produce high-quality articles. Competitors would need a large amount of start-up capital to hire a comparable staff. The comprehensive e-health site WebMD erected a formidable barrier to competitors by their sheer size and diverse set of assets. Smaller competitors would have to overcome its economies of scale.
The online pharmacies did not successfully create competitive barriers. Soon after their well-publicized launches, PlanetRx and Drugstore.com were besieged by both low- and high-end competitors. On the low end, discount brokers such as DestinationRx.com offered discount pharmaceuticals at lower prices than PlanetRx and Drugstore.com could. On the high end, CVS and Walgreens offered more complete service and local pickups. Squeezed between these 2 groups with no real differentiating factors, PlanetRx and Drugstore.com had nowhere to go.
Organizational Structure for Cost Control Internet leaders in the late 1990s thought that the most important predictor of future success was market share. Oftentimes, sound financial prudence was sacrificed to achieve greater market penetration. The promise of the Internet has always been to offer information and services to many customers at very low cost. Companies that succumbed to the temptation to spend lavishly soon found that they were short on cash and had to sell out or declare bankruptcy. Companies that had a rigorous organizational structure for cost control focused their spending on projects that were strategically important and offered solid returns. With cash in reserve, they were well equipped to survive economic disruptions and downturns.
Lack of an effective cost-control mechanism has been a critical problem in all of the industry sectors we have examined. Many of the companies adopted a "culture" of loose spending that was common at the time within the Internet industry. Extravagances such as fully equipped gyms, thousand-dollar Aeron chairs, and offices in the most expensive locales possible were seen as prerequisites to being a legitimate Internet company.
Many companies also succumbed to the rather erroneous notion that generous spending on advertising would automatically result in increased Web site traffic and hence increased revenue. Too often, marketing plans were approved that failed to offer adequate returns to justify their cost. Overspending on sales and marketing was a chronic problem for the online drugstores, health information portals, and WebMD.
Health info portal MDConsult is the one successful cost-control example. This is likely attributable to oversight of corporate owners which provided guidance and financial discipline.
Four Factors That Predict Future PerformanceWe have used our "4 factors" criteria to analyze 3 separate e-health market segments. This analysis is shown in Table 5. There is a definite trend for companies that achieved more of the factors to have performed better than those that achieved fewer.
A company that manages to secure all or most of these factors will have a lot behind it as it strives to build a profitable business. Physician reference site MDConsult.com is a wonderful example. With a unique and valuable product and disciplined spending, its future seems promising. This is the type of company that will grow itself and continue to grow, despite minor mistakes and setbacks that inevitably occur in a company's history.
Start-ups that have achieved only 3 of the factors face more challenges.
Success is possible, but there is little room for error. WebMD is a company that falls into this category. It has an impressive array of e-health properties that allow it to offer a bundle of services that nobody else can. It also has paying customers and an annual revenue stream of hundreds of millions of dollars per year. Its uncontrolled spending introduces a great deal of uncertainty into its future. This 1 missed factor turns a sure winner into a calculated gamble at best. Suddenly, success depends on whether its cash reserves will last. WebMD may very well overcome these issues with time, but its missing strategic factor has made success much more challenging to achieve.
E-health companies that have more than 1 missing factor are at a severe disadvantage. Their fundamentals are so flawed that even the most solid backing may not lead to success. The online drugstores come to mind. They had the best executives, the backing of leading venture capital firms, world-class strategic partnerships, and hundreds of millions in financing. In the end, none of this mattered and the companies still failed.
Future Opportunities Despite the widespread failure of e-health and other dot-com companies following the burst of the Internet bubble in 2000, the potential for e-health to streamline and improve medical care remains excellent. Even a small improvement in efficiency can produce tremendous savings for healthcare consumers and produce rich profits for enterprising start-ups.
The first generation e-health companies, like Internet companies in other industries, are mostly gone. These companies lost billions in value; thus, the lessons learned have been very costly ones. A new generation is emerging and can benefit from the mistakes of the earlier pioneers. Executives of these companies should study the past and take a hard look at their business plans. If their strategies offer compelling value and unambiguous revenue, create competitive barriers, and control costs then they are well on the way to building a successful Internet start-up and securing a promising future for their ventures and themselves.