Web MD's real business: selling demographic information
cbs.marketwatch.com
Tom D
Commentary
E-commerce health check-up
Healtheon and WebMD deal dissected
By Rebecca Lynn Eisenberg, CBS MarketWatch
Last Update: 11:33 AM ET May 24, 1999
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SEATTLE (CBS.MW) -- This week's mega-billion-dollar Internet merger seemed
inexplicable at first.
Why would Healtheon Corp. (HLTH: news, msgs), a healthcare
industry enterprise software and services provider, pay almost $10
billion for WebMD, a money-bleeding healthcare-oriented online
community for consumers?
It was not the money-hemorrhaging nature of WebMD that gave
me pause. After all, among the numerous Net firms boasting market
caps in the billions, precious few of them have ever seen a profit.
Rather, what was most baffling about WebMD's multibillion-dollar
valuation was its usual combination of extreme youth and almost non-existent revenues.
WebMD officially launched a mere seven months ago, in October 1998. And, during the
first nine months of that year, the company brought in a paltry $75,000 to balance its
losses of $7.8 million.
Fit market?
Not that WebMD's business seemed the least bit profit-generating, from the way it
described itself, as a provider of communities and "healthcare information" to consumers
for free, and selling "services and information" to "physicians." Physicians don't make an
attractive market, in these HMO-heavy times.
So I spent an afternoon at the WebMD Web site, WebMD.com, where I found the
answer. WebMD's true business, according to the "privacy statement" hidden two levels
into this site, is that of collecting demographic information from its information-seeking
consumer membership and selling it as market research and targeted advertising to drug
manufacturers, medical equipment makers, health insurance companies, government
agencies and private businesses seeking to minimize risk.
As nefarious as that revenue model might seem to privacy-seeking consumers, it sounds
equally magnanimous to profit-seeking investors.
According to WebMD's COO Jay Gilbertson, WebMD doesn't currently sell market
research to insurance companies, but it does "intend to do so over time." The company
also intends to give notice of such intentions, said Gilbertson. The company's business
model also includes revenue from e-commerce, advertising, subcriptions, claims
transactions and other services, he noted. Although WebMD's base suscription for
physician costs $29.99 a month, the company hopes to sell added services for $400 a
month.
Regarding consumer memberships, Gilbertson pointed to WebMD's existing community
devoted to discussion of Hepatitis C. "Right now Hepatitis C is our largest community,
with 33,000 registered members," he said. "The total population of people who have
Hepatitis C is believed to be 180,000, and there are only four drugs to treat these
people."
Thus, WebMD struck a $5 million deal with Amgen (AMGN: news, msgs), the world's
largest biotechnology firm, whose product line includes hepatitis C treatment Infergen.
According to Gilbertson, Amgen will not only use WebMD's services to sell its
treatments, but will also leverage WebMD's hepatitis C community to "recruit people for
clinical research." All with their agreement, of course.
Bad prescription
However, WebMD's Web site seems almost purposely designed to mislead its true
purpose. Enticing new visitors with the promise of a "health and wellness center," it urges
first-time guests to "join a community," "ask our experts," or participate in posting boards
and chat, without warning them that they can do none of the above without first providing
a zip code, working e-mail address and zip code.
Chances are that a user will select a "member community" representing their most pressing
health concern -- such as Alzheimer's, asthma, impotence, uterine fibroids, schizophrenia,
hepatitis C, smoking cessation, allergies, weight control, depression or diabetes, among
others -- before learning that her selection will form a body of consumer research to be
sold off to customers, including her employer.
Similarly, a new user more likely will have already posted a message that they later regret
before finding the privacy statement and learning that "messages posted … can not be
removed … " For people who demand a greater level of privacy, the statement merely
advises that "there are several" anonymous e-mail services available, and fails to provide a
Web link even to one.
What results is a system optimized for the collection of consumer data, which while
purportedly sold only in "aggregate" form, is nonetheless sold, and not for cheap.
Although it was far from forthcoming about this fact to its consumer community, WebMD
undoubtedly exhorted its revenue-generating potential to every potential strategic partner
within earshot.
They lined up. Lycos (LCOS: news, msgs) and E-Trade (EGRP: news, msgs) acted
quickly, and were able to share in some of WebMD's marketing advantages virtually for
free. But this window of opportunity quickly closed.
By early April, WebMD had the clout to compel a $220 million fee from the country's
leading chemical company, Dupont (DD: news, msgs) in exchange for an exclusive
five-year appointment as the sole provider of "life sciences content" on the WebMD site.
Lifeless content
Notably, the "life sciences content" that Dupont bought rights to provide had little in
common with life, science, or even content. Rather, as defined by the companies' public
statements, it consisted of all "information about prescription products, over the counter
medicines, food, medical supplements and medical foods." In other words, items to be
purchased rather than read -- which, of course, constituted all "content" on the site.
At bottom, the Dupont "alliance" was no different from the e-commerce partnerships
routinely collected by portal giants AOL (AOL: news, msgs) and Yahoo (YHOO: news,
msgs). Except WebMD was able to look legitimately like a scientific site devoted to
medical content, and thus charge more.
The Dupont deal could have cast some much-needed light on WebMD's unique blend of
medicine and marketing, had anyone outside of tech and insurance industry boardrooms
good reason to care.
The boardrooms cared. When Healtheon announced its purchase, six other big league
players announced that they were claiming an equity share in the post-merger firm,
WebMD.
These companies included Microsoft (MSFT: news, msgs), which
grabbed the biggest stake of equity with a $250 million investment
(plus another quarter-million in marketing and subscription
scholarships). Another $110 million was contributed by Insurance
consultancy Superior Consultant (SUPC: news, msgs),
e-commerce chip-maker Intel (INTC: news, msgs), Japanese
venture capital firm Softbank, Web portal Excite (XCIT: news,
msgs), broadband Internet access provider Covad (COVD: news,
msgs), all of whom were able to put aside their differences (and
direct competitions) to share in a good investment.
All those companies probably saw the way that medical inventory
is even more expansive, arcane and diverse than books, and thus
perfect for e-commerce. They also suspected that recurring medical prescription revenue
would likely be at least as dependable as those generated by pet owners buying food.
Further, they most likely understood the way that medical information lends itself perfectly
to personalization, and thus direct sales.
Most of all, however, they must have seen the business-to-business sales opportunity with
WebMD. After all, what does the insurance industry crave more than demographic
information that will help it reduce risk?
Salted wound
And that is the $10 billion rub of WebMD. How much is an endless stream of
health-related demographic information worth to a company that sells database software
and enterprise consulting services to insurance companies?
Healtheon's answer was clear. Maybe now WebMD's true purpose will be clear as well. |
