Once-Vaunted Solution Never Grew to Expectations
The health IT market is littered with the bones of many a large company trying to break into this challenging arena. These bones are turning to dust: McKesson, dust; GE Healthcare, dust; Microsoft’s initial foray, dust; Google’s first attempt, dust. And now, IBM Watson Health.
Each of these companies had enormous resources at their disposal. Combined, they’ve spent billions in trying to penetrate and be successful in the healthcare market. Yet despite their size, their prominence, and their name recognition, none of them were successful. There is not a universal reason as to why they all succumbed, eventually throwing in the towel; each company had its own unique story.
The only universal truth that I can ascertain for all these companies is that they had two things going against them:
- Healthcare moves at a glacial pace.
- This is an extremely fragmented market, with subsequently high costs of sales.
The Case of IBM
Before I get started, let me just say I have a ton of respect for IBM, having worked closely with the company over the course of my career. But when it comes to entering the healthcare sector, IBM made a lot of miscalculations.
I recall a conversation I had years ago, shortly after Watson won Jeopardy!. At a local healthcare event, an IBM-er came up to me and asked about adoption of Watson in healthcare. The conversation went something like this:
IBM: We believe Watson has great potential in healthcare.
Me: What problem(s) will Watson solve in healthcare?
IBM: What problems do you have?
It was abundantly clear that IBM was seeking a market for Watson, but really had no idea as to what the most important problems were to solve. It was a technology looking for a problem – never a good place to start.
Secondly, IBM often made poor acquisition choices that did not meld together in markets served and problems addressed. Their biggest purchase was Truven, which they bought from P.E. firm Veritas, who, as one person put it to me, “…had squeezed that lemon dry” prior to IBM picking it up. Truven targeted payers and large self-insured employers, which fit IBM’s sales model.
Wanting to catch the PHM wave (which still sits somewhere out in the middle of the Pacific), they acquired Explorys and Phytel. Explorys, that was spun out of Cleveland Clinic, targeted large healthcare systems. Phytel, on the other hand, was a dated solution when IBM bought it and was targeted at smaller ambulatory practices.
Then IBM went out and acquired PACS vendor Merge, taking them into the radiology market.
Remember, I said healthcare is a fragmented market…
Well, it looks like IBM had plans to hit the whole breadth of healthcare: small ambulatory practices, large health systems, radiology departments, payers, and large employers. Talk about stretching yourself thin.
When you combine the above with unrealistic forecast models that were used to justify acquisition prices, you wind up with a recipe that is unpalatable.
But I cannot be too hard on IBM, for hindsight is always 20/20. The key faults in their strategy were simply being too enthusiastic about the potential opportunities this market presents, and not fully appreciating the fragmented nature of this market and its slow pace of adoption, which still exists today.
Coupling the above with the cruel reality that one must move on, IBM is taking the hit and releasing its Watson Health assets at a loss to yet another PE firm, Francisco Partners. (Note: IBM will keep Watson and continue exploring AI/ML opportunities for this technology in the healthcare sector.)
But don’t worry about Francisco; they are one of the more savvy PE firms in healthcare and will make money on this in time.
The likely scenario for Francisco is to break up and sell the assets. Merge will go to a radiology company that needs a neutral PACs solution, like Agfa, Siemens, Philips or Toshiba. Truven will be sold, maybe in pieces (it was never an integrated solution, as it was a combination of various assets Thompson-Reuters acquired before selling to Veritas). Explorys never gained traction – gone. Same fate for Phytel.
As for IBM, they made this small acquisition ($34B) in a company called Red Hat. Investors are anxious for IBM to fully capitalize on this acquisition and that is where the attention will be placed. Regardless of industry, the migration today is to the cloud, and Red Hat is perfectly positioned for that future transition.
So, no more meddling in healthcare for IBM going forward (except for aforementioned Watson AI/ML, cloud services and PWC consulting gigs). As of today, IBM joins the ranks of those that came before in attempting to capitalize on the healthcare opportunity and exiting years later, licking their wounds. IBM should not feel bad about this; they are in good company and not the first, nor certainly the last, to struggle with this challenging market.