Striving for the Top of the Food Chain in the Smart Home’s Explosion

The past two Consumer Electronics Shows have been defined by smart speakers—the Amazon Echo in 2017 and the Google Assistant in 2018, and those are just the tip of the smart home iceberg. Apple’s recent entry into the market makes it the final hardware-producing FAANG (Facebook, Apple, Amazon, Netflix, and Alphabet’s Google) member to join the competition, and the countless consequent devices designed to interact with the budding universe of smart speakers means that there is no shortage of gadgets for eager consumers to integrate into their home ecosystems. This explosion of smart devices brings the Internet of Things (“IoT”) one step closer to household ubiquity. That is, we are accelerating towards a future where the interconnectedness of each part of the home—from our speakers to our locks—is so commonplace that we don’t even think about it, just like we no longer think about the number of electric appliances in our homes.

In this brave new world of talking toasters, however, the ultimate prize for Amazon, Google, and Apple is not producing the best-selling smart speaker. Rather, the real reward is owning the operating system (“OS”) of the IoT. That’s Alexa, Google Voice, and Siri instead of the speakers that sit in your corner. Companies seek to own the OS because as technology becomes increasingly available to consumers, hardware is commoditized (see Moore’s Law), while the OS remains an infinitely scalable intermediary between the hardware and all of the software, not to mention the first customer touch point. Additionally, operating systems create strong network effects. That is, as an OS attracts more consumers, increasing numbers of hardware and software developers build their products for the OS, further entrenching the OS’s value at no cost to the OS provider. Think of Microsoft’s cash machine as Windows rose to personal computing dominance in the 1990s versus computer manufacturers’ constant, painstaking race to cut costs while also improving product quality.

An OS for the IoT dovetails with each major contender’s corporate strategy in unique ways. Running the home would make an Amazon shopping cart ambient. Realize you’re almost out of paper towels as you clean up a spill? Ask Alexa to order more, and they’re on your doorstep tomorrow, assuming you have Prime Delivery of course. For Google, the world’s largest marketing company (serving about 30 billion impressions per day), a commanding position in the home would make the data that it sells and mines that much more robust; it would also complement the company’s Nest Thermostats, which are already a cornerstone of many modern homes. Finally, Apple occupies a slightly different lane in this race. Keeping with its heavily integrated, high-end product strategy, Apple is not selling its Home Pod at a loss, and it is not nearly as quick to open the Siri Home OS to every “smart x” manufacturer in Shenzhen as Amazon is with Alexa. The Home Pod is yet another stake in Apple’s integrated ecosystem, the heart of which is the iPhone.

At this junction, then, all of the key players in the smart speaker industry have defensible, differentiated motives to control the smart home’s OS. A key question, however, is whether there will actually be a dominant OS for the IoT. Benedict Evans, partner at Andreessen Horowitz, asserts that the answer could well be “no.” His argument is two-pronged.

  • First, if smart technology’s ubiquity is the end game, will people need to interact with their connected devices at all, let alone through smart speakers? Consider smart locks, for example. If we want them to automatically unlock our doors as we approach our homes and lock them as we leave, wouldn’t our phone’s OS be a better contender to control our locks than the OS that tells us what is running low in our fridge?
  • Second, very few people are going to invest in every piece of a smart home all at once. This means that while it is easy for people to say “Wouldn’t it be nice if every part of my home were connected?” it is much more difficult for most people to say “I’m going to buy a new refrigerator, television, dishwasher, dryer, and redo all of my light fixtures.” Smart device manufacturers realize that many consumers are not fully integrating their homes, at least not all at once, and are consequently creating contraptions that can stand alone as customers’ sole smart machines. This array of ecosystem-free devices runs on countless different operating systems, which means that the smart home OS status quo, while flush with dominant players, is still heavily fragmented. The smart home ecosystem, then, does not necessarily need to be unified by a singular OS and is currently distributed across countless operating systems according to the whims (and demands) of each individual hardware manufacturer.

Today’s fragmentation may give way to tomorrow’s hegemon, such as when Windows rendered DOS and IBM/OS obsolete, but the future is far from certain. Thus, while many of tech’s high-powered players have stepped up to the plate, the game for in-home IoT dominance is still in its early innings—and it isn’t even clear whether there will be a winner.

Learning Puts on its Gameface

If you ask an elementary school student if they would rather read a textbook or play their favorite game, I bet you can guess the most common answer. Fortunately, an increasing number of opportunities exist to bridge the gap between learning and fun. As an education investment bank with 15 years of history serving clients in the quickly evolving education space, MHT Partners is ever focused on the different learning methods at play in today’s modern classroom. One such approach loved by educators, parents and students alike is digital, game-based learning.

The game-based learning market has evolved over the last several decades. The origins of learning games trace back to the 1980s, when early computer game software was developed for children. School subjects quickly began making an appearance in children’s computer games: Math Blaster entered the arcade game scene in 1983, Carmen Sandiego (who taught geography) entered the videogame market in 1985, and by the 1990s, Mario Teaches Typing was prevalent on computers in many elementary schools!

Fast forward to 2018, the appearance and delivery of game-based learning has changed quite a bit since its humble arcade origins. Now, gamification of learning represents much more than Mario and a keyboard. Children have new devices on which to play games as well as to access a much broader range of supplemental, and even standards-aligned, curriculum in games. Parents and teachers can select game-based content online and via apps that has child-safe certifications, and in many cases, monitoring capabilities.

Another significant factor in the evolution of game-based learning is its place in the classroom. Following a huge push for personalized learning from legislative leaders and educators, the demand for quality digital curriculum and classroom-based technology has grown exponentially. One indicator of this trend is evidenced by the install base for Chromebooks in K-12 education, which grew 225% in just two years , (2014-2016). As technology becomes more pervasive in the classroom, more opportunities arise for new digital curriculum, including educational games to improve learning. With digital game-based learning applications in the classroom, a teacher can provide not only a personalized learning environment, but also a fun experience!

Several companies have started flourishing in classrooms and homes with online educational games serving a wide spectrum of ages, subjects, skill levels and technology devices. Even traditional education publishers are taking notice of this space. In 2017, Scholastic acquired Ooka Island, an adaptive, game-based program that develops early reading skills. McGraw-Hill Education acquired Redbird Advanced Learning, a digital personalized learning provider for K-12, in 2016.

Digital game-based learning is not without its challenges. These include concerns around equality in student accessibility to technology as well as the difficulty of aligning game content to the myriad of curriculums and standards across the U.S.

Despite these challenges, game-based learning has the potential to enhance student learning outcomes with its one-to-one learning applications, and more importantly, to coalesce education and fun. Without even realizing it, students are empowered to learn textbook material from that fun game they’ve been playing on their tablet for the last two hours!

Why Private Equity is Turning Its Attention to Gastroenterology

M&A activity between physician practices and private equity investors has evolved meaningfully over the last several years. Coming out of the Great Recession, investors pursued consolidation, administrative optimization, and networking improvements in specialties such as dentistry, dermatology, physical therapy, and anesthesiology. Today, having written the playbook for successful partnerships with physician practices, investors have begun identifying the next wave of attractive specialties in healthcare services to implement proven investment strategies.

Recently, gastroenterology and endoscopy (collectively “GI”) has emerged as an area of interest for private equity investors focused on U.S. healthcare services. Gastroenterologists nationwide are receiving calls from investors, and it is easy to see why: the rationale for investment in GI is underpinned by a strong market, macroeconomic factors, industry trends, and local considerations.

As is true across the private equity investment landscape, financial markets continue to provide attractive sources of capital to investors, driving competition for attractive opportunities. Favorable debt terms (e.g., low interest rates for high-performing businesses) support strong overall investor demand. Furthermore, private equity “dry powder” – the amount of dedicated funds that private equity investors are committed to deploy – continues to grow. Many firms also face looming investment deadlines as a result of fund structures that require the timely deployment of capital in order to meet investor commitments.

At the macroeconomic level, GI services are poised for growth. A high incidence of colorectal disease in the U.S. drives patient volume to GI specialists focused on screening, preventative care, and treatment, and over the last two decades, patient flow has been augmented by the nationwide increase in chronic conditions such as diabetes, obesity, and high blood pressure. As the population ages, demand for GI services will far outpace other areas of the economy.

Additionally, GI stands to benefit from attractive industry dynamics, such as the widespread adoption of physician-controlled endoscopy centers. Endoscopy centers and ambulatory surgery centers (“ASCs”) expand the breadth of physician control over the procedure, the delivery of care, and ancillary services, in addition to keeping patients out of more costly hospital facilities. The gamut of procedures approved by the Centers for Medicare & Medicaid Services (“CMS”) for outpatient care settings favors GI, as does the fact that the specialty operates as an important provider of preventative care.

GI service providers are fragmented as well. A handful of regional groups compete with many smaller local practices. GI businesses of scale (50+ physicians) exist in many large metro areas, though few industry players are able to achieve leverage with payors at the national level. Large practices will benefit from local consolidation, while smaller independent practices will benefit from a centralized administrative infrastructure that lowers cost.

Audax Private Equity initiated the first notable private equity investment in GI by establishing a partnership with Florida-based Gastro Health in March 2016. More recently, Dallas-based behemoth Texas Digestive Disease Consultants (“TDDC”) announced it was seeking a strategic partner. Washington Gastroenterology, the 2018 merger of four GI leaders in the Seattle area, exemplifies GI practices realizing the benefits of local scale. MHT Partners believes that these bellwether transactions, increasing awareness among gastroenterologists in regard to their strategic options, and the factors described above will combine to drive attractive M&A opportunities for GI practices in the near future.

If you’ll be at Digestive Disease Week in Washington, DC June 2-5 and would like to arrange a meeting please email Alex Sauter (asauter@mhtpartners.com).

The Evolution of Wellness Programs to Wellbeing Programs

Employee health and wellness have long been a focus for employers, but how they address it has changed in recent years. As more and more employers understand the benefit of implementing well-designed wellness programs, there has been a shift in focus from basic employee health to overall employee wellbeing.

For employers, employee wellbeing helps solve a range of issues from curbing absenteeism and sickness to reducing healthcare-related costs. Successful wellbeing programs can also drive employee engagement, boosting overall productivity and employee retention rates. Health Advocate estimates that stress costs U.S. businesses an estimated $300 billion annually in lost productivity, while obesity-related healthcare expenses are expected to cost the U.S. $344 billion in 2018. These staggering numbers provide a strong financial incentive for employers to continue improving their corporate wellbeing programs.

For employees, the evolution of basic health plans to overall wellbeing can be beneficial in more ways than one. Employers today are taking a more holistic approach to managing wellbeing, covering areas beyond just health. This can include things like health and fitness, financial stability, personal growth, and mental health. Focusing on these areas improves overall wellbeing, driving productivity by reducing intangibles like stress or personal issues. Further, this approach is more preventative and aims to reduce the need for healthcare altogether.

New technology also continues to improve wellbeing programs, making it easier for employees to participate and drive overall engagement. Starting with wearables and the gamification of fitness tracking, new devices allow participants to track daily lifestyle habits and earn rewards for reaching certain milestones. For example, a client of ours, the ITA Group, a global engagement solutions expert focused on creating authentic, lasting emotional connections between organizations and their people, offers its Strive5 solution which emphasizes the five key areas it believes affect employee health and wellbeing: performance, career, wellness, social and community. Strive5’s proprietary technology supports ongoing data aggregation from the user’s recognition, performance and wellness initiatives to provide unprecedented visibility into his/her overall success.

Additionally, more and more programs involve a mobile app that can offer services ranging from life coaching to sleep tracking and meditation. These tech-enabled programs are more interactive, increasing participation rates across all demographics.

With all the ongoing interest in the space, there has naturally been a large amount of M&A and fundraising activity in the sector. Investors and corporations alike are drawn to the recurring and scalable nature of these wellbeing program providers. In 2017, digital health solutions providers such as Solera Health, Omada Health, Sharecare, and Jool Health have raised over $100 million in venture capital and growth equity. MHT Partners is very familiar with the investor interest in this space, having recently worked with ITA Group to pursue acquisitions in the space, including an acquisition that closed last September.

Bottom line:  wellbeing programs can provide enormous advantages to an organization, including increased employee retention, improved participation rates in wellness and training options and improvements to both earnings and revenue.

Retail’s Recent Interest in Healthcare Insurance Tie-Ups

In this two-part series, members of MHT Partners’ Consumer and Healthcare Practices analyze the impact generated by several proposed mergers/acquisitions between retail pharmacies and commercial insurance groups.

Part I: What it Could Mean for Your Wallet

The last 18 months have seen an abundance of mergers and acquisitions across the board, however few deals have garnered more interest and caused more confusion than the recent spate of tie-ups between traditional retailers like Walmart and CVS and commercial insurance payors like Humana and Aetna. While the success of these transactions will remain unknown for now, MHT believes that these creative combinations have the promise to deliver cost savings to consumers and make healthcare more accessible to the masses.

Leading this round of M&A is CVS Healthcare Corporation’s proposed acquisition of healthcare insurance giant Aetna Inc. That’s right, the nation’s leading drugstore chain with nearly 10,000 locations wants to buy one of the third largest health insurance companies with over 46 million subscribers. The deal is currently being reviewed by federal regulators, however many experts are bullish on the tie-up receiving the green light, in contrast to Aetna’s failed attempt to acquire major competitor Humana and Walgreens’ failed attempt to acquire Rite Aid. Regulators deemed that those proposed acquisitions would ultimately reduce competition in their respective markets (although Walgreens is buying 1,932 Rite Aid stores). A combined CVS-Aetna represents vertical (as opposed to horizontal) integration in the increasingly complex healthcare industry and quite possibly a remedy for declining performance in the non-healthcare aisles within CVS. It is important to note that the two companies are not recent acquaintances, as CVS has been managing Aetna’s pharmacy benefits program since 2010.

So what would this merger mean for consumers? MHT Partners weighs in on a combined CVS-Aetna from the retail and healthcare angles:

Pharmacy departments have long been the golden geese of drug stores, providing high margins and drawing customers through aisles of otherwise undifferentiated merchandise. Whether or not consumers realize it, the non-pharmacy / non-clinical “front end” of CVS, and many other retailers, has been in decline for many quarters, as measured by same-store sales, and in the current retail environment, opening new stores is not a solution either. Tobacco products are several years removed from its stores and CVS has been struggling to backfill its assortment with high margin, high velocity products, mostly through expanding its personal care and beauty sections. The company began to offer same-day and next-day delivery from stores this year to compete with Amazon.com. Further refining its assortment, customers can expect more fresh produce and grab-and-go meals and snacks, appealing to health-conscience consumers trying to avoid packaged foods. Longer term, consumers should expect fewer shelves and fewer traditional aisles, as CVS will leverage more of the store footprint for its MinuteClinics and additional clinical services. Lastly, don’t forget the power of big data! Combining the vast databases from CVS’ ExtraCare loyalty program and Aetna’s subscriber health records is a holy grail for data-driven marketers.

Part II: What it Could Mean for Your Health

To be continued . . .

MOOCs: Expanding Education for the Lifelong Learner

Massive Open Online Courses (“MOOCs”) have come a long way since they were first developed six years ago. What once began as free online courses provided by just a handful of universities has now developed into an impressive 9,400 courses with participation from more than 800 universities. MOOCs were created with the goal to increase access to higher education globally. However, as the popularity of the programs grew, educators began to worry that MOOCs’ online approach and (initially) free courses would shake up traditional teaching pedagogies and disrupt the post-secondary education system.

However, as MOOCs have developed, they’ve turned out to be less of a threat to higher education and more of a supplement. As the job market changes and technology becomes obsolete, continued education has become essential to maintaining the necessary skills required for tomorrow’s jobs. MOOCs have (whether intentional or not) met the demands of this evolving trend, providing an effective solution to what has become their largest customer segment: lifelong learners.

Lifelong learners are turning to MOOCs to deepen and refine their skillset. MOOCs provide flexibility through their easy-to-use online model (many classes are self-paced) and offer classes at every price point. Furthermore, they provide an extensive and diverse selection of topics. Providers, such as Coursera or edX, offer classes on nearly everything – topics range from traditional college courses, such as Psychology or Russian History, to classes covering entrepreneurship or even critical thinking. By enrolling in a MOOC, users can learn the skills needed to succeed regardless of what stage of life they’re in, making MOOCs an attractive option for continued education.

As platforms advance and quality content becomes easier to develop, MOOCs have never been better equipped to serve professional and lifelong learners. In fact, MOOCs are incredibly well positioned to capitalize on the large professional development and continuing education market, as they provide a unique service offering compared to that of traditional corporate training. Professional development can be expensive and keeping up with new technology is no trivial task. MOOCs provide a manageable and cost-effective option for acquiring the combination of skills needed to achieve career growth, making it easier for someone that doesn’t have time for formal education or whose employer isn’t ready to foot the bill.

The rise of lifelong learning is certainly heralding a time of transformation and development throughout the MOOC landscape. The number of paying users is outpacing the number of non-paying users, and total business and technology classes now comprise 40% of courses. The MOOC market is shifting, and although the market’s rapid growth has cooled off in recent years, MOOCs aren’t going anywhere. Instead, they are on the cusp of a critical, transformative phase, developing to best serve the needs of their largest and most lucrative end market.

 

Source: Class Central

The Benefits and Increasing Prevalence of Ambulatory Surgery Centers

The first Ambulatory Surgery Center (“ASC”) was established in the 1970s by two Phoenix, AZ-based physicians seeking to “provide timely, convenient, and comfortable surgical services” to patients.1 Today, as the healthcare industry collectively seeks to drive down costs, improve patient health outcomes and overall satisfaction, ASCs have become an increasingly common option for both outpatient and higher acuity surgical procedures.

Economic efficiency and a focus on value-based care are the foundation of ASC’s value proposition across the continuum of care. Recent data published on the cost effectiveness of ASCs supports the notion that ASCs are often a more cost-effective alternative to hospitals for both patients and employers. A 2016 study from the Ambulatory Surgery Center Association estimates that $37.8 billion is saved annually by utilizing ASCs as opposed to hospital outpatient departments.2   Additionally, advances in technologies have made outpatient care in ASCs an increasingly viable option for complex procedures that have historically been performed in hospital settings. This shift in patient volume to ASCs, among other factors, has resulted in many health systems opening their own ASC, or seeking ways to form partnerships with ASCs owned by physician groups or private investors. These partnerships are forged with the confidence that ASCs can provide an improved cost structure relative to hospitals due to greater staffing flexibility and lower facility overhead.

ASCs stand to benefit from the shift from the traditional fee-for-service reimbursement model to value-based care. Value-based care focuses on providing higher quality patient outcomes at lower costs. ASCs have a narrower scope of processes in a single setting and as a result are better able to focus on the patient experience, often resulting in better patient outcomes. Quality care has long been a focus for ASCs, with industry initiatives promoting quality and safety, such as the ASC Quality Collaboration. Additionally, ASCs are subject to ample regulatory scrutiny from the Centers for Medicare and Medicaid Services including policies related to medical records, tracking diagnoses, and safety within ASCs. Moreover, a key assurance to the quality and safety of ASCs are that they are led and owned by economically incented and thus highly engaged physicians. For perspective, physicians have ownership stakes in approximately 90% of all ASCs.

MHT Partners believes that several factors will continue to drive the increasing preference of ambulatory surgery centers in the healthcare market today. These factors include ASCs’ economic efficiency and an emphasis on value-based care. Patients will continue to seek high-quality, low-cost outpatient procedures, and health systems will seek to embrace the subsequent economic benefit.  With the opportunity to lower costs, drive efficiencies and improve patient care, ASCs will remain an important part of the healthcare conversation in the coming years.

1 “History.” History – Ambulatory Surgery Center Association (ASCA), www.ascassociation.org/aboutus/whatisanasc/history.
2 “Study: Commercial Insurance Cost Savings in Ambulatory Surgery Centers.” Study: Commercial Insurance Cost Savings in Ambulatory Surgery Centers – Advancing Surgical Care, 14 June 2016, www.ascassociation.org/advancingsurgicalcare/reducinghealthcarecosts/costsavings/healthcarebluebookstudy.