Network Effects And Platforms Drive Enormous Value For Investors. Healthcare Should Pay Attention

Platforms and network effects in business are all the rage. To such an extent that it fed up one business writer enough to write a book entitled ‘The Platform Delusion’ (which is a quite good read). 

Yet the attractiveness of the ‘platform’ moniker persists: more and more companies self-describe as ‘platforms’, and investors reward them both by funding more and valuing them at a premium. Why? 

At Summit Health, we are believers in the promise of network effects and platform businesses in healthcare. Yet we’ve also written the perils: that not all network effects are created equal, that they are more challenging to operate and fail at comparatively higher rates (at least that’s what the research suggests). 

To keep ourselves honest, we decided to dive in deep again to the data. What we found has big implications for healthcare startups, investors, and incumbents alike. Why healthcare? We’ll explain. But first, to the data. 

Big Tech Platforms With Network Effects Outperform Pure Big Tech. Across Dimensions And Metrics. 

The TL;DR version of the story (see graphic below) is simply: across virtually every measure, technology companies employing a platform business strategy and network effects outperform those pure play technology companies. 

To get to this point, we pulled a list of the top 220 most successful and highly valued technology companies in the world as measured by market capitalization. Data was pulled from Pitchbook, and we compared those that employ platform business strategy and leverage network effects with their pure play tech peers.

The Results

• Platforms grow consistently faster: Technology firms employing platform business strategy grew revenue faster than their pure play tech peers on a year over year basis (37% vs 15%, not shown). More importantly, this was not a unique phenomenon; they also grew revenue faster over a five year time horizon with a 18% CAGR vs 11% CAGR for their pure tech peers.

• Platforms are more scalable: Platform tech companies are more able to tap into their network of users to drive efficient growth. They generated $893,000 of revenue per employee, versus $389,000 of revenue per employee among pure technology firms in the 2021-2022 reporting period.

• Platforms leverage assets efficiently: Perhaps not surprisingly, the assets that underpin platform businesses yield greater returns, as evidenced by a higher return on assets (16% vs 6%) for platforms compared to their pure tech peers.

• Platforms generate more shareholder value, consistently: With the greater pricing power and customer stickiness that comes from network effects, platforms are able to operate more capital efficiently than their pure tech peers. This reveals itself in higher returns on equity (30% vs 15%) and in their ability to grow EBITDA (21% vs 11% in five year EBITDA CAGR). 

Across the board, technology companies embracing platform business strategy and network effects outperform their pure tech peers. Accordingly, they tend to be valued at a premium by investors, as demonstrated by a 5.0x enterprise value-to-revenue ratio versus a 4.2x for their pure tech peers. 

For all these reasons, we see more and more companies - and not just in technology - investing in platform business strategy and seeking to tap into network effects. Walmart now is leveraging its own e-commerce platform to run a marketplace directly connected consumers with suppliers, in which Walmart has no other value chain role (i.e., it does not take control of inventory). Nike is seeking to build an online community of customers who interact with each other and the brand as well. 

How is this relevant for healthcare? In countless ways. 

Why Healthcare Is Starting To Pay Attention To Platforms And Network Effects

The idea that “healthcare is decades behind” has been conventional wisdom now for… decades. 

If we agree with that premise, we can also look to experience in other sectors to understand how technology and platform businesses in particular revolutionized the customer experience as well as how industry developed to meet customer needs. 

In the early 2000s, people got the majority of their news from TV and newspapers. People and corporations looking to travel worked through travel agencies. Software was sold on a perpetual license basis and deployed on premise. The medallion system regulated the taxi industry. 

Today of course, people get their news online and, increasingly, through social media platforms.  Marketplaces connect airline systems directly to consumers. Software is sold as a service, and increasingly software companies such as Salesforce.com are “platformizing” themselves, exposing their technology and creating business processes to allow others to build on top of and sell their own software to customers. And of course Uber and Lyft have utilized technology to create networks of drivers and riders, obviating the need for taxis as a standalone business. 

Platforms create value by connecting disparate users and allowing them to transact - exchange something of value - with each other in an efficient way, removing “friction” that previously existed. 

So many of the challenges of our healthcare system are due to the types of problems that platform thinking can address, including:

• The complexity of matching expert supply with demand

• Information sharing in real-time and at scale

• Coordinating activities between different parties

• Aggregating the needs and interests of the  “long tail” (whether consumers or companies)

• High transaction costs as a result of fragmentation

Every healthcare organization - be it payer, provider, hospital, laboratory, pharma, pharmacy or other - should be thinking about ways to tap into platform thinking. Whether that is taking the initiative to address data silos (as Mayo Clinic Platform is) or to empower clinicians to gain agency over how they practice (such as Wheel), platforms and network effects afford a novel way to convert institutional fixed costs into lower variable costs when dealing with other parties.

Platforms are bringing down barriers, and bringing constituents together. Healthcare companies of all sizes would be wise to pay attention and develop a platform strategy. 

How To Get Started 

We’ve written before about how software companies such as EHRs should think about making the transition from pure technology to becoming a network effects-driven platform. 

There are also books (Platform Revolution and The Cold Start Problem) that do a good job of explaining platform business thinking and give examples of how others have been successful. 

But if you’re thinking “Sure, but healthcare is different,” then we agree, and that’s why we founded Summit Health. We are longtime healthcare technology insiders, have operating experience with network effects and platforms, and we’re here to help. Contact us or schedule time with us.