8 January 07

Happy New Year from Babson’s ICE Center, where the temperatures are far from icy.  So far, we’ve had a balmy winter here in Massachusetts. 

Each year since 2001, I’ve highlighted a few new offerings that may be on the point of making the leap from small appeal to large appeal.  These are my personal choices -- product and service innovations that I find particularly interesting.  Some are obscure, others well-known. 

            For the last couple of years, I’ve reviewed my innovation picks at the end of the year to see what happened to the new offerings highlighted at the year’s beginning.  I reviewed the product innovations in my last update of 2006, but couldn’t quite fit in the services.

So we’re beginning the New Year with another look at the last – what worked, what didn’t, and why.

At the beginning of 2006, I highlighted two new services to watch:

Ø      Zillow.com, a web-based real estate information service;

Ø      ExAnte Healthcare Banking and the Health Savings Account.

Zillow has prospered even with the slowdown in real estate sales in the United States.  The Health Savings Account, however, underperformed relative to the rosy expectations held by many at the beginning of the year.  

Zillow – adapting for success

Zillow’s estimated house values off Geary Blvd in San Francisco

Zillow is a website that features a single service – estimating the market value of a property for homeowners and prospective buyers.  Founded by veterans of Expedia.com and lavishly funded by venture capital, the site launched at the end of 2005 and rocketed to the 9^th most popular real estate site by mid-2006.  Zillow is making money on eyeballs and ads.

Initially, Zillow didn’t know where it was going to find its profit in real estate.  The reports in places like The Wall Street Journal at the end of last year focused on the revenues available by taking fees from the $60 billion real estate brokerage industry. 

The explosion of online advertising had Zillow switching direction.  As Lloyd Frink, Zillow’s president, remarked in The New York Times in June:

“It became quickly apparent to us that there's a bigger opportunity in providing information than in having a 'Buy Now' button for real estate.”

Zillow President Lloyd Frink,  New York Times, 26 June 06

            The company was able to change its business model – it went from a transactions-based site to one that is content-based.  Remarkably,  Zillow did this with a group of executives that came out of Expedia.com, one of the most successful transaction-based websites.   These managers had been very successful with a transaction model, but had little experience with advice sites.  

They did have some, however.  It turns out that Expedia also has an advice division – in 2004, the company purchased TripAdvisor, a web site that provides advice to travelers, written by other travelers, about hotels and locations (it’s very good if you want a ground-level review of a hotel or resort).   Zillow executives built on their experience with TripAdvisor to help create a profitable and successful advice business in real estate.

Keep your eye on Zillow, however.  I’d expect that this is just a first step for the company as it works to find revenues and profits in the $60 billion real estate brokerage business.

Health Savings Accounts – too risky?

            In 2003, the US Congress passed legislation which enabled the creation of Health Savings Accounts (HSAs).  These are tax-deferred accounts, like IRAs, which are dedicated to spending on healthcare.  Combined with a high deductible insurance policy, these accounts are intended to reduce overall expenses for healthcare by having patients pay for much of the non-catastrophic medical care they receive.  If consumers are paying for their own healthcare, the thinking goes, they’ll spend healthcare dollars more wisely.

            DiamondCluster International published a report in late 2005 that projected 15 million new HSAs by 2010, covering about 10 percent of all those insured.     

There are currently about 1.2 million health savings accounts in the US, according to Steve Davis, the managing editor of an industry trade newsletter called Inside Consumer-Directed Care.   That’s a long way from 15 million, and the growth in subscribers has been slow. 

The fact is, most employees aren’t interested in this new approach.  Consider what happened to supermarket chain Kroger – it would like more of its employees to go this route, so it pushed HSAs aggressively during healthcare enrollment periods in 2006.  But only about 5 percent of its 70,000 eligible workers signed on, according to reporting in The New York Times.  This was significantly below Kroger’s expectations. 

What does the future hold for HSAs?  Is this a failed policy, another ineffective attempt to remake health care?  Or is it just a little slow to develop?  As a policy, there are lots of attractive features to these accounts.  Looking at them from the consumer’s point of view, however, reveals significant problems – for most people, they are not as attractive as other kinds of health insurance.

Health Savings Accounts – Trading Price against Benefits

The profile of this service in the “four factor” model, as diagrammed above, reveals a number of shortcomings.   The economics of this program are attractive to employers and policy makers, which makes it “Easy to buy” for consumers – big companies like Kroger are trying to get their employees to switch.  

But high deductible health care is quite different from what most people are seeking in health insurance.  Even if it would be less expensive for them to go with the high deductible policy, they’d rather have less risk and pay more in premiums.  

There’s lots of research showing that most people are irrationally risk-averse.  The slow rate of adoption of this healthcare product provides a demonstration of this.

This program could still succeed, but only if relative prices adjust more.  As healthcare costs continue to rise, the difference in price between full-service and high-deductible health insurance plans should increase as well.  If it does, more people will take on more risk in exchange for savings.  Right now, however, HSAs look like a bad deal to most healthcare consumers – they are adding complexity and risk and reducing benefits in exchange for lower premiums, and the tradeoff isn’t attractive. 

More Information:

1. My March, 2006 Update on notable Service Innovations is here.
2. For more on Zillow’s progress, here’s a recap from a June article in The New York Times.
3. I’ve been using the four factor framework to evaluate new innovations for five years now.  Here’s a link to an explanation of the approach, from Harvard’s Working Knowledge.
4. For more on Employer Healthcare choices, the Kaiser Family foundation published its survey results here.
5. Last week’s update on product hits and misses is here.