Exploring the Role of Network Effects in Healthcare: Insights from Epic, Tempus AI, and Doximity
Last month's revelations of DeepSeek's outstanding AI capabilities led to an unprecedented market loss, with Nvidia shedding a staggering $580 billion in market capitalization. To put it into perspective, this equated to more than the GDP of Greece, Costa Rica, Luxembourg, and Croatia combined.
The long-term implications of DeepSeek are still uncertain, but one thing is clear: the importance of durability, beyond just growth, cannot be overstated for a company and its investors. Durability is the blend of business model, technology, products, and market position that constitutes a company's strategy, with the ability to adapt to societal pressures representational of its longevity.
Health tech and digital health sectors have been the recipient of over $100 billion in venture capital investments over the last decade. While periods of high-revenue growth and significant company exits have emerged, they tend to be fleeting.
While there are various ways to attain a leading and sustainable market position, an analysis of prominent health tech companies like Epic, Doximity, and Tempus suggests that network effects could be an underutilized yet powerful element in their strategies.
Harnessing the Power of Network Effects
Network effects arise when a company's product gains value as its user base grows. Social media platforms like Facebook and Twitter are the most apparent examples. Users benefit significantly from being part of a widely-used platform because they can engage with people they care about.
Many consider the internet and technology to have opened up vast opportunities for networked platforms. Research shows that companies that generate value through network effects grow faster, earn higher profits, and deliver better returns for investors.
So, why don't more health technology companies seek to leverage network effects to their advantage?
Navigating the complex healthcare markets represents one challenge. Selling technology to even a single user is tough already, making overcoming the "cold start" problem (no one adopts because no one has adopted) an added hurdle for network-based platforms. However, the most significant healthcare challenges require solving issues between different user groups.
Perhaps adopting a "platform" approach, where companies focus on efficiently connecting different user groups, will uncover the most substantial growth opportunities in health tech.
Doximity, Tempus, and Epic are exhibiting the potential of platform strategy.
Tempus AI: Understanding Network Effects and Data-Driven Diagnostics
Tempus AI is a forefront diagnostics company that began by offering genetic tests for oncology patients. Unlike many lab companies, Tempus has ambitious broader goals: the company has made substantial investments in technology that sets it apart.
First, Tempus has invested in electronic health records (EHR) integrations to make provider testing orders more straightforward and results delivery more efficient. Moreover, it allows providers to share patient records with Tempus. Second, Tempus has built a robust data platform to store, parse, anonymize, and analyze patient data, providing the foundation for AI models to be developed on top of it.
The technology investments support an innovative business model that leverages cross-side network effects, wherein the valuable testing and clinical data that Tempus collects attracts life sciences companies and researchers willing to pay for access to de-identified datasets.
Tempus's commitment to network effects has paid off, as demonstrated by its growth compared to a peer.
Doximity: Network Effects for Doctors Drive Growth and Profits
Doximity is often likened to LinkedIn for doctors but evolved to encompass collaboration and productivity tools for medical professionals, with telehealth, secure messaging, and digital signature functions.
Doximity generates revenue primarily through pharmaceutical and health system clients, with the former paying to market solutions and the latter to post job openings and communicate with physicians. Doximity's unique selling point is its robust engagement with clinicians, including a 25% profit margin and double-digit revenue growth for five consecutive years.
Clinicians' strong engagement with Doximity attracts more clinicians, creating a powerful flywheel effect.
Epic Systems: Building Networks in Healthcare
While frequently viewed as the most successful EHR software vendor, Epic Systems is also a platform business, inadvertently relying on network effects. Epic's single code source and deep integration into healthcare providers' workflows provide competitive advantages by allowing seamless information sharing and collaboration among a vast network of hospitals and clinics.
Epic's recent investments in new areas, such as the Cosmos data platform, enable health systems to pool collective clinical data from across its clients, providing valuable clinical insights to improve patient care.
Epic is thriving by balancing network effects with competition, providing tools for third-party developers to build on top of its platform while protecting its competitive edge.
In conclusion, health tech companies thriving on network effects tend to offer unique value propositions, generate sustainable revenue, and attract users due to their prominent network positions. While AI may also create value in healthcare, focusing on business strategies that lead to differentiated and defensible growth is essential. Healthcare technologies that embrace network effects, along with other powerful methods, are poised to shape the future.
Enrichment Data:
Several health tech companies have successfully leveraged network effects in their growth strategies, leading to sustainable competitive advantages. Some examples include:
- Teladoc Health: Teladoc Health benefits from network effects by offering a large network of providers and patients, making the platform more efficient and convenient for both parties, thereby increasing its appeal for new users.
- Epic Systems: Epic Systems, a leading EHR software vendor, creates network effects by deeply integrating its software into healthcare providers' workflows, facilitating the sharing of patient information and coordinating care across a vast network of hospitals and clinics.
- Doximity: Doximity is a professional networking platform for healthcare professionals, particularly appealing for collaboration, communication, and career advancement as more medical professionals join the platform.
- 23andMe: This genetic testing company harnesses network effects by collecting genetic data from millions of individuals, making it more valuable for researchers and individuals seeking insights into ancestry and health.
These companies have utilized network effects to increase user engagement, improve services, and create barriers to entry, ultimately driving long-term success in the health tech sector.
- Despite the market loss after DeepSeek's AI capabilities revelations, Epic Systems continues to focus on its network effects strategy, leveraging its deep integration into healthcare providers' workflows.
- In the health tech sector, network effects have proven to be a powerful tool for profitability, as seen in companies like Tempus AI, which utilizes cross-side effects to create value with its data-driven diagnostics.
- Navigating the complex healthcare markets is a challenge for many, but companies like Doximity, with its strong physician engagement, are successfully harnessing network effects to drive growth and profits in 2022.
- AI healthcare is a growing field, but incorporating network effects into business strategies, as demonstrated by Epic, Doximity, and Tempus, can lead to sustainable competitive advantages and long-term success.
- The potential of platform strategy is undeniable, as shown by the examples of Epic, Tempus, and Doximity, and this approach could uncover substantial growth opportunities in health tech for companies willing to adapt.
- The long-term success of health tech companies relies on more than just AI capabilities or growth; embracing network effects and other powerful methods, as demonstrated by these prominent examples, is key to shaping the future of healthcare technology.
