Big Data and Analytics, Risk Management
Lessons on Big Data, Risk, and the Vertical Integration of Wearables and Startups
It is amazing how quickly the world of health sensors and wearables has developed. In just a few years, we have seen the wearable market explode with Fitbit, Jawbone, and Apple commanding healthy shares of the overall market that delivered some 70 million devices to users this past year alone and will deliver more next year . Still, many scores of other wearable devices are available. With such growth and product availability, it forces us to wonder, where is this market headed? I think its future will be driven by the creation and use of Big Data. It is a lesson for startups in the data space, too.
Clearly, wearables bring a new level of measurement to our bodies and health that was not possible previously. The data created by a wearable device is becoming more and more valuable to insurers, doctors, health researchers, employers, and the users themselves. But who can access and control that data is currently limited by law and ownership. It stands to reason that the user will and should have access to his or her own data. That is part of the point. Use a wearable and participate in your health tracking. However, the digital platforms or systems created by leaders like Jawbone, Fitbit, and Apple, however, raise competitive questions around the use and economic value of that data.
Users of wearables are not likely to see the performance of the whole population of users, but the owner of the digital platform does see this. That is to say, you can see your data (only), but not that of the aggregate of the population. The algorithms that score users on performance, health, prescription costs, risk, and even morbidity are also highly unlikely to be shared with the users. Expect proprietary models to be developed here. Such data is where a tremendous economic value is created for insurers, employers, hospitals, and pharmaceutical firms.
Key Point: Wearable devices create valuable data when aggregated and are of economic importance to various firms in the health industry. Users don’t even get to see that data, yet they participate in its creation. Privacy and data use issues will become more poignant as wearables advance in adoption.
If you are a large insurer and you convince, reward, or require all of your customers to use a wearable to track health and report that information back to your analytics team, you will have a huge benefit in being able to better manage and price risk and understand the costs of insuring your customers. The novel data coming from wearables becomes a critical component to your risk management process. As the insurer, you would likely have your analytics team look at that data and develop customized algorithms for the measurement of health, costs, and treatment options. The Big Data coming from wearables, its transformation through analytics, and use in the firm in managing risk is a competitive advantage. It stands to reason that an insurer does not have incentive in sharing that data with other insurers (or many other constituents for that matter). In fact, insurance firms that get better results by leveraging wearable data to better manage risk, preemptively treat customers, and control costs are economic rewarded for the creation and management of the data coming from wearables. It suggests a need for insurers to control the use and creation of the data from the wearables.
This suggests to me that the future of wearables involves vertical integration with the health industry and in particular insurers. It a small way, this has already happened. John Hancock launched a new program, Vitality, in which policy holders get reduced rates for using a wearable.  In particular, John Hancock provides a Fitbit device to policy holders in this program. John Hancock provides policy holders a discount on premiums and Fitbit sends that data to John Hancock. This is a form of vertical integration, with integration evolving along the availability of the data created by the device. Fast forward some years, and one might ask, should John Hancock allow Fitbit to partner with other insurers? Maybe Fitbit finds the business offer from John Hancock so compelling that they are open to an exclusive partnership, too.
Key Point: Big Data and its use to create value is a competitive advantage for firms. Expect companies to grow and diversity along lines of data. Firms that are better able to control, create, and use such Big Data will want to form unique and exclusive partnerships to strengthen the creation of the Big Data going forward.
Exclusivity is a feature of vertical integration that becomes most desired when the value of the partnership is high. Insurers are far better capitalized than the wearable startups (with Apple being the notable exception – more on that later) and have many more customers, meaning vertical integration is likely to include insurers as initiators. John Hancock could press for or require exclusivity in its partnership with Fitbit. It could do this by becoming a greater customer for Fitbit, an investor, or owner. In essence, John Hancock already pays Fitbit for the data (by buying Fitbit units). Expect more vertical integration in the wearables market with buyers and partners wanting access to the user data.
Also, there will be a shakeout in the wearable industry. The many scores of manufactures of watches, bands, and clothing items will not all survive. Remember the many PDAs and many TV manufacturers of old. Technology rewards the makers that are efficient and able to evolve quickly. Gaining large market share quickly is immensely important, too. Vertical integration, in part or whole, will anoint winners in the wearable industry. With the backing of a major insurer, any such wearable maker would achieve massive market share and push competitors out of business, by controlling customer demand. With the wearable market already dominated by a few major players, it appears that many of the smaller wearable firms are not financial viable now and are surviving on investor funding. Patents, technology, data, and analytics can be sold to interested parties, like insurers, allowing for a new form of vertical integration. A major insurer might just buy a small and poorly funded wearable firm (with solid technology) and distribute the devices to thousands or millions of users, making it a major player in the space quickly. Devices might be given out for free (like John Hancock currently does) making it hard if not impossible for other wearable firms to charge for devices. With devices being free, the wearable market will coalesce around those firms that offer users the best economic trade for their data. Insurers are best positioned to offer that economic trade, as they are best positioned to gain from the data. It is a bet that some venture capitalists might be making – sell a wearable firm to an insurer. Expect insurers and possibly major hospital networks to become more than customers and partners of such wearables, expect them to want to own and control wearable devices, too.
I expect some leading insurers to even acquire wearable devices. In a recent study by PwC, 70% of consumers said that they would exchange their wearable data with employers and or insurers for price discounts and majority of prospective wearable users would prefer that their employer or insurer provide and pay for the wearable (bands and smart watches in particular).
Key Point: Consumers already see insurers and employers as major beneficiaries of the data collected from wearables. They want those beneficiaries to also become benefactors. Consumers want to be paid for their data. Insurers are in a position to pay.
Big Data is the new advantage that is revolutionizing business partnerships and will drive how firms grow and expand. As for Apple and its dominance as a brand and hardware producer, it makes me wonder if its wearables could lead Apple into new enterprises like insurance. Users of Apple wearables might be offered life insurance policies at special rates for sharing data collected from the Apple Watch. It would be an amazing opportunity to capture the interest of the millennial generation in life insurance. And if Apple does not see new business entry along the lines of data valuable, it could (and should) form exclusive partnerships with insurers and be paid for providing that data to the insurers.
Key Point: Look at the novel data created in your firm or startup to identify growth strategies. Opportunities to grow along data lines are compelling, especially if you can control and create that data.
More on strategies for leveraging Big Data and Analytics for growth and innovation are discussed in my recent book, From Big Data to Big Profits: Success with Data and Analytics.
Professor Walker provides keynote talks, seminars presentations, executive training programs, and executive briefings.
Recent talk topics enjoyed by clients have included:
“From Big Data to Big Profits: Getting the Most from Your Data and Analytics”
“Leveraging Artificial Intelligence and Automation at Work”
“Winner Take All – Digital Strategy: From Data to Dominance”
“Success with an Inter-Generational Workforce: From Boomers to Millennials”
“FinTech, Payments, and Economic Trends and Outlooks in Consumer Lending”
“The World in 2050: Risks and Opportunities Ahead”
Exceptional executive training programs have included:
“Digital Disruption, Automation, Analytics, Data Science, the IoT, and the Big Data Wave”
“Master Course on Operational Risk: Measurement, Management, Leadership”
“Complete Course in Risk Management: Credit, Market, Operational, and Enterprise Risk”
“Cyber-security Training: Prevention, Preparation, and Post-Analysis”
“Managing Your Brand and Reputation in a Crisis.”
“Strategic Data-Driven Marketing”
“Enterprise Risk Management and the CRO”
About Russell Walker, Ph.D.
Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Associate Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University.
His most recent book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.
You can find him at @RussWalker1492 and russellwalkerphd.com
 Gartner Report on Wearable Device Forecasts.
 John Hanncock Vitality at https://www.jhrewardslife.com/
 PwC Report: The Wearable Future.
Apple, Big Data, Big Data Analytics, Fitbit, Health, Internet of Things, IoT, Jawbone, John Hancock, Risk, Risk Management, Sensors, Startups, Value of Big Data, Value of Wearables, Vertical Integration, Wearables
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