It was a busy week in New York City last week, with the Pope’s visit to the city snarling traffic, the UN General Assembly bringing an unprecedented number of global dignitaries to town and Apple unveiling the iPhone 6s to a (mostly) adoring public. For many New Yorkers, the gridlock was the equivalent of several sick days out of the office. On this week’s Cardwell Beach podcast, I joined Dave Donars, Cardwell Beach’s chief of research, to discuss how Apple may have been shrewd to schedule such a release date, how New Yorkers are turning to Oscar, a new health insurance company, to help with their real sick days and how big insurers aren’t happy about it.
Listen below for the full discussion.
DAVE: Welcome, welcome to Cardwell Beach podcast. My name is Dave Donars, I’m the Chief of Research at Cardwell Beach.
BRIAN: Hi, my name is Brian Erickson. I am the Chief Marketing Officer here at Cardwell Beach.
DAVE: I want to announce that we probably have three keys for the show. The first one is that we really want to dig into Oscar, which is an amazing, possibly not amazing, differentiated, possibly not differentiated healthcare company, and what’s been happening with them recently in terms of a lot of money coming into them from Google, as well as them being mentioned in Congressional and anti-monopoly hearings about the fact that they are now considered competition, even though they only have 40,000 members in two states. Secondly, we are recording this live in New York City, where there are two events of major importance, and depending on your tilting, one, we probably will be agnostic on the issue, but largely they do coincide through happening in New York City. And thank God we are a disintermediated workplace, because there is no way we would be able to both work if all of this had to happen in one place. First of all, the Pope addressed the General Assembly and is kind of hop-stopping around New York City right now today, from the Lower East Side all the way up to about 130th Street, and the city is, the U.N. General Assembly has more presidents and prime ministers in one location than has ever been recorded in history. And for the average listener, that’s just fantastic facts. But for, I think, the average New Yorker on this day, it just means that transit is nearly physically impossible. I’ve had personally four meetings cancelled today because this is like a snow day to many people. You want to add that onto the fact that there’s a new iPhone 6S and an iPhone 6S Plus being released today, that are coming out in New York City, which is the largest market in the world in terms of total users, also in terms of total premium users, which may be something we discuss now, today, or maybe just something we discuss in the future in terms of the database and the marketplace. But the reality is that there’s a great deal of people who want the newest iPhone in this metro area who, 75 percent of them will not be able to get it because the streets have been slowed down because of the visit from the Pope.
Let’s talk about the iPhone just for a minute. OK. So the fact is that the Pope’s visit to New York City has created a situation for Apple iPhone users. It is created by created by Newsy and other, possibly more credible news organizations than them. But I actually like Newsy. I have no problem with them. And I’m not trying to disparage them in any way, but 75 percent of iPhone deliveries for today, which is Friday, it is September 25th, are not going to be delivered today because of the fact that the Pope is in New York City. So when the world’s largest market, where there are the world’s most premium users of the iPhone, three out of four of them will not be able to get their iPhones today.
BRIAN: You almost wonder if this was a ploy by Apple. Manhattan is basically shut down. It’s, you know, they have advisories not to go into any major train stations. They have alternate routes to avoid the Pope traffic. It’s basically impossible. Many people are treating this as a sick day or even similar to a snow day, which kind of ties us into a topic we want to get into in a little bit of health insurance. But without these phones being able to get shipped, what is going to happen to this, probably one of the top markets in the world for iPhone sales?
DAVE: But I’m saying that this is, New York City is not only the largest market of 6S and 6S Plus markets, as well as not only the highest premium 6S and 6S Plus users, what this creates in terms of New York City is also, I love New York City. I’m not a native New Yorker, I will never be able to call myself a New Yorker, but the fact of the matter is that I, this is my home, but there is also a lot of kind of complaining-ness, neurotic complaining-ness that goes along with being in New York City. Brian did very good to describe the situation, we’re an island where millions of people live has been shut down because the head of one religion decided to visit. Like it is a creation of some neuroses. But by the same extent, it is a little odd that we have to live in these constraints. And it is a little odd that you’d be sensitive to it. All of this, you add A plus B plus C, and please disregard everything we’re said and just think of this as an equation, creates a situation where the most premium users on the planet are now complaining on social media of the fact that they cannot get their iPhones today. Which helps Apple in so many ways, creates a sense of demand. It creates a sense of demand in Topeka, Kansas. It creates a sense of demand throughout the Midwest or South or other areas of the country where there are good transportation and delivery systems to overcompensate for whatever demand is there. In one single market, which happens to be the most complainy, the largest and the highest amount of premium users, there is an issue. And that itself creates a psychological sense of demand that I think plays to Apple’s favor.
BRIAN: Why don’t was start to talk a little bit about, the topic that we were originally going to talk about today was health insurance and some of the regulatory environment that’s brewing around there and the claims that big, massive companies are making about relatively small startups like Oscar. Why is this happening? Why are they viewing or trying to position Oscar as somebody that could even be close to competitor to them?
DAVE: I think that you’re asking a question that’s a little bit of a two-headed monster, which I know is an unfair thing for me to say. But I think that there’s an element of this that is very, very real in terms of that we have very large, established venture and equity firms investing in Oscar. As well as the fact that there’s been some recent regulatory issues between United and Aetna and some of the other smaller health insurance companies about regulation and opportunity to access different types of insurance that they may be opportunistic and using Oscar as an example as competitive to them. I’ve done an analysis. Between those big health firms, they have, the big three have almost 80 million people. Oscar has 40,000. It is .05 percent of the entire pie. Like this isn’t a real player for these guys. To consider them a player
BRIAN: But at the same time, Dave, how long has Oscar been around?
DAVE: You’ve done your research. I’ve done my research. Matt has done his research. What we’re doing is we’re finding alternating sources. Somewhere between 2009 and 2012, a gentleman named Josh Kushner developed the concept of Oscar Health Insurance. Oscar is an amazing concept, and Brian, you and I have I think our first real working relationship together was kind of about Oscar and some of the benefits and Alibaba and some of the benefits. We made a presentation called The Database of the Marketplace for the Leaders’ Council where we spoke about the issue of the database is the marketplace, which is kind of something I think was our first real interaction to develop something of a Cardwell Beach perspective on what’s happening in digital. And I think from there we kind of developed that digital is business kind of perspective. And one of the companies that stood out from that presentation is Oscar. One of our premium examples of how well this could work is Oscar. You know, Brian, you’re going to have to help me out right now. But who, who were we speaking to at that conference?
BRIAN: It was really more of a small group work session with the Chief Marketing Officer of AIG, the head of digital for IBM, and the CMO of Covidien Health, as well Ed who was running the group. So the premise of it was looking at businesses that had not yet transitioned from a relationship type of sale over to a digital shopping experience, and looking at companies that were surprising in the way that they had made that transition. And Oscar was really the prime example that we had come across at the time.
DAVE: I think that is right. In terms of the American regulatory environment, in terms of what’s happening within health insurance, with Obamacare, and a lot of other elements, with legacy requirements and a lot of other things, Oscar seemed incredibly interesting to us because of the fact that they were pushing the envelope. As far as it can possibly be pushed, they were going to a level of trying to understand what was happening with their client at a current time. I think that that’s an incredibly important thing to understand. Josh Kushner I think believed that there was an opportunity to find systems that had a high legacy cost in terms of employee benefits, in terms of overall infrastructural costs, and eliminating that by creating a new company. Kind of the Tesla for healthcare. However, I think however many regulations there are around automotive, it doesn’t compare to however many regulations there are around healthcare. Oscar has bled money for 13 quarters straight since its founding, it has bled money every single quarter. And what we have now are Google, which is now called the Alphabet, the ABC’s, investing $32.5 million in it. It is now valued at just less than $2 billion, and it’s a company that has lost money every single quarter. And that doesn’t seem to make sense. But the fact of the matter is that Amazon didn’t make a damn lick of sense until about 2006. And so you’ve got about ten years of buying Amazon stock, of putting venture into Amazon, becoming a prime stakeholder in that system, where the price versus the opportunity is a very good cost. The question becomes, does the Amazon model, which is a CPG model at its core, and Brian, this is a real question for you, on the fly, a real question for you, does the CPG model of database is the marketplace work in a service industry model?
BRIAN: You know, I think it’s interesting that you frame it as a CPG model, and I think there’s a reason that a lot of us perceive things sold in an ecommerce or digital fashion to be CPG based. And I think the reason for that is that CPG was just the easiest thing to sell on line because people didn’t need to understand it. And in the early days of digital, you know, there wasn’t a ton of advanced functionality. There wasn’t a ton of user generated content around reviews and rating products to help lend to credibility. That’s different now, and what we’re starting to see is things that kind of seemed in vain to start selling on line being sold very readily on line. Another thing that we, in that Leaders’ Council presentation that we discussed, we kind of opened the discussion with this, was if you look at Alibaba, which around this time last year I believe had the largest IPO in history, the things that they were selling on their home page are things that seem absurd for people to purchase on line. I haven’t checked their home page recently, but I remember seeing lumber, dump trucks, wholesale diamonds, street lamps. So I think that it’s not necessarily a matter of it being a CPG model as much as that was the low hanging fruit at the time.
DAVE: I’m going to interrupt you very, very quickly. It’s just, who’s buying street lamps? There is only one type of entity that’s buying street lamps, which is, you know, state or government entities. Like it is a very specific thing, and it was, not as a joke, it really was presented on their home page. I’m sorry to interrupt you.
BRIAN: No, and that’s actually a really good point. Again, when we think of ecommerce, we think of oh, I’m going to buy a gift or I’m going to buy something simple and low risk. But you don’t have to look at the exact statistic here, let me just actually do that while this loads.
DAVE: I think while you’re loading it, I want to kind of announce that on today’s date, while we were broadcasting this, what one of the main various suppliers of Alibaba are today are Cutting Edge Products, Incorporated based out of North Carolina, the United States, which have things like a rock key hider sand, which is just like a little rock where you can hide a key in case you get locked out of your house, spindler key hider. But their number one, this is actually according to Alibaba, their number one seller is police force stainless steel handcuffs. And it literally says, “for bedroom” on the website. Alibaba is a fantastic place.
BRIAN: Alibaba has positioned themselves incredibly to say, we’re going to sell all the stuff that people think is absurd to sell on line, and there’s a market for it. So I found the statistics here, Dave. In 2013, B to B ecommerce revenue was $559 billion, which is essentially double that of B to C ecommerce. And so the piece that we see on a day to day basis as consumers is a very small tip of the iceberg compared to what’s being sold, and I think it’s just a matter of realizing this shift while you’re at work. Think about the things that you’re purchasing on line that, you know, are really B to B purchases.
DAVE: That’s a great point. There was an article in the Harvard Business Review that spoke about that, the fact our B to B purchases, be they insurance for what we’re choosing ourselves, or vendors who are choosing to work with, are six times more emotional than they are when we’re as consumers ourselves. When it’s not our specific own dollars at play, it becomes a much more emotional experience. When it is through an institution that we are using those dollars, even though those dollars kind of do directly tie back to our paycheck, I think there’s still a very strong element of the fact that this is something coming over the wires to us as a purchase that we are making based on our feeling about the company, versus what’s actually happening. What’s interesting about Oscar is that they didn’t do a lot of B to C marketing. As of the end of 2014, Oscar is interesting in terms of corporate entities in that 75 to 80 percent of their overall marketing budget was directly to consumers, whereas you look at the big players like Aetna and United, and their institutional spending to consumers was less than 30 percent. So you look at a jive from 75 percent down to 30 percent, because of the large institutional advantage or bias or however you want to phrase it that the large players have in comparison to Oscar. And I want to be really clear about this. Like I don’t, my perception of this is that I don’t believe like Matt or Brian or I or anyone at Cardwell Beach thinks that Oscar is somehow a superior healthcare experience to what you would get from any of the major providers. And we are not in any way saying that if you get a very serious thing such as cancer or, I don’t know, you get hit by a bus, or you’re going to have a baby, that Oscar is anywhere better or worse in this reality. I don’t care how cool your ads are, I don’t care about anything else. You have to operationally on a day to day level function and make this stuff work for me, because otherwise this is going to be turned into an incredibly negative experience. What is surprising to both Brian and I is over the last few years, Oscar has weathered those experiences. It’s not a large sample size in comparison to what we’re talking about in terms of overall health insured Americans, but it is statistically significant and it is large enough and it is broad enough in terms of age demographic, in terms of overall demographic of income, in terms of things about what your family history is. In all three sectors it’s statistically significant, and what we are seeing is that people have a much more positive view of Oscar than they do of other companies. And at this level, it degrades the fact that these are just people who are positive social commenters, that these are people who are called cortical influences in PR or something like that. We are talking about real issues that people are dealing with and that the company seems to mitigate pretty well.
BRIAN: We talked a little bit earlier about the fact that essentially this is such a regulated product, health insurance, right? It is the ultimate commodity. And Oscar is really an excellent case study in the power of brand. But where do you think the line is between the operational side of things and the marketing? Where is that?
DAVE: I want to be clear that I think that we’re at an interesting pass at this, and I think we’re using Oscar as a proxy to kind of foretell our vision of what the hell happens in the world, is that like we’re at a point where we’ve reached a level that some companies really have the combination of sizzle and steak. And that there are marketing companies out there that can suffice that through a cross-channel marketing platform and help them build best in breed kind of brands. What they’re dealing with is an institutional disadvantage that marketing can help overcome over time, but in an open, naked marketplace, the fact of the matter is that when you are seriously disrupting the marketplace, you are going to be overall negatively impacted by public relations and you’re going to be overall negatively impacted by a lot of institutional things. Think about Uber, think about the TLC Commission.
BRIAN: I want to just see if I’m getting correct out of what you’re saying, is that everything is your brand. So I asked, what is the line between the operational side of Oscar and the branding side of Oscar? And really, if I’m hearing you correctly, there is no line. It’s that Oscar is a smart company and they’re realizing that the way they operate and the way they deal with their server technology and their legal policies are all part of their brand. Last year we had the issue with Target and their data centers. Who would have ever thought ten, fifteen years ago that your CTO was somebody that you had to give training on how to deal with the branding perspective of technology? When they leaked all that information, which now seems to be an everyday occurrence, nobody cares anymore, your data centers are a huge portion of your brand and the CTO is just as much on the line for branding decisions and mistakes as the Chief Marketing Officer is.
DAVE: I think that’s an amazing point. The database is the marketplace. You’re totally right, Brian. There is no way that the database is somehow removed from the marketplace anymore. There is no way that how you consume and protect your consumers’ information is separate from your identify anymore. But more importantly, and where Oscar comes into play, which is really where we’re trying to focus in on, is that how much information you have about your customer means if you have intelligence behind that information itself, you can therefore better help your consumer in their purchase journey. And whoever helps the consumer the most is the best option for the consumer. And that makes total sense, right? But we’re now in a world where it’s very obvious to people within a few minutes if a company knows who they are. And the database is the marketplace is an argument about not so much about what we’re doing on a minute by minute basis within a specific industry, but it’s much more about how are we interacting with them, you know? There is no sizzle. This is all about steak. I think branding is broken on some level. Like I think at a very high level, branding is totally broken because we’re not living in the 1970’s, and we cannot supersede companies that are totally, utter failures. If honestly, your product, at the end of the day, doesn’t help people, marketing’s not going to help you. No amount of money that you throw into the end side of that equation is going to help the beginning side of that equation. Good products succeed. The only companies that Cardwell Beach can help, the only companies that marketing companies can help, the biggest corporation in the world, like anything in the death star, anybody know anything in death star? No company in the world can overcome an inferior product. It isn’t possible anymore. It’s only about very good products going head to head in a marketplace where people are making decisions about what happens.
BRIAN: Yeah, so turning back to the Aetna and Anthem merger that’s under review by regulators, you wonder is Oscar the reason that they’re merging? To create greater efficiency, to either buy themselves more time or just ride out the wave as long as they can… I guess one and the same. Because they know that understanding the customer is so important, and that companies like Oscar are a death knell for them. I would be very interested when we start to see some of the arguments that come out, as to why Oscar is such a threat to them. It will certainly be entertaining, if nothing else. If that is part of their argument, that they are completely unprepared to enter this new age of the customer and this age of digital and selling on line. So Dave, thanks so much for talking about this topic. I mean, it’s super interesting and it’s going to be something we’re going to get to watch play out in front of us for months, years, decades, who knows how long this could go on? But thanks again, and we’ll see you next time.