There is a common assumption in computing that when the generalists enter a niche, the specialists must give way. So when Microsoft (NASDAQ:MSFT) entered the Electronic Medical Record (EMR) market, I assumed that specialists such as McKesson (NYSE:MCK) and Cerner (NASDAQ:CERN) would soon look for the exits.
This was especially true because Microsoft did its homework. It did not release its Amalga hospital system until it was tested successfully in some top hospitals, under the name Azyxxi, so it could deliver integration with HL7 billing codes and other industry standards. Its Healthvault Personal Health Record (PHR) was designed to integrate with existing systems and business models.
Google (NASDAQ:GOOG), by contrast, ignored the industry with its Google Health PHR. It drew a large crowd to the 2008 HIMSS show, but there seemed to be little follow through. Its eventual demise was easy to predict.
Once Microsoft did launch, it quickly drew some big customers. I became especially certain of my call for generalists after the Obama administration announced its $19.2 billion stimulus to the industry, based on meaningful use standards to be written in Washington by industry experts who rejected the industry's CCHIT effort to direct what I called “that sweet, sweet stimulus cash” to incumbent providers.
I figured generalists like Microsoft could spread development costs across a huge customer base, that it could accept smaller margins, and that the result would be lower-cost systems for more customers.
I was wrong. If you bought Microsoft based on the promise of health IT, you're a loser. The specialists won.
It turns out selling software to a big hospital is a lot like selling weapons to the Pentagon. The contracting model -- featuring long sales cycles, extensive amounts of free work, and fat margins once the contract is captured to make up for it -- favors specialists. Most federal government contracts, in fact, go to specialty firms ringing Washington, D.C. companies that practice this model.
So Cerner is at its 52-week high and McKesson is up 20% so far this year. This despite competition from such industrial giants as GE and Siemens (SI), which also know contracting.
Microsoft did outlast Google. HealthVault can expect many conversions to its system from Google, before Google Health sunsets at the end of 2012. Amalga has already sunset a complete hospital information system (HIS) version of Amalga it was selling in Asia. The company currently claims Amalga has been installed at over 120 U.S. hospitals. There are 5,759 hospitals in the U.S., according to the American Hospital Association.
Don't call the antitrust lawyers on this one, either. Small hospitals and charity hospitals will have low-cost choices for Electronic Medical Records. Three EMR systems based on the VA's VistA system have been approved for meaningful use, as has a fully open source version called WorldVista. But given the federal government's recent decision to sunset VistA in favor of a new, open source version to be built by contractors, this will remain a niche.
The lesson seems clear. The more closely an industry is tied to government, the more closely its business models emulate those of government, and the more important specialists become.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.