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    Salesforce gets some Slack

    MARC BENIOFF got the idea for the “ohana” corporate culture on a sabbatical in Hawaii. The term refers to a network of families bound together. He likes to think of Salesforce, the world’s third-biggest software firm, which he founded and runs, as just such a network. On December 1st Mr Benioff welcomed Slack, an instant-messaging tool, to his ohana. The $27.7bn deal is one of the biggest ever in the software industry.
    Like many family alliances the tie-up is partly about power and feuds. Slack’s product has a cultlike following, which Salesforce wants to harness to build a tech platform that sells digital tools that no firm can do without. Stewart Butterfield, Slack’s co-founder, hailed it (hyperbolically) as “the most strategic combination in the history of software”. The feud is with Microsoft, whose advances Slack spurned four years ago. The deal makes Salesforce a far more formidable challenger to the giant.

    Mr Benioff may be best known to the public for championing corporate “purpose” (and owning Time magazine). But in his own industry he wins kudos for disruptive innovation. In the 2000s the young Salesforce basically invented software-as-a-service (SaaS)—accessing programs remotely rather than installing them on office computers—particularly for managing customer relationships. Microsoft, Oracle, SAP and others had to follow suit.
    The explosive growth of SaaS has propelled Salesforce to ever greater heights. And to greater breadth: since 2016 it has spent over $25bn snapping up over a dozen firms to boost its computing chops. It bought Tableau, a data-analytics platform, and MuleSoft, which helps firms connect legacy IT systems to the cloud.

    Then came the pandemic. A boom in tech stocks lifted Salesforce’s market value from $144bn to $225bn this year. Slack, whose share price has lagged behind those of Zoom and other enablers of remote work, suddenly looked affordable. Mr Benioff is paying with a mix of cash and Salesforce stock. His firm’s valuation is still well behind Microsoft’s $1.6trn. But it may at last have a shot at tech’s top table. It already rules in customer-relationship software and thrives in other areas of business software, especially since acquiring Tableau. Aaron Levie, boss of Box, a cloud firm, describes Slack as “another dot on the graph” that plots Salesforce’s rise to become the world’s number-two business-software company (behind Microsoft). Perhaps, Mr Levie muses, “even the largest”.
    Such sentiments explain why for Microsoft the Slack deal is a red rag. Slack got the giant’s attention a few years ago when Mr Butterfield promised to wipe out email, which would threaten Outlook, Microsoft’s popular inbox, and its email server, Exchange. “If you are going to come at the king, you’d better not miss,” quips Charles Fitzgerald, a former executive at Microsoft who is now an angel investor. Back then Mr Butterfield did miss—and Microsoft shot back with a new product, Teams, combining messaging with videoconferencing and other functions. Slack has launched an antitrust complaint against it for offering Teams free of charge in its Office bundle, together with its popular word processor and Excel spreadsheets.
    Teams is a big reason why Mr Butterfield is in an ohana-ish mood. Like Zoom, it has videoconferencing—and far more active users than Slack, which explains the latter’s lacklustre stockmarket performance. Salesforce will invest to reinvigorate it, presumably adding more video-meeting capability. Its sales machine will push Slack beyond early adopters into the corporate mainstream.
    That will intensify Salesforce’s rivalry with Microsoft, with which it will compete in three main areas. With Slack it will directly take on Office, now that Teams has been folded into it. Slack also offers a gateway to 2,400 software tools, mostly created by independent companies, that compete with other Microsoft products. Salesforce and Slack could bundle all this software into a convenient alternative to Microsoft. Second, Salesforce competes with the giant in customer-relationship management, where it plans to make Slack the user interface, and other business functions.

    Then there is the bigger battle over platforms. Both Salesforce and Microsoft aim to give businesspeople who do not themselves write software the tools to build customised programs—“with clicks not code”, as Salesforce puts it. Salesforce’s Developer 360 is punier than Microsoft’s Power Platform but is improving, thanks to MuleSoft and Einstein, a set of artificial-intelligence services. Slack could be a “Trojan horse” to hook customers of Salesforce’s own clients on more of the company’s applications, says George Gilbert of TechAlpha Partners, a consultancy.

    Success is not in the bag for Salesforce. Mr Benioff may fail to turn his vision into reality. Even if Slack gets its video act together it would be late to videoconferencing, which has matured rapidly during the pandemic. Most large corporate clients already use Zoom, Teams or Cisco’s Webex software. And Salesforce might mistakenly end up sacrificing Slack’s growth while trying to bolster its own businesses.
    Moreover, Slack is not in and of itself enough to make Salesforce into a genuine rival to Microsoft. Mr Benioff would need to build (or buy) capabilities in document storage, cyber-security and more, reckons Mark Moerdler of Bernstein, a broker.
    Wall Street is already wary of Salesforce’s big acquisitions; the firm’s share price dipped when news of the Slack deal surfaced. Still, SaaS holds vast potential, as Microsoft shareholders know well. And, as Mr Butterfield noted on the deal’s announcement, Mr Benioff has already started one revolution. Betting against this ohana is not for the faint-hearted.■

    This article appeared in the Business section of the print edition under the headline “Get me some Slack” More

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    Nestlé gives a flavour of the future

    SWITZERLAND IS KNOWN for its timepieces. But it is also home to another business that for most of its history has operated with metronomic regularity. That is Nestlé, the world’s biggest food company. Established in the 1860s in Vevey, a small town on the shores of Lake Geneva that remains its home to this day, it has long been seen as an opaque behemoth with an insular culture and the occasional brush with scandal. Yet a billion of its products are consumed every day. Its sales last year surpassed $93bn. When it talks coffee, it talks in 100bn cupfulls. Data may be the new oil in America and Asia, but in Europe hot beverages are hotter than either crude or computing. With a market value of $320bn, Nestlé is worth more than Royal Dutch Shell, the continent’s biggest energy firm, and SAP, its software giant.
    Many global food firms have been models of reliability. Other venerable names, such as Campbell’s, Danone, Kraft Heinz and Unilever (which sells more non-food items than food), also have roots stretching back over a century. Yet five years ago, amid a sharp slowdown in growth, the industry suddenly found itself under siege. 3G, a Brazilian private-equity group with a zeal for ruthless cost-cutting, merged H.J. Heinz and Kraft Foods. Two years later American activists targeted Nestlé, demanding the same recipe. The same year Kraft Heinz tried and failed to take over Unilever, and later saw its profits tumble, leaving 3G’s reputation in tatters.

    Europe’s consumer-goods business is still growing at about half the pace it did a decade ago. It badly needs a caffeine shot. No one has shown better how to administer one than Mark Schneider, Nestlé’s first chief executive from outside the firm in almost a century—and the barista-in-chief of its three-year turnaround.
    Mr Schneider, a straight-talking German with an American passport and a fondness for quips, is the perfect foil for bossy hedge funds. He is not prone to panic. But nor is he complacent. He came from outside the food industry, so sees it with fresh eyes. He carried out what Martin Deboo of Jefferies, a bank, calls “the chief-executive version of Blairism”, steering a middle course between the aggressive profit-margin targets desired by the Americans and the meagre restructuring tolerable to the Swiss. Most significant, he revived confidence in organic sales growth, a metric that had fallen at Nestlé from an annual 7.5% in 2011 to 2.4% the year he took over. During the slash-and-burn era of 3G, sales growth was for wimps. No longer—partly thanks to Mr Schneider.
    The importance of sales growth is hard to overstate in food. Bernstein, a broker, calls it the “lifeblood” of the industry. In recent years it has been pummelled by changing diets, digitalisation and deflation in parts of the rich world, as well as sluggishness in emerging markets. But Mr Schneider swiftly found remedies.
    The first was innovation. Thanks to e-commerce, small upstart brands were able to elbow aside the behemoths and sell directly to consumers. He responded by forcing boffins to bring Nestlé’s ideas to market more quickly, often digitally. The three years it sometimes took them was fine for a car, but not for a chocolate bar, he says. New ideas he cherishes include allergy-busting cat foods and vegan burgers. Second, he was quick to strike transformative deals. Within six months of licensing Starbucks coffee in 2018, Nestlé had already launched 24 of the chain’s products. Third, he bought and sold companies, adding to fast-growing nutritional-health businesses and selling down pedestrian ones such as ice cream in America and packaged meat in Europe.

    Nestlé has sped up growth in other areas, too. It is moving relentlessly upmarket. Last year the share of sales from premium products rose to more than a quarter, including items with naked snob appeal such as “flat white over ice” Nespresso pods. It has joined the craze for plant-based foods and other healthy fare (never mind that this makes its confectionery business look increasingly out of place). And it is desperate to improve its reputation for sustainability. On December 3rd it said it would invest SFr1.2bn ($1.3bn) over five years to help its farmers improve their soils as part of a SFr3.2bn effort to combat climate change. It has also pledged to make packaging recyclable or resuable by 2025. These are attempts to soften its image as a corporate goliath, which puts off not just young shoppers but snobby well-off ones, too.
    For now, investors are impressed. As Mr Deboo notes, the share price has already awarded Nestlé ten out of ten for the turnaround, though that may be premature. Sales growth has still not recovered to the 4-6% a year that the firm once promised. Infant formula remains a laggard. So does water, with its cheapest bottled products, consumed in offices, battered by the pandemic. And Nestlé is not immune to industry-wide problems. Growth is slowing in emerging markets as people there spend less on ingestible treats and more on digital goods. Moreover, low incomes among the young will dampen their appetite for premium products.
    Not so sweet
    Relatively speaking, the virus has been kind to Nestlé. Most of its products are used at home, rather than on-the-go, so extra sales for the pantry easily eclipsed what was lost at the sweet shop. Danone, a European rival that was already struggling to keep up with Nestlé at the start of the year, has slipped much further behind.
    Still, Mr Schneider is no blithe optimist. In a recent Zoom meeting held amid stockmarket euphoria about the prospects for a covid-19 vaccine, he was cautious. As a former health-care executive used to handling cold chains, he expressed doubts about the ability to distribute vaccines at the required temperatures, especially in the developing world. The longer it takes to spread the vaccine, the higher public debts will pile up, potentially casting a “long shadow” over the 2020s. On top of that, he notes, a demographic challenge is looming with rising numbers of elderly requiring medical care. “I’m quite muted in my outlook,” he admits. But Nestlé, in more than 150 years of history, has survived worse. ■
    This article appeared in the Business section of the print edition under the headline “Feathering its own Nestlé” More

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    How the pandemic is forcing managers to work harder

    BUSINESSES ARE still struggling to understand which of the pandemic’s effects will be temporary and which will turn out to be permanent. Three new reports attempt to analyse these longer-term trends. One is from Glassdoor, a website that allows workers to rank their employers. Another is from the Boston Consulting Group (BCG), a management consultancy. The third is from the Chartered Management Institute (CMI), a British professional body. Read together, they imply that firms stand to benefit—but that managers’ lives are about to get more difficult.
    One change that is all but certain to last is employees spending more of their time working at home. The Glassdoor report finds that less commuting has improved employee health and morale. Splitting the week between the home and the office is also overwhelmingly popular with workers: 70% of those surveyed wanted such a combination, 26% wanted to stay at home and just 4% desired a full-time return to the office. Perhaps as a consequence, remote work has not dented productivity—and indeed improved it in some areas. Flexible work schedules can be a cheap way to retain employees who have child-care and other home responsibilities.

    Telecommuting offers other potential cost savings, and not just the reduced need for office space. Remote workers do not need to live in big cities where property is expensive. If they live in cheaper towns and suburbs, companies need not pay them as much. Glassdoor estimates that software engineers and developers who leave San Francisco could eventually face salary cuts of 21-25%; those quitting New York could expect reductions of 10-12%. As the report points out, remote employees are, in essence, competing with a global workforce and are thus in a much weaker bargaining position.
    This point is reinforced by the BCG report, which finds that the pandemic has increased the willingness of companies to work with freelancers. Previously, many managers worried that legal and compliance issues prevented them from using outside staff. The pandemic forced firms to adjust their business models rapidly, and simultaneously led to growth in the pool of talented freelancers, as full-time employees had to be laid off. BCG says that “by embracing flexibility in whom they hire, internally or externally, [companies] can finally speed up operations and deliver faster on strategy.”
    Despite its advantages, a remote workforce, or one consisting of more outsiders, brings challenges for managers, as the third report demonstrates. The CMI surveyed 2,300 managers and employees. The results highlight just how important effective communication, and concern for workers’ well-being, is to good management. They also unearthed an interesting difference of perspective: nearly half of senior executives thought they were engaging employees more in decision-making since the pandemic, but only 27% of employees agreed.
    The survey also shows that the experience of remote working has not been uniform. Of those working virtually, 69% of women with children want to work at least one day from home when the pandemic ends, compared with 56% of men with kids. These women have had less contact with managers during the lockdown than their male peers have had, suggesting they have been neglected.

    Strikingly, 48% of British staff from minority ethnic backgrounds thought that workplace culture had got better during the crisis, against 34% of all employees. This suggests something was wrong with office culture beforehand: the CMI survey found that black employees were more likely than any other ethnic group to feel their manager did not trust them to undertake their role.
    So managers have a lot more work to do in responding to the pandemic. Executives need to tailor their behaviour to individual employees’ needs. Ironically, though managers may have feared that remote working would allow employees to slack, it may be that managers have not been up to the challenge. Bosses may have spent too much time videoconferencing and not enough speaking directly with subordinates.
    Ask someone what it is like to work at a firm and they may respond by saying what the offices are like—whether they are cramped, in a nice location and so on. In a world of remote working, employees may stress instead how the employer communicates with them. Not so much “management by walking around” as management by phoning—or Zooming—around. Time to get dialling.
    Editor’s note: Some of our covid-19 coverage is free for readers of The Economist Today, our daily newsletter. For more stories and our pandemic tracker, see our hub
    This article appeared in the Business section of the print edition under the headline “Managing by Zooming around” More

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    How China’s Jin Jiang and Huazhu put Marriott and Hilton to shame

    COVID-19 HAS, received wisdom has it, been terrible for hotels. The share prices of the eight biggest listed Western groups by room count have slipped by 14%, on average, this year. The glum consensus is, though, being challenged by two big Chinese chains. Both are enjoying resurgent demand for domestic travel as China has tamed its epidemic. And strength at home is fuelling ambitions abroad.
    Jin Jiang, the world’s second-biggest hotel firm by capacity, boasted an occupancy rate of 74% in the third quarter, in line with last year and more than double that of its bigger rival, Marriott International. Its market value has soared by three-quarters this year, to $6.4bn, above better-known Asian brands such as Shangri-La and Mandarin Oriental. Huazhu, which like Jin Jiang is based in Shanghai, saw revenue per available room recover by 40% from the second quarter, to 179 yuan ($27). The group is now worth $16bn, behind only Marriott and Hilton Worldwide among the world’s listed hoteliers.

    Similarly to their big Western rivals, Jin Jiang and Huazhu each owns a portfolio of brands that cater to different customers. Jin Jiang, which is controlled by Shanghai’s local government, operates everything from budget digs (think Marriott’s Fairfield Inn) to the upper end of the mass market (like Sheraton). Huazhu is a more all-encompassing group, which also competes in the luxury segment. Both companies prefer to offload the costs of hotel construction to franchisees in exchange for lower franchise fees, which enables them to expand much more rapidly.
    The pair indeed look poised to capture a greater market share at home, reckons Yulin Zhong of 86Research. In America chain hotels accounted for 72% of all hotel rooms at the end of 2019. In China the equivalent figure was just 27%.
    As incomes rise and Chinese travellers become more discerning, the standardised, dependable amenities and good service that big chains guarantee begin to look more appealing. Domestic providers of such things enjoy a substantial first-mover advantage. The number of hotel rooms in China held by Wyndham, the biggest foreign operator, is merely a third that of Huazhu and a fifth that of Jin Jiang. And their advantage is growing—the two firms have more than 7,300 hotels under development between them, mostly in China, equivalent to 47% of their existing stock.
    In a bid to break into the global market, two years ago Jin Jiang purchased a majority stake in Radisson, the world’s 11th-biggest hotel operator by capacity, for $332m. In January Huazhu paid $868m for Deutsche Hospitality, a posh German group. Such tie-ups allow the new owners to study the nuances of serving a sophisticated foreign clientele without spending millions on marketing their unfamiliar brands in the West (or raising the sort of hackles that Chinese acquisitions often do in more sensitive industries such as technology or finance). As American and European hoteliers continue to reel amid the pandemic’s second wave, more last-minute deals may be on offer for the Shanghai duo. ■
    This article appeared in the Business section of the print edition under the headline “Hospitable climate” More

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    Congress wants to boot Chinese firms from American exchanges

    FOR 18 YEARS American regulators have implored Beijing to let them inspect the China-based auditors of Chinese companies listed on America’s stock exchanges. Dream on, China’s Communist regime responded, citing sovereignty and national security. On December 2nd Congress had had enough. The House of Representatives passed a bill that would boot offending firms off American bourses if their auditors fail to comply with regulators’ information requests for three years running. Since it had earlier sailed through the Senate by 100 votes to nil, it can expect a presidential signature.

    This would put Chinese businesses worth a combined $2trn at eventual risk of expulsion, including Alibaba, a New York-listed internet titan (see chart). It would make it harder for Americans to get exposure to China through American exchanges. Those hungry for juicy Chinese stocks might end up buying them abroad instead, through channels over which Washington exerts no control.

    This article appeared in the Business section of the print edition under the headline “Boiling point” More

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    Volkswagen’s boss takes on the unions

    FIVE YEARS ago the Porsche and Piëch families, who control just over half of Volkswagen’s voting rights, poached Herbert Diess from BMW, a posh Bavarian carmaker. He was hired to run VW, the biggest by far of the the group’s 12 marques, because of his reputation as a cost-cutter and hard-nosed manager who would not shy away from taking on the unions. Untainted by VW’s “Dieselgate” emissions scandal, he made a good start by improving its poor profit margins. In 2018 he was rewarded with the job of running the entire group.
    Only two years later the dynamic Bavarian’s job is on the line after a series of clashes with organised labour. In June Mr Diess almost got the boot because of a dust-up with the supervisory board over a leak of confidential information about the group’s software failings. He alleged it might have come from the board’s union representatives. After that he was relieved of his job as boss of vw (which he had kept).

    This time the clash is more serious still. On December 1st the executive committee of the group’s 20-member supervisory board, the non-executive conclave that holds management to account, met to discuss his request for an extension of his contract. The current one runs to 2023, so extending it now would constitute a vote of confidence. No decision has been made public. The whole board will convene on December 10th.
    Mr Diess demands unequivocal backing from the board so that he can fulfil his mission to cut vw’s bloated workforce and boost profitability (which is lagging far behind Audi and Porsche, the stars of the group). He wants to fill the soon-to-be-vacant job of chief financial officer with an ally, perhaps Arno Antlitz, Audi’s finance chief. He also intends to make his confidant the group’s head of procurement. The two roles are central to his drive to boost efficiency at VW, which recently approved a €150bn ($181bn) investment plan.
    Bernd Osterloh, who heads the works council and also sits on the supervisory board’s executive committee, voted down Mr Antlitz and other candidates for the two jobs suggested by Mr Diess. That provoked Mr Diess to ask the board for support. Stefan Weil is the state premier of Lower Saxony, which, as the owner of 20% of VW shares, is entitled to two seats on the supervisory board. The Volkswagen law from 1960, which limits the voting rights of any shareholder to 20%, gives Lower Saxony a veto on any major decision. To protect investment and jobs in the region, representatives of the Land invariably back the board’s ten labour representatives, which means that organised labour tends to call the shots on VW’s board.
    “Osterloh and Weil will try to bring down Diess,” predicts Ferdinand Dudenhöffer of the Centre for Automotive Research, a think-tank. Mr Diess, who can be gruff, clashed with Mr Osterloh soon after he arrived from BMW—and regularly since then. On November 28th he published a manifesto on how to transform VW into a digital company focused on electric vehicles. “When I started in Wolfsburg, I was determined to change the Volkswagen system,” he wrote of his early days at VW’s headquarters. Mr Diess wanted to “break down antiquated structures, and make the company more agile and modern”. He succeeded in some areas, he said, but not everywhere.

    “Lower Saxony should give up its voting rights,” thinks Mr Dudenhöffer. Otherwise VW will remain constrained by its “provincial corset”. Mr Dudenhöffer believes that Dieselgate would not have happened without VW’s skewed corporate governance. With unions refusing to allow lay-offs, he explains, cheating may have seemed the only way to increase its profit margins. Toyota sells almost the same number of cars worldwide as VW with roughly two-fifths of the workforce.
    Bernstein, a research firm, published an open letter to board members in November urging them either to back Mr Diess or to sack him. Corporate Germany’s traditional model of co-determination has gone too far at vw, the letter says. It is supposed to help bosses and labour to work together rather than fight each other at every turn. Even if the board backs Mr Diess this time, the infighting will soon resume. It may be time to consider repealing the counterproductive Volkswagen law.■
    This article appeared in the Business section of the print edition under the headline “In the hot seat” More

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    The surprising resilience of American restaurant chains

    COVID-19 HAS been brutal for big tenants of American shopping centres, such as clothing stores and cinemas. Not so for the casual eateries that surround these outlets. Many of America’s sit-down dining chains are on track to emerge stronger after two quarters of pandemic-driven innovation. The final hurdle is the winter.
    Independent restaurants were early victims of lockdowns. Chewing, chatter and low air-flow made their busy floors prime candidates for super-spreader events. As early as March, state and local regulations shut down dining halls and began to whittle down the ranks of sit-down eateries. Yelp, a popular review website, reported more than 32,000 restaurant closures between March and September; 61% of these were predicted to be permanent.

    Larger chains fared better. With the credit lines and corporate infrastructure to roll out new delivery methods and safety measures, they steadily stemmed losses. Plenty have now recovered or exceeded their pre-pandemic valuations.
    New off-premises business has helped. Texas Roadhouse, a steakhouse chain, introduced to-go “family packs” and an online butcher selling meat to grill at home. This tided it over as it installed protective equipment and slowly reopened dining rooms. In October it reported a year-on-year increase in same-store sales.
    Other chains dealt with a fall-off in diners by propping up profit margins. Darden Restaurants, the parent company of Olive Garden, slashed promotional spending and simplified menus to reduce waste and costs. Olive Garden’s margins improved even as a lack of clients in flagship locations depressed overall sales. The company felt sufficiently self-assured after the second quarter to reinstate its dividend.

    America’s restaurant chains are outperforming international rivals, says Dennis Geiger of UBS, a bank. American consumers have steadily returned to fill seats as officials lift restrictions (see chart). In other markets stricter regulations and shyer consumers are holding back recovery. Hong Kong’s dining sector has yet to turn around from its spring collapse; receipts fell to an all-time low in the third quarter and even fast-food purchases fell by 23% relative to last year. The share price of Vapiano, a big German chain, stands at less than a tenth of its pre-pandemic level. Darden’s is back to where it was in January. Texas Roadhouse’s is up by a third.
    Winter will test the strength of American chains once more, as lockdowns loom to staunch the flood of new covid cases. At least chains with a national presence think that even as northern locations grow frosty, southern states will be opening patios. And data from Yelp show that interest in outdoor dining is breaking records: it was up tenfold in early October, year on year.■
    Editor’s note: Some of our covid-19 coverage is free for readers of The Economist Today, our daily newsletter. For more stories and our pandemic tracker, see our hub

    This article appeared in the Business section of the print edition under the headline “Malls’ last stand” More

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    The dawn of digital medicine

    IN JANUARY Stephen Klasko, chief executive of Jefferson Health, which runs hospitals in Philadelphia, chatted to a bank boss. The financier told him that 20 years ago health care and banking were the only industries yet to embrace the consumer and digital revolution. “Now”, Mr Klasko recalls him adding, “you are alone.”
    The banker had a point. The McKinsey Global Institute, the in-house think-tank of the eponymous consultancy, reckons that when it comes to digitisation, health care has lagged behind not just banking but travel, retail, carmaking and even packaged goods. Some 70% of American hospitals still fax and post patient records. The CEO of a big hospital in Madrid reports virtually no electronic record-sharing across Spain’s regions when the first wave of covid-19 washed over the country this spring.

    By exposing such digital deficiencies, the pandemic is at last spurring change. Confronted with shutdowns and chaos, doctors have embraced digital communication and analytics of the sort that has for years been common in other industries. Patients are growing more comfortable with remote and computer-assisted diagnosis and treatment. And enterprising firms, from health-app startups and hospitals to insurers, pharmacies and tech giants such as Amazon, Apple and Google, are scrambling to provide such services.

    McKinsey estimates that global digital-health revenues—from telemedicine, online pharmacies, wearable devices and so on—will rise from $350bn last year to $600bn in 2024 (see chart 1). Swathes of America’s $3.6trn health-care market are in for a digital makeover. The same is happening in China, Europe and most other places where doctors ply their trade.
    The groundwork for what looks poised to be the next trillion-dollar business has been accelerated by the pandemic. Money is pouring in. According to CB Insights, a research firm, a record $8.4bn of equity funding flowed into privately held digital-health darlings in the third quarter of 2020, more than double the amount a year ago (see chart 2). The industry’s “unicorns”, worth $1bn or more apiece, have a combined value of over $110bn, according to HolonIQ, a research firm. In September AmWell, a telemedic in which Google has invested $100m, raised $742m in an initial public offering; its market capitalisation is $6bn. On December 2nd JD Health, a digital pharmacy affiliated with JD.com, a Chinese online emporium, raked in $3.5bn in Hong Kong’s second-biggest IPO this year.

    No wonder investors are giddy. Demand for digital medicine is surging. Doctolib, a French firm, says its video consultations in Europe have shot up this year from 1,000 to 100,000 a day. Ping An Good Doctor, a Chinese online health portal viewed by some as the choicest part of its insurer parent, is expanding to South-East Asia in a joint venture with Grab, a Singaporean ride-hailing giant.
    As with many technology fads, some of this will turn out to be hype. Sober analysts at Gartner, a research firm, pour cold water on exaggerated claims made by proponents of individualised “precision medicine” and medical artificial intelligence (AI). But even they admit there are reasons to think that not all the excitement is overblown.
    Technologies such as sensors, cloud-computing and data analytics are becoming medical-grade just as the risk of contracting covid-19 in hospitals and clinics makes their adoption look more enticing than ever. Specialist firms like Livongo and Onduo make devices to monitor diabetes and other ailments continuously. A study by Stanford University found that nearly half of American doctors surveyed used such devices. Of that group, 71% regarded the data as medically useful. In June the Mayo Clinic, a prestigious non-profit hospital group, teamed up with a startup called Medically Home to provide “hospital-level care”, from infusions and imaging to rehabilitation, in patients’ bedrooms. Even the Apple Watch has been shown to predict a medical problem known as atrial fibrillation in a clinical trial.
    An Apple a day
    Patients are keen. A study of some 16m American ones just reported in JAMA Internal Medicine, a journal, found that their use of telemedicine surged 30-fold between January and June. American consumers surveyed in May by Gartner were increasingly using internet and mobile apps for a variety of medical needs (see chart 3).

    Critically, regulators around the world are pressing health-care providers to open up their siloed systems—a precondition for digital health to flourish. The EU is promoting an electronic standard for medical records. In August the Indian government unveiled a plan for a digital health identity with interoperability at its core. Kuantai Yeh of Qiming, a VC firm, says that China’s government, too, is trying to overcome resistance to electronic records from hospitals fearful of losing patients to rivals. Yidu Cloud, a big-data platform for hospitals, may already be the world’s largest health data set, thinks Kai-Fu Lee of Sinovation Ventures, a venture-capital fund in Beijing.
    Apple, with its reputation for protecting users’ privacy, is also championing a common standard. A combination of such efforts and regulatory pressure heralds “a new era” for digital medicine, thinks Aneesh Chopra, a former White House technology chief. Judy Faulkner, boss of Epic, a leading maker of software to manage electronic health records that Mr Chopra has long urged to be more open, declares she is all for it; 40% of the data managed by her firm are already shared with non-customers, she says. Kris Joshi, who runs Change, which handles over $1.5trn in American medical-insurance claims a year, sees more interoperability, at least between businesses.
    All this is helping medicine evolve from “a clinical science supported by data to a data science supported by clinicians”, argues Pamela Spence of EY, a consultancy. Does this make health care big tech’s for the taking? Amazon wants Alexa, its digital assistant, to be able (with your permission) to analyse your cough and tell you if it is croupy or covidy. In November the online giant, which already sells just about everything else, launched a digital pharmacy to take on America’s drug-distribution coterie of pharma firms, middlemen and retailers. AliHealth, a division of Alibaba, China’s e-commerce champion, is disrupting its home pharmacy market. Its revenues leapt by 74% in the six months to September, year on year, to $1.1bn. Apple has its watch and nearly 50,000 iPhone health apps. Google’s parent company, Alphabet, has Verily, a life-sciences division.
    Tech giants’ earlier forays into health care flopped, argues Shubham Singhal of McKinsey, because they had gone it alone. Medicine is a regulatory minefield with powerful incumbents where big tech’s business models, particularly the ad-supported sort, are not a natural fit. But the pandemic has also highlighted that existing providers’ snazzy hardware and pricey services too seldom genuinely improve health outcomes. If the new generation of digital technologies is to thrive it must “improve health, not increase costs”, thinks Vivian Lee of Verily. Her firm is moving away from fee-for-service to risk-based contracts that pay out when outcomes improve (eg, if diabetics get blood sugar under control or more people get eye exams).

    That points to a hybrid future where Silicon Valley works more closely with traditional health-care firms. Epic is using voice-recognition software from Nuance, a startup, to enable doctors to send notes to outside specialists; it has also teamed up with Lyft, a ride-hailing firm, to ferry patients to hospitals. Siemens Healthineers, a big German health-tech firm, is working with Geisinger, an American hospital chain, to expand remote patient monitoring. Patients of India’s Apollo Hospitals can use an app to get drug refills, tele-consultations and remote diagnoses—and even secure a medical loan through Apollo’s partnership with HDFC Bank.
    Dr Klasko, keen to prove the banker wrong, is embracing the hybrid approach with gusto. “You must have partnerships with providers, not just hundreds of unconnected apps.” He has brought bright sparks from General Catalyst, a VC firm that made early bets on many digital-health startups including Livongo, to work alongside his innovation team in Philadelphia. “Moving fast and breaking things does not work well in health care,” observes Hemant Taneja of General Catalyst. But nor does standing still. More