Although Many Investors Are Spinning, Turntable.fm Has Not Yet Picked A DJ

Although many investors are spinning for the chance to invest in Turntable.fm, the hot music startup has not yet picked a DJ, despite reports to the contrary. Business Insider claims that Turntable has raised $7.5 million at a $37.5 million valuation and “that term sheets were indeed signed yesterday.” But reached a few hours ago as he was boarding a plane, co-founder and chairman Seth Goldstein told me, “We have not closed any new financing.”

There is certainly a lot of interest in Turntable from VCs who want to fund its next round. The buzz among venture investors is that there is intense competition for the deal, particularly between Union Square’s Fred Wilson, Accel, and Kleiner Perkins. Wilson is the clear favorite (Turntable is based in New York City), but he is being outbid by Accel and Kleiner.

The rumor is that Wilson is offered Turntable a $25 million pre-money valuation, while Accel and Kleiner offered double. That could have easily been pushed up to $30 million pre-money, in which case the $37.5 million figure would pencil out as a post-money valuation. (Just remember, VCs send signed term sheets all the time. It doesn’t mean the company has to accept the terms).

Not only are top-tier VCs excited about Turntable, there’s even some potential acquirers sniffing around, including AOL, Facebook, and Sony. As far as I can tell, no formal offers were ever made because co-founders Goldstein and Billy Chasen just got this started and don’t want to sell. Plus, they obviously aren’t having any problems raising money.

Why is everyone going gaga over a startup that launched with a completely different product, Stickybits, that never went anywhere? Turntable is a social music site where you enter different listening rooms in which players can become DJs and spin music while chatting with each other’s avatars. Chris Sacca likes to hang out there a lot (he is a previous investor, along with First Round and Polaris). It’s been gaining some impressive early traction, even though you still need to know someone to get in.

It is social music discovery at its best. You can listen to hours of full-length songs selected by other players in a variety of different themed music rooms. The better the DJ, the more points everyone else rewards him with. And if you like a song you can add it to your playlist, or buy it through Amazon or iTunes.

But the business is not a slam dunk. Turntable pays per-stream fees just like Pandora or other “Internet radio” services. The music labels could decide to crack down on Turntable and try to extract higher fees. But Turntable’s early growth and engagement numbers are too high to ignore. People spend hours in these rooms. Maybe this time, the labels won’t kill it before trying to work out a deal. Even then, though, Turntable will have to find other ways to make money—perhaps through digital goods or better avatars, sponsored rooms, or some people might be willing to pay to be a featured DJ.



Josh Harris Takes His Wired City To Kickstarter

For the past year, Josh Harris has been trying to get funding for his Wired City concept. It’s a crowdsourced Internet TV station where all the viewers are also the broadcasters, multicasting to each other and the World Wide Web.

If this sounds a little like the documentary movie We Live In Public that is because Harris was its subject. He also founded Jupiter Communications and Pseudo a decade ago, but he’s a little bit eccentric. His ultimate vision for Wired City is wild (check out my interview with him from last year below). Harris once told me that all he needed was $50 million to build it. I suggested he might want to start with a smaller, less expensive piece of it to prove it out.

Now he’s taken his idea to Kickstarter, where he is trying to raise $25,000 to build a “net television pilot.” That will probably be enough for the uniforms, and might help him secure some angel money to get a real production going. “More importantly,” he tells me, “it is a litmus of audience interest in the thing.”

In it’s first day, the project has already raised $2,108. I bet he could raise the entire $500,000 on Kickstarter if he wanted to. It’s perfect for Kickstarter because it’s kind of half-movie, half-Internet startup.

You won’t get any shares in Wired City for contributing, but you will get “privileges for being a founding member,” including a “day of cyber-living on the Wired City set (non-transferable)” and maybe even a “Wired City cadet bandana.” If you pledge $2,500 or more you get:

A Wired City Official dress uniform including jacket, pants, socks, underwear, collared shirt, t-shirt and formal hat. Seven days (for four) of cyber-living on The Wired City set (transferable). PLUS one year of VIP status (including prime capsule hotel living quarters), a personal video assistant and special powers/privileges. PLUS 20,000 BoWC credits.

Well, what are you waiting for?



Zuckerberg’s Not So Subtle Dig At Google Circles

Even as Facebook revealed some new chat products on Wednesday, the elephant in the room was Google’s latest attempt to create a social network, Google+. Mark Zuckerberg tried deflect direct comparisons by saying, “Every app is going to be social.”

But he did make one remark, which suggested how he really feels about Google+ and one of its main features, Circles. Zuckerberg didn’t mention Circles specifically but he did state:

The definition of groups is . . . everyone inside the group knows who else is in the group

This might seem obvious unless you’ve played with Circles. The Circles feature is how Google+ handles groups, but it is not completely intuitive and problems can arise when different Circles collide It is designed to let members set up different groups of people, or Circles, to share things with.

But Circles are one-way, or asymmetric. Everyone sets up their own Circles and nobody knows whose Circle they are in. Secret Circles would be a more apt description. Zuckerberg seems to be suggesting that they are not really groups because instead of everyone in the group knowing who else is in the group, it is the exact opposite: nobody knows which groups they are in.

Circles are so confusing that Ross Mayfield created the Slideshare below to explain it all. Facebook has a “symmetric sharing” model where two people mutually confirm that they are friends, and then can start sharing stuf with each other privately or publicly. Twitter has an “asymmetric follow” model where people Tweet out publicly and anyone can follow what they are broadcasting without that person necessarily following back. It’s one-way.

Google+, however, has an “asymmetric sharing” model where you can share one-way with people, but they don’t have to share back. It’s kind of like the Circle of Trust in Meet the Fockers (watch the video clip in the third slide), only not quite as funny.



Is Groupon Bad For Small Businesses?

Editor’s note: The following post is a response to our guest series taking a critical look at the daily deals industry. It is written by Vinicius Vacanti, CEO of Yipit, a daily deal aggregator that collects deals from more than 300 daily deal sites.

If you watch the nightly news, you would assume there’s a murder on every block, and if you’ve been reading TechCrunch recently, you would assume Groupon is murdering a small business in every city.

Given the hundreds of thousands of merchants who have run daily deals in the past year, it is inevitable that a few will have had bad experiences.  However, to assume that a handful of these anecdotes fully represent merchants’ experiences with daily deals is insufficient and irresponsible.

A series of guest blog posts by Rocky Agrawal criticize daily deals, advising small businesses to stay away based on examples of where the deals fail to turn a profit for the businesses. While Rocky’s posts are surely well-intentioned, his evidence is largely based on a few anecdotes and a basic misunderstanding of daily deal economics.

As we detail in Yipit’s Daily Deal Industry Report based on more than 100,000 past deals, 43% of offers in May involved merchants running a deal for at least their second time. Can so many merchants be delusional? Clearly some merchants have figured it out.

While I understand and applaud Rocky’s motivation to protect small businesses, can those businesses really afford to ignore a marketing channel that can deliver hundreds, if not thousands of new customers in a cost per acquisition model? Not only are most small businesses struggling, their standard marketing channels of yellow pages and newspapers are becoming less and less effective.

Instead of telling small businesses to avoid daily deals, how about trying to understand why some small businesses are having success?

With that understanding, we could then educate other small businesses on how they might be able to replicate that success themselves.

It’s a Numbers Game

Like most marketing options, daily deals comes down to the numbers. The good news is that most of the key variables that affect the success of a daily deal experience can be optimized by small businesses via daily deal structure and execution.

My co-founder, Jim Moran, wrote a post on the economics of a daily deal including a calculator. While this calculator bakes in a lot of assumptions, it’s the start of a handy tool for small businesses.

The two most important variables that small businesses can optimize are:

Overage: This metric represents how much more revenue the customer generates for the business than the value of the coupon. The larger the overage, the better for the small business. There are many things small businesses can do to increase overage including:

  • Strategically Price the Offer. If you are running a restaurant and the average per person bill is $30, provide a $15 for $30 certificate. The person is likely to bring someone else turning the meal into a $45 for $60 deal.
  • Up-sell the user. In a Hacker News post, this skydiving business does a great job of explaining how they up-sell sky divers into getting videos of their jump (60% of customers) and even a second jump that same day (40% of customers).

Return Rate: This metric represents what percentage of customers come back as a regular customer after using a daily deal. Improving this metric has the potential to deliver the most value for small businesses as indicated by the calculator referenced above. In a report authored by Rice University, often cited as a reason daily deals are challenging, small businesses reported that 20% of customers came back. That’s actually huge! If a company runs a deal that sells 1,000 vouchers, 200 customers will come back. As the calculator above implies, that’s a high enough return rate to make the deals very successful for most small businesses. To improve return rates even further, small businesses can:

  • Surprise and delight daily deal customers. Daily deal customers can be a bit embarrassed to be using a deal. Instead of acting disappointed, small businesses should do the opposite and make them feel welcome. They should thank the customers for coming, tell them the story of the business. It’s actually an easy opportunity to surprise the customer.
  • Offer an incentive for them to come back. With their bill, offer them a 20% discount or, if you’re a restaurant, a free appetizer to come back and try the business again.
  • Collect their contact information. Tell them you often send out notifications for special events and promotions
  • Discount just the first session. If you have a business that involves several sessions like class-based businesses, offer a discount on just the first session. If users like the session, they’ll come back for the rest of the sessions paying full price.

Other factors that improve the economics of a daily deal:

  • Breakage: Anywhere between 10% and 30% of deals aren’t redeemed. North American businesses get to keep the profits associated with those vouchers without incurring the cost.
  • Exposure: Small businesses gets emailed to tens of thousands and, sometimes, hundreds of thousands of users. This exposure is often the entirety of the value provided by most other marketing channels for small businesses.

If small businesses focus on creating the right structure for their daily deal to increase overage and execute on the daily deal experience to increase return rates, daily deals can become a very attractive marketing option.

Not right for everyone

That being said, daily deals in their current form are not right for every business. The vast majority of deals are for spas, salons, restaurants, events, activities and other services. These merchants all have a large fixed cost base, perishable inventory and considerably lower variable costs. Accordingly, their marginal cost on an additional customer is low enough allowing them to discount aggressively. That’s why businesses have been offering discounts for hundreds of years.

On the other hand, traditional retail categories appear the least frequently across the Yipit database, representing less than 10% of all offers.

A powerful tool that shouldn’t be ignored

Daily deals represent a powerful, scalable new cost-per-acquisition marketing channel that small businesses can optimize via strategic pricing and good execution.

If we really want to help small businesses, we should stop telling them to avoid daily deals. Instead, let’s focus our energy on educating small businesses on how they might be able to effectively take advantage of this new marketing channel. Or, I guess we can just keep directing them to yellow pages advertising.



Why Is Zynga Rushing Towards Its IPO?

The IPO window is now wide open, with everyone from Zynga to Groupon rushing towards it. Nobody knows how long that window will stay open (rule of thumb is 18 months), so better go public while you can. But today’s IPO filing from Zynga came particularly fast. According to one source, the actual writing of the 150+ page S-1 document was one of the fastest documentation processes for an IPO of this size, only taking two to three weeks.

CEO Mark Pincus abruptly cancelled a planned appearance at the D9 conference at the beginning of June, adding to speculation that was when Zynga decided internally to go ahead with the IPO. The three-week period referenced above was the time between what is known as the first “org meeting” with bankers and the final document filed today.

Zynga’s financials are strong, so they could really get the IPO process anytime they want. But there is definitely a sense that the urgency level picked up all of a sudden.

One theory—and it is only a theory at this point—is that Facebook may be moving up its own internal IPO schedule. It just added Reed Hastings to its board, and there is speculation that it may have already kicked off its internal process to get ready for an IPO. This would still be very early stages, but it would include getting its financial reporting in order if it hasn’t done so already and starting the board process to get it to sign off on looking for investment bankers.

If Zynga caught whiff that Facebook was starting to take actual steps towards an IPO, it might want to get out ahead for several reasons. One is that it has a good chance at becoming the most sought-after new Internet stock. (It’s financials are much cleaner than Groupon’s). But that position will be short-lived and will last only until Facebook itself IPOs. In the interim, Zynga’s stock will suck up a lot of the demand for publicly-traded Internet growth stories.

Another reason is that if the Facebook IPO is as well-received as everyone thinks it will be, Zynga could benefit from an expansion of its PE multiple (and stock price) just as a halo effect. All Internet stocks could do well when Facebook goes public, but you have to be public in order to benefit from that.

Or maybe Facebook has nothing to do with it, and CEO Mark Pincus just wanted to get the filing out before the 4th of July holiday. What do you think?

Photo credit: Flickr/Garry



With 17M Registered Users, Tango Is Growing Twice As Fast As Skype Did Its First Year

Back in Skype’s early days, it was adding users so fast that it liked to boast that it was “the fastest growing, globally available communications tool in history.” Well, by at least one measure (registered users 9 months after launch), mobile video chat service Tango is outpacing Skype. Tango now has 17 million registered users across both Apple and Android devices, only 9 months after it launched. By comparison, Skype celebrated 9 million users on its first birthday back in 2004.

Today, Skype has more than 600 million registered users, so Tango still has a long way to go. But the company wants to reach 100 million users over the next year. (Don’t we all?). If it does that, it will certainly earn the title of fastest growing communications tool.

But even getting to 17 million registered users in less than a year is quite an accomplishment. Tango took four months to get to 8 million, and another five months to add another 9 million. And all on mobile too. Tango is adding 2.5 million registered users per month.

The number of active users is 5.5 million in the last 30 days. Tango’s peer-to-peer service is handling 2.5 million minutes worth of calls every day, and the average call is 4 minutes.

Tango came out just as Apple was spending millions of marketing dollars promoting its own mobile video chat feature, FaceTime. Whereas FaceTime only works between Apple devices, Tango works across platforms on both iOS and Android. That cross-platform compatibility really helped drive growth. Downloads are split 50/50 between the two, and Tango is the No. 6 most popular free social networking app for the iPhone.

Tango already has 56 employees, and is building an engineering team in China, where it is also growing among users. The service is still free, but Tango will introduce premium paid features at some point in the future.

What is incredible about Tango’s growth is that it doesn’t even offer any desktop or Web software yet. Although, this seems like an obvious direction for new products, going mobile first certainly hasn’t hurt the company.



A Snapshot Of Zynga’s Financials: Revenues Grew 392 Percent Last Year To $600 Million

Zynga finally filed for its IPO today, and we now we get to take a look at its financials. At a high level, the company made nearly $600 million in revenues last year, and $90 million in profits. It grew at an incredible pace, with revenues growing 392 percent in 2010, up from $121.5 million in 2009 (and up from $19 million in 2008).

In just the first quarter of 2011 alone, the company’s revenues reached $235 million (or a $940 million revenue run-rate), and that was up 134 percent from the first quarter of 2010. What is particularly amazing about all of these revenue growth numbers is that Zynga started paying Facebook 30 percent of all Facebook Credits-related revenues starting in July, 2010, and only barely skipped a beat. Sequential revenue growth slowed from 32 percent in Q3 2010 to 15 percent in Q4 2010, but then accelerated again to 20 percent growth in Q1 2011.

The good news for investors is that Zynga actually makes a profit. After a $53 million loss in 2009, it swing to a $90 million net profit in 2010. And profits grew 84 percent in the first quarter of 2011 to $11.8 million.

Zynga makes almost all of its money from the sale of virtual goods (95 percent of Q1 2011 revenues), and the rest is advertising. Advertising revenue grew 321 percent in the first quarter to $13 million, while online gaming revenue grew 127 percent to $222 million.

Zynga also reports a non-GAAP (Generally Accepted Accounting Principles) measure, which it calls Bookings. In this sense, it is joiningother recent Net IPO filers like Groupon, which also put forth their own non-GAAP measure of revenues. In Zynga’s case, Bookings make it look even bigger. For instance, total Bookings in 2010 were $838.9 million, or 40 percent higher than its $597.5 million in revenues.

Zynga defers the recognition of all of its revenues, which is actually a more conservative accounting approach and is a godo thing. But it still wants to get credit for what it could have recognized, so it reports Bookings as well. It’s kind of like a way for Zynga to pat itself on the back in its financials.

Here is how Zynga explains Bookings in the S-1:

Bookings is a non-GAAP financial measure that we define as the total amount of revenue from the sale of virtual goods in our online games and advertising that would have been recognized in a period if we recognized all revenue immediately at the time of the sale. We record the sale of virtual goods as deferred revenue and then recognize revenue over the estimated average life of the purchased virtual goods or as the virtual goods are consumed.

Advertising revenue is treated the same way.

Some other key metrics investors will want to keep an eye on (all numbers are as of March 31, 2011):

  • Total Q1 Revenues: $235.4 million
  • Online Game Revenue: $222.4 million
  • Online Advertising Revenue: $13 million
  • Cash and Cash Equivalents: $996 million
  • Operating cash flow: $103 million
  • Cash flow from financing activities: $225 million
  • Daily Active Users: 62 million
  • Monthly Active Users: 236 million
  • Monthly Unique Users: 146 million
  • Employees: 2,268

The difference between active users and unique users is that active users are counted per game, whereas a unique user might play more than one game. In other words, there is an overlap in active users. In March, 2011, 146 million people played one or more Zynga games. So Zynga makes about $1.60 per user per quarter.

Zynga’s cash flows from “financing activities” was twice as big in Q1 than from operating activities, which is interesting. In the filing, Zynga discloses that it sold $287.2 million worth of marketable securities in the first quarter, primarily related to a $485 million financing which it raised during the quarter (but it also repurchased $261 million worth of stock in the same period).



Square Closes That $100 Million Round, Mary Meeker Joins Board

It’s official. Jack Dorsey’s Square has joined the billion dollar valuation club. The mobile payments startup closed a $100 million series C led by Kleiner Perkins, a story we broke a few weeks ago. The new round values Square above $1 billion.

Tiger Management is also an investor. And Mary Meeker, the former Morgan Stanley Internet analyst who is now a partner at Kleiner, will get a board seat. She will join other new board members Vinod Khosla and Larry Summers.



Accel, Khosla, and Andreessen Horowitz Pour Another $30 Million Into Social Browser RockMelt

Is there a future for social browser startup RockMelt? Despite attracting only a few hundred thousand users since its much-hyped launch, the company filled with ex-Netscape rockstars and backed by former Netscape founder Marc Andreessen just managed to raise another $30 million in a B round led by Accel Partners and Khosla Ventures, with Andreessen Horowitz, Ron Conway, Bill Campbell and Josh Kopelman also participating. Jim Breyetr of Accel and Vinod Khosla will be joining the board as observers. That’s some pretty serious money.



AOL Consolidates 53 Brands Down To 20 “Power Brands;” The Huffington Post Gets Bigger

AOL CEO Tim Armstrong likes to streamline things. And he is about to streamline AOL even more. Somewhat reversing the anti-portal strategy he inherited, he will start to consolidate 53 different content brands into 20 “power brands.” (Don’t worry, TechCrunch is still one of them).

“More and more stuff is moving towards well-known brands,” says Armstrong. “Unless human nature is going to totally change, the Internet is going to end up in a branded environment.”

The Huffington Post will be absorbing many of the former stand-alone AOL editorial sites, and in the process expanding from 28 sections to 36. Armstrong believes that simplifying AOL’s content portfolio will make it easier to sell ads and attract readers. Instead of “300 different things that sales people could sell, now they can focus their sales efforts against key categories.”

AOL’s celebrity site PopEater, for instance, will become HuffPost Celebrity. Politics Daily will be rolled into HuffPost Politics. Kitchen Daily will become HuffPost Kitchen, Parent Dish will become HuffPost Parents, AOL Black Voices will become HuffPost Black Voices, and so on. HuffPost Music, HuffPost Small Business, and HuffPost Kids will all be new.

Outside of the Huffington Post, the power brands that will remain are:

AOL.com
Autoblog
Engadget
Joystiq
Mapquest
MMA Fighting
Moviefone
Patch
Stylelist
TechCrunch
TUAW
AOL Autos
AOL Healthy Living
AOL Industry
AOL Money & Finance,
AOL Music
AOL Search
AOL Travel
AOL Video

Meanwhile, AOL will be merging its two main homegrown content management systems: Blogsmith and the Huffington Post’s own custom CMS based on TypePad. The new CMS will all be merged into the Huffington Post’s system, although a few big sites like Engadget will remain on Blogsmith for the time being. (TechCrunch will stay on WordPress).

All of these changes will take place over the summer.



The HP TouchPad Will Come With Its Own Facebook Tablet App (Leaked Pics)

The world has been waiting for an official Facebook tablet app, and waiting, and waiting. But that app may not appear on the iPad first (although Facebook is working on an iPad app for sure). Instead, Facebook’s first tablet app will appear on the HP TouchPad, which comes out this Friday and runs the WebOS it bought with Palm.  Unless the iPad app also launches this week, the TouchPad will become the first tablet with an official Facebook app.  Given the tension between Apple and Facebook, a concurrent launch on the iPad seems unlikely. Update: Facebook has reached out to clarify that “this app was not built by Facebook but by HP.” Much like RIM built the Facebook app for the Blackberry Playbook using Facebook platform. I’ve changed the headline to make it more accurate.

How do I know?  I got my hands on some screenshots of the Facebook app for the TouchPad.  You can see them here.  But what I wonder is if this is also what the app will look like on the iPad.  All I can say for sure is that these pics are from Facebook’s tablet app running on WebOS.

A few features stick out.  Along the left rail, which pops in and out, you’ve got your main navigation: Newsfeed, Messages, Events, Places, Friends, and Photos.  The Newsfeed can be viewed in both a stream view or a more tablet-friendly tile view.  The tiles make better use of typography and images.

Also notice the addition of Places and Photos to the left rail navigation. Places opens up a map with nearby activity and the ability to check in. Photos displays your Facebook photos in a tiled album view.  Profiles also highlight people’s photos.  You can toggle between their wall, info, and photos.

Judging from these images and others I’ve seen, the app really takes advantage of the extra screen real estate to good effect.  Photos and Places especially shine.  I really hope the iPad app looks similar.



Why Google Health Really Failed—It’s About The Money

Editor’s note: This guest post was written by Dave Chase, the CEO of Avado.com, a health technology company that was a TechCrunch Disrupt finalist.  Previously he was a management consultant for Accenture’s healthcare practice and was the founder of Microsoft’s Health business. You can follow him on Twitter @chasedave.

As reported on TechCrunch, Google shut down its medical records and health data platform. Since then, there’s been a lot of bits spilled offering explanations, but they all missed the most critical item. Money. Or in the language of healthcare—Reimbursement. I explain more below regarding why Google Health was doomed to fail in light of the legacy reimbursement model.

First, let’s recap some of the explanations offered up so far. These are all valid but miss the biggest point.

Adam Bosworth, who originally ran Google Health gave one reason: It’s Not Social. That’s true if one wants to create a weight management program or is simply interested in fitness-minded folks. Clearly that is important given the obesity epidemic, however there’s vast swaths of healthcare where being “social” isn’t appropriate or applicable in a doctor-patient relationship. In other words, being social is necessary but not sufficient to transform healthcare.

In the comments of TechCrunch’s original article reporting the shutdown, I gave my immediate take…

  1. It’s tough, even for big companies, to focus on a bunch of different things. I’m sure they could have figured out how to be successful if it was as strategically important as Search or Chrome or Android or Social…but they have bigger fish to fry.
  2. The Health space is a very difficult one. In many ways, it’s counter-intuitive for those who haven’t been in the arena from both the healthcare provider and consumer perspective.
  3. As much as there’s a massive consumer-empowerment movement, in order to get ongoing and broad adoption of something in healthcare, one needs to lead with the clinicians.

If you are interested in more, I’ve written about this here.

One of the better analyses was done by John Moore of Chilmark Research.

Few consumers are interested in a digital filing cabinet for their records. What they are interested in is what that data can do for them. Can it help them better manage their health and/or the health of a loved one? Will it help them make appointments? Will it save them money on their health insurance bill, their next doctor visit? Can it help them automatically get a prescription refill? These are the basics that the vast majority of consumers want addressed first and Google Health was unable to deliver on any of these.

As much as we’d like to think it isn’t the case, the fundamental driver of most (not all) behavior in healthcare is the reimbursement scheme. As I described in an earlier piece on the “Do it Yourself Health Reform” movement, I spent much of my time as a consultant in the Patient Accounting departments of heatlhcare providers. The legacy reimbursement scheme can only be described as a Gordian Knot designed by Rube Goldberg.

I expanded on the insidious effects of the reimbursement model in the U.S. in my overview of The Most Important Important Organization in Silicon Valley No One Has Heard About. For those who would like to be optimistic about the reimbursement model changing, read about Health Insurance’s Bunker Buster. In the meantime, it’s critical to understand the current reimbursement model to understand why Google Health failed to transform the landscape.

To understand the impact, I’ll exaggerate to make a point—your healthcare provider doesn’t care about you unless they can see the whites of your eyes. Why is that? Today’s flawed reimbursement scheme only compensates the healthcare provider for a face to face visit. It’s hard to fault the primary care physician who has been put on a hamster wheel of 30-40 appointments per day and can’t even give their practice away upon retirement (that was once their retirement plan) for not wanting to deal with their patients sending email or sharing information from their personal health record.

Interestingly, in the transformative models I describe below, doctors consistently tell me that half to two-thirds of their patient interaction time doesn’t need to be face-to-face. They can deliver high quality medicine without being in the same room as them. Yet, the fee-for-service model causes this country to waste mountains of time waiting to get appointments and then in the waiting room in order to facilitate the face-to-face appointment.

The problem for a company like Google or Microsoft is their success is measured in the tens of millions. Those kinds of numbers are only present in the legacy reimbursement model. Frankly, Google could have done all the right things, but if the reimbursement model doesn’t change Personal Health Records will remain irrelevant for most healthcare providers. At best, we’re seeing Electronic Health Record vendors release so-called Patient Portals that are often driven more by a marketing objective than a clinical objective. Further, they are flawed in that they are a one-way broadcast of the silo’ed information from only one healthcare provider.

Is there any hope for individuals to be more involved in the healthcare system as Personal Health Records promised? After all, it’s clear that healthcare works best and costs least when the patient/individual is a partner in their care with their healthcare provider. Fortunately, I believe that we’re seeing the first waves of a tsunami lapping the shore.

It’s what I call the P.A.C. Tsunami. Patient-centered, Accountability and Coordinated. Today’s flawed fee-for-service reimbursement system is essentially the opposite of those three elements creating all the wrong incentives. In its place, we’re seeing the first waves. Both the Do-it-Yourself Health Reform movement and the government-driven health reform are creating incentives for what are called a Patient Centered Medical Home (PCMH) and Accountable Care Organizations (ACO).

We are already seeing dramatic success with the first editions of PCMHs in the models such as MedLion that were highlighted in The Most Important Important Organization in Silicon Valley No One Has Heard About article. ACOs have the right goals in mind but remain like Unicorns—fantastical beings no one has seen yet and have been described as stupefyingly complex in their design. In contrast, one can’t help but be optimistic when studying the results of PCMHs such as 40-80% reductions in the most expensive facets of healthcare (surgical, specialist & ER visits) or a pilot program in Ohio with Medicaid diabetics that scaled could save Ohio $500 million annually.  Or consider the case of Denmark that was the first country to broadly adopt the PCMH model. It’s been so successful, they have reduced the number of hospitals in that country by over 50% as they simply don’t need that many hospitals anymore.

What does this mean for the tech community? I’d posit that as mobile technologies have fundamentally reshaped voice and data, there’ll be an equally radical transformation of healthcare. Just as legacy telcos had to fundamentally transform themselves or they’d be an artifact of history, so too will healthcare organizations transform (or die). With the transformed healthcare ecosystem, there are requirements for entirely new categories of software that a new generation of startups will develop. Exciting times indeed.

Image credit: Colin Dunn