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The Quantified Other: Nest And Fitbit Chase A Lucrative Side Business

Apr 17 2014, 5:10am CDT | by

Last year Karl Dalal walked more than 1.5 million steps around Houston, each step tracked by the Fitbit Zip that was clipped to his clothes. “I wear it religiously,” he says. “And so does my wife.”...

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15 weeks ago

The Quantified Other: Nest And Fitbit Chase A Lucrative Side Business

Apr 17 2014, 5:10am CDT | by

Last year Karl Dalal walked more than 1.5 million steps around Houston, each step tracked by the Fitbit Zip that was clipped to his clothes. “I wear it religiously,” he says. “And so does my wife.” A big reason he cared enough to keep it on was that someone else was tracking those steps, too: his employer, BP.

All that walking helped Dalal, 51, opt for a lower health care premium from the self-insured oil giant. The corporate wellness program that he also oversees just brought BP America’s health care costs below the U.S. average growth rate of 6%. Around 14,000 other employees, 6,000 spouses and 4,000 retirees got free Fitbits like Dalal in 2013, and this year a few thousand more have signed up for his program.

Smart, connected devices have been pitched to consumers as agents of life improvement. Every company that makes a gadget for our shoes, wrists, cars or walls produces a torrent of data that can be directed at helping us lose weight, run faster, drive more carefully and use less energy. There’s a tinge of narcissism to the quantified-self movement, but the industry is realizing null

Your data combined with those of thousands of other people can tackle bigger problems such as cutting your company’s health care budget or sparing the nearby utility from building another power plant.

Smart-thermostat maker Nest Labs (which is being acquired by Google for $3.2 billion) has quietly built a side business managing the energy consumption of a slice of its customers on behalf of electric companies. In wearables, health tracker Fitbit is selling companies the tracking bracelets and analytics services to better manage their health care budgets, and its rival Jawbone may be preparing to do the same.

These companies are capitalizing on the terabytes of data they collect from consumers and, to an extent, on the largesse of taxpayers. State governments have increased the money–from $1.3 billion in 2003 to $6 billion in 2012–allocated to helping utilities manage energy demand, according to the U.S. Energy Information Administration.

In health, new rules under Obamacare broaden the incentives employers can give their staff, boosting cash rewards on premiums or deductibles from 20% to 30%. Small businesses can apply to a pot of $200 million in grants to set up such programs.

Nest founder Tony Fadell says revenue from his utility services will eventually outweigh what he makes from selling thermostats, and fatten his margins: “We’ll get more and more services revenue because the hardware sits on the wall for a decade,” he said during an interview in December in Nest’s Palo Alto office.

Nest launched its energy-services programs in April 2013 and has 12 partners in the program, including Chicago’s ComEd and Southern California Edison. Honeywell, considered the biggest U.S. thermostat maker by sales, has demand-response programs with 25 utilities.

For Nest, winning contracts with utilities is a slog. Nest needs to catch some utilities between three-year planning cycles and sell more thermostats. It’s in less than 1% of U.S. households.

Nest’s deals with utilities also vary. In some cases the utility reimburses customers $30-to-$50 a year per thermostat for the right to turn the air conditioner down on hot days to ease the load on the grid. In other deals Nest splits cost savings with the utility. Demand response programs are worth an estimated $80 per thermostat, so 1% of U.S. households potentially spells a $100 million pie that Nest, utilities and customers can split each year.

Crucial to Nest’s pitch to utilities: its thermostat learns a household’s activity over time through multiple sensors that detect things like temperature and movement, and automatically changes the temperature accordingly. Honeywell’s thermostats don’t detect movement, relying more on customer programming. Also, while Honeywell funnels all user data to utilities, Nest takes over the difficult job of parsing it and managing consumption.

“We don’t let utilities control the thermostat. We don’t share the data with the utility. We won’t work with them if they don’t agree,” says Nest cofounder Matt Rogers. Utilities define a successful demand-response program as one that lowers energy usage by 30%. Nest’s servers and algorithms can reduce it by 50% to 60% at peak times, Fadell claims.

Nest’s director of energy services, Ben Bixby, says “many” utilities are in the pipeline, but it’ll likely be years before the real revenue kicks in.

Till then Fadell and Rogers are trying to avoid the fate of other smart utility projects that ended up on the scrap heap. An earlier generation popped up in 2008 after federal stimulus money helped utilities upgrade their power grids to produce real-time energy data they could share with third parties.

Google and Microsoft responded with software–called PowerMeter and Hohm–that let consumers better understand their energy usage. The software was free, but both programs were shut down in 2011 due to a lack of user interest. Cisco also tried and failed to maintain an energy management system for utilities.

Analysts say it’s hard to independently verify savings claims with smart thermostats because of the complex web of variables. “We know intuitively there is a conservation effect, but it’s not yet measured,” says Debbie Kimberly, the vice president of energy efficiency programs at Austin Energy, a Nest utility partner. “We’re in the process of looking into that.”/>/>

Fitbit, a wearable device that counts your steps, began working with employers after several like Autodesk and TokyoElectron approached the tiny startup in 2010 to use its bands in their corporate wellness programs. Today Fitbit sells its trackers in bulk to “thousands” of employers at a discount, along with sophisticated tracking software that can, for instance, get one office competing against another or see how active certain employees are, assuming the employees have given their permission to expose their personal data. It’s one of the fastest-growing parts of Fitbit’s business, says CEO James Park.

For privacy reasons both self-insured employers and those with group insurance have to bring on a population-management firm such as StayWell or Welltok to manage the data as a neutral third party. Amy McDonough, who oversees Fitbit’s employer program, wouldn’t comment on how Fitbit data would affect pricing negotiations between employers and health care providers, though health insurer Cigna said null . The data are still being tested.

It’ll take a few years of scaling up before Jawbone’s and Fitbit’s enterprise play becomes lucrative. For now both have free and open APIs (application programming interfaces) that link their smartphone apps with insurers, employers and fitness apps like RunKeeper, with a user’s permission. Jawbone vice president of product management Travis Bogard says Jawbone may ape Fitbit and provide analytics software to employers.

It might also take a revenue cut from third-party services like Sleepio, which charges insomniacs $25 a week for cognitive behavioral therapy sessions by tracking them (at no charge to Sleepio, for now) through the Jawbone UP, or Wello’s $199-a-month online fitness classes, which also draw data from the UP.

This time last year Jawbone spent $100 million on BodyMedia, a maker of high-tech armbands that could track sweat, activity and temperature and that had just started a test project with Cigna. The bands tracked several thousand people deemed at risk of diabetes, and Cigna provided remote coaches to encourage them to become more active. Early anecdotal evidence shows a double-digit improvement in users’ risk profiles from categories like “chronic” to “at risk,” according to Cigna spokesman Joe Mondy.

Cigna wants to eventually reach millions of employees and estimates the right “consumer-oriented product” could lead to a 13% year-over-year reduction in medical trend, what insurers charge employers based on the risk profiles of their employees, Mondy says. “We can literally bend the cost curve.”

Medical trend for insurers has actually be falling in the last few years, from annual cost rises of 12% to the current 6%, partly because consumers know more about the competing costs of hospitals or generic drugs, Mondy adds. New, personalized data about sleep and activity may well be feeding into this transparency trend. Still, Fitbit’s McDonough cautions it’ll take three-to-five years before her company can categorically say its devices and analytics are responsible for lowering health care costs.

There are risks for gadget makers who enter the data-broker model. Employers who collect more health data about their staff naturally face a greater risk of being attacked by hackers, or staff who might manipulate the data to lower healthcare costs. Various data breaches at hospitals in 2013 already led to a 15% error rate of medical diagnosis that year, according to the Ponemon Institute.

The onus of security will fall on the enterprise customers says Nir Zuk, CEO of corporate security specialist Palo Alto Networks. “I don’t think security is at the top of the minds of these Internet of Things companies,” he says.

Part of the outcome will rest on what new conveniences consumers will share in exchange for their increasingly personal data. “It will definitely be about the data as we move forward,” says Jawbone’s Bogard. The “quantified self” was just a first step, he adds.

In other words, most people don’t really care about how many steps they’ve taken each day, but they do care about their insurance and energy bills.

Once all these data are mined and shared across a growing web of connected things and entities, Karl Dalal’s Fitbit will not only inform his insurer he’s running a fever–it’ll tell his Nest thermostat to turn down the heat.

 
Update
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