BIG DATA–The New Monopoly

mo-nop-o-ly (noun) –the exclusive possession or control of the supply or trade in a commodity or service.

Generally speaking, monopolies are considered bad for the economy and the consumer.  Two of the most easily remembered monopolies are the original AT&T and Standard Oil.  AT&T was given its monopolistic status by the government, whereas Standard Oil, achieved it through business practices. In both cases, the government eventually broke up these monopolies, and innovation, lower prices, and competition thrived.

Data is the new and most leverageable monopoly commodity!  Big Data companies are successfully creating barriers to entry that stifle competition and create a new type of moat around their success.  Unlike traditional analog monopolies, the marginal cost of a new customer is effectively zero.  No new plants to build, no distribution costs, no new staff to hire (yes, there is a real cost to building and running these data centers, but the costs of that technology continues to drop rapidly).

Today, it appears that some of the largest consumer data aggregators — Google, Amazon, Apple, Facebook, etc. — have emerged as near-monopolies in their ability to collect data and insights about consumers.  Facebook, as one example, built its business on an advertising model, but its real value is data targeting.  It has more and better data about most people (at least in the U.S.)  than almost anyone else.  The more users Facebook engages, the lower Facebook’s data acquisition costs and the higher their value. Amazon has a similarly unique data set as the largest online retailer in the U.S., Google as the dominant search engine, video platform (YouTube) mobile OS (Android), and ad platform (DoubleClick). Apple, through iOS. The other two companies that might be thrown in the mix are AT&T Wireless (thanks to Apple, by the way) and Verizon Wireless (along with its acquisitions of AOL and Yahoo), which have the two largest databases of mobile IDs in the country.

However, our governmental institutions today are ill-equipped to respond to the challenges of global companies growing at exponential rates. Traditionally, the value of a company was built on a combination of intellectual property and physical assets (plants, trucks, machines, etc.). The physical assets were often developed and acquired based upon the underlying intellectual property (think patents).  Today, it still takes around three years to get a patent, but companies’ ability to leverage intellectual property can happen in a few years or even months.  As an example, Uber burst on the scene with its founding as Uber Cab in 2009, and reached a valuation at $3.5 billion in 2013. Had they waited for a patent approval, they would have missed the market opportunity.

Does It Matter?

Each of the big data competitors has emerged with a unique opportunity to collect more and better data and then sell that data to advertisers. Does it matter?

The short answer is yes, it matters. These giant data aggregators are already dominating the ability to leverage data to more effectively to target an ad.  But the insidious part is their ability to disaggregate a supplier from a buyer.  Companies like Amazon or Facebook know (or infer) not just who you are but what you are like. They know not only where you are but they can guess where you are going. They don’t just know what you are doing right now — they have a pretty good idea why you are doing it. And they make excellent guesses about what you will do next, guesses that grow more accurate as you go about your daily life while being carefully observed by the data giants. Amazon is already adjusting its pricing algorithm in real time. Amazon can charge one individual a different amount than another. Since the acquisition costs of many products are pre-negotiated, when it chooses to increase a price, the incremental margin remains with Amazon. Additionally, Amazon knows more about the value of a product than the manufacturer.  Therefore, Amazon can negotiate the price for every item and drive down manufacturers’ margin.

They have users’ shopping data, now married to zip code (which tends to indicate income levels) and to family members (if you set up “sub-accounts” on Prime). Amazon acquires age and demographic information, and if they want to, Amazon can purchase your credit score and other available data to provide a fuller view of a consumer. They can successfully charge you more than the next buyer for something they’re confident you want, like that “soon to obsoleted” piece of technology.

In the narrow confines of online advertising and commerce, combining some of these data clearly makes marketing more efficient by improving targeting, and by identifying and eliminating the famed half of the marketing budget that is wasted. As HBR noted:

“Marketers have trained their big-data telescopes at a single point: predicting each customer’s next transaction. In pursuit of this prize marketers strive to paint an ever more detailed portrait of each consumer, memorizing her media preferences, scrutinizing her shopping habits, and cataloging her interests, aspirations and desires. The result is a detailed, high-resolution close-up of each customer that reveals her next move”.

We have reached an inflection point.  Data are ubiquitous, and the marriage of data from multiple sources is commonplace. We are witnessing the transition from from data improving efficiency, to data becoming a strategy, to data becoming a barrier to entry (monopoly)!

Today, data is a strategy, and we need to start thinking about it as one. While scale is always a source of leverage for a supplier, with data the marginal acquisition cost is near zero and the benefit to data aggregators grows exponentially with each incremental data element. Data should adhere to the same competitive standards as other business strategies. Data monopolists’ ability to block competitors from entering the market is not markedly different from that of the oil monopolist Standard Oil or the telecommunications monopolist AT&T.

The real problem is that our institutions are still moving at the speed of analog while our economy is literally moving at the speed of light. The actions and behaviors of these companies is rational and so far seemingly legal, but left unchecked they will become egregious. Data corrupts and absolute data corrupts absolutely.

Author: Jonathon Shaevitz

Jonathon Shaevitz is the CEO of Industry Index.

Posted in Data, Financial, Thought-leadership.