Six major internet companies and internet-service providers, including AT&T, Twitter and Alphabet’s Google, Amazon and Charter Communications will detail their consumer data privacy practices to a U. S. Senate panel Wednesday. Despite the optics of Big Tech vs. Big Government, the data privacy regulatory trend is more likely to result in “divide and conquer” of technology companies into winners and losers.
More specifically, the fault line appears if you split “Big Tech” into two types:
Corporations using your personal data to improve and sell products and services directly to you. Corporations using your personal data to increase their revenues via selling to advertisers or third parties. Sixty-four percent of Americans favor more regulation on data privacy. But we also like cool, personalized gadgets and services that use our data to make the experience better. We don’t, however, like discovering that our emails are being monitored or our buying/watching/fitness habits are being sold to marketing agents. As you read Senator John Thune’s comments or California’s new privacy law, it appears the key impact of regulation enactment will be defining privacy in terms of a business model. In other words, “what is a company allowed to do with my personal data?”
The past 50 years have shown that the cycle of regulation and deregulation creates winners and losers in shareholder value terms, and the same will be true this time around. This may take some time to play out among the titans testifying, but divergence could be significant.
Facebook, Twitter and Apple provide instructive studies in contrast. Facebook, though not present Wednesday, Twitter and Google are data brokers with advertising revenue driving growth today and will continue to be unless they radically change their business model (i. e. you pay them an annual fee to not sell your data). Apple, on the other hand, sells products directly to us. Unlike Facebook or Twitter, Apple’s business model is incentivized to protect our data — after all, we pay Apple directly for its products and services, and the company uses our data to design better, more personally customizable products.
Data privacy is only one wave of a rising “data regulatory” tide. As of 2018, Big Tech seems to realize that if they don’t get the customer data story right, they risk future growth under an increasingly blinding spotlight. For Facebook, Twitter and increasingly Google, this is about restoring trust in the platform so they can continue to monetize your personal data through ad sales. For Apple, it’s about designing products that move the company into new, more regulated sectors altogether, like healthcare. For AT&T, and Charter Communications it’s also ultimately about ad sales but not directly tied to selling your data.
Profit margins at risk There isn’t an inevitability, however, to the outcomes. Good governance of technology will ultimately improve shareholder returns. Good management teams react, great management teams get ahead of the curve. This ultimately could mean adjusting the business model to avoid getting swept away by rising regulations. Big Tech shareholders out there should pay close attention to boards and C-suites of companies that traffic in data (see Google, Twitter, AT&T) and stay focused on these developments. The sellers of data face much bigger headwinds to maintaining their high margins in this environment than sellers of products.
One way for shareholders to measure improved governance in this instance is observing if new, improved controls are put in place to manage the core product transparently and responsibly (vis a vis Americans’ changing attitudes towards data privacy). This includes controls on the cost of producing data, which will likely require adaptions to the current business model. Then comes reporting. History suggests that better reporting standards are needed for new technology risks.
From an investor perspective, executives and boards that don’t understand and communicate about new, complex risks lose money for shareholders. Data privacy falls into this category. But better governance doesn’t have to be a by-product of regulation.
After all, markets will reward great management teams navigating ahead of the regulation curve via the multiple we are willing to pay for their stock… And of course the reverse is also true.
By Ryan Dodd Cyberhedge Founder/CEO & Tim Seymour Cyberhedge Advisory Board Member — As seen in CNBC