Like fossil fuel in the ground, customer data may soon be a liability, not an asset
Author: John Naughton
Source: The Guardian (https://www.theguardian.com/commentisfree/2019/jul/14/the-networker-customer-data-liability-not-asset-british-airways-ico-fine-leak-marriott-hotel-group)
Oil, which was once considered as indispensable to the economy is witnessing a reversal of fortune. Environmental costs of digging up and burning oil have forced humans to look for renewable sources of energy and now talks are when will renewable source of energy will overtake oil. Countries heavily dependent on oil for generating revenues are looking to diversify and reduce its dependence on oil revenue. Today data is considered to be the new oil and companies are falling over each other to generate and control data.
“Data is the new oil” is a tired metaphor designed to capture the fact that, just as the old economy ran on oil, so the new digital economy runs on data. Just as plentiful reserves of underground oil were good for oil companies, so the possession of masses of data would likewise be a great asset for tech companies lucky enough to have it. And whether or not they count it explicitly as an asset on their balance sheets, in practice it gives them a powerful bulwark against competitors and startups. It’s no longer enough for a couple of grad students to come up with a better search algorithm than Google’s, for example; they would also have to build a global network of massive server farms – and have acquired exabytes of data. So possession of large quantities of data greatly heightens the barrier to entry for competitors and thereby strengthens incumbents. The more data you have, the better.”
However, storing and protecting data is not easy as we have seen major data breaches across big companies. If you are not able to protect the data then it becomes toxic and your strength becomes your weakness.
“UK Information Commissioner’s Office (ICO) had fined the Marriott hotel chain £99.2m for a data breach that happened in November 2018. The breach involved the theft of 500 million customer records from the company’s guest reservation database. A few days earlier, the ICO had imposed a fine of £183m on British Airways for a breach that had leaked the data of half a million users.”
Companies will continue to spend heavily on safeguarding data or else it will meet the same fate as that of oil – you have it but cannot use it.
“.. The ICO’s recent fines, however, cast a shadow on this cosy scene. Possessing oodles of data is only an unalloyed good if you can protect it from thieves, hackers and other criminals. If you can’t, then that precious asset can suddenly turn toxic – just like fossil fuel reserves. And as a result your balance sheet no longer looks quite as inviting to investors. Apart from the reputational damage – public humiliation, exposure of corporate incompetence, etc – there is also the matter of the fines. Prior to the EU’s GDPR (General Data Protection Regulation), many of the penalties levied by data-protection authorities were risible, especially to large companies. But under the GDPR the bill can run to 4% of global turnover. As the man said, a billion here and a billion there and soon you’re talking real money. More important, however, the centrality of data in the tech economy provides a useful indicator of where the main levers for regulation may lie. Facebook (with global revenues of $55.838bn in 2018) could easily absorb a 4% fine ($2.23bn). But if regulators insisted that it had to open up its data trove to competitors then that would really hurt. Also, the announcement two weeks ago that the UK Competition and Markets Authority is embarking on a major investigation into the hidden data trading markets that underpin both Facebook’s and Google’s current prosperity suggests that – finally – governments are beginning to flex their muscles for the coming fray with the tech giants. It’s taken an age for this to happen, but better late than never.”
Note: the above material is neither investment research, nor financial advice. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.
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