• by Ted McConnell , Featured Contributor, October 3, 2019

Like any economic resource (e.g., land), advertising has utility. It goes to its highest and best use when an impression is populated with a message of potential interest to the person viewing it.  Data is the clear solution to get best use of media, but regulatory interventions from the EU, and more recently, the state of California, are gumming up the works.

Since data is used at all stages of the marketing process, you might guess that the consequences of regulating data would be far-reaching, and you would be right. What follows is a cursory look at some of the implications of such a process.

First, what’s the upside of using data correctly? Digital ad spending in the U.S. was $130 billion last year, according to eMarketer. For perspective, that’s about the same as the 2016 GDP value added of farm production.  

Let’s say one impression in 10 matters to its audience. Estimate one in five, if you like; it doesn’t change the story.

With these assumptions, we have $130 billion changing hands that’s productive only 10% of the time. So, we have an opportunity for a 9X productivity improvement by matching ads with viewers. A 9x growth opportunity should be good news. Media can, in theory anyway, keep getting more valuable until no impression is wasted on an audience that does not care about the message. But that may never happen.

Friction

Privacy regulation is creating an impediment to value creation by limiting the trading of data.  As an unintended consequence, that same regulation is giving an advantage to Google, Facebook, and other large walled gardens.

This happens because impediments to data movement in the open web increase walled gardens’ competitive advantage over the vast majority of publishers. Today, smaller players effectively aggregate to create scale by trading data. But the new regulation stops trading among smaller companies.   Facebook and Google, on the other hand don’t need to collaborate to get scale. They have it inside their walls.

Metcalfe’s Law says that a network’s effectiveness is proportional to the square of the number of connected users. The basic idea is simple. What if, for example, you could only call people on your block? How valuable would the telephone network be?

The New York Times has about 4 million subscribers, and Facebook has well over 2 billion monthly users. The difference of the squares is five orders of magnitude!

The new legislation will damp open-web data by, among other things, making every publisher get permission from every user about all possible downstream uses of data. Sounds like fun, doesn’t it? Harsh penalties will make it simpler to do ineffective targeting than to absorb the risks of breaking the law.

The newest regulation is called the California Consumer Privacy Act (CCPA). As it comes onstream, regulators seem blissfully unaware that their actions regarding privacy are helping Facebook and Google assert their already huge scale advantage.

Last week Randall Rothenberg, CEO of the Interactive Advertising Bureau, said, "The question is, will the internet become a series of walled entities, with no ability to cross-pollinate? The role of public policy is to try and ensure as level a playing field as possible so that competition can flourish.” His clear suggestion: Regulation is not leveling the playing field.

Privacy regulation, though needed, needs adjusting to create the right balance between commercial and social costs and benefits.  Right now, it looks like a way to impose massive fines on almost any company under cover of altruism.

And in the near future, there will be subtle social consequences as well.  

Before data and programmatic buying, demography was the mechanism of choice for advertisers to define media targets. Demographic targeting commoditized people, but at least it occasionally saved a female from an ad for prostate medication.  Today, selling something to someone merely because they are Hispanic or female seems, honestly, like identity politics for profit.

There is a massive efficiency difference between selling a car to someone because they are male and selling it to them because they seem to need a car. Data enables that efficiency, but data is in trouble.  

On the current trajectory, people will be commoditized as demographics. Smaller ecosystem players will be compromised; states will have unlimited ability to siphon off the profits of America’s most innovative industries; message relevance will decline; and lawyers will make big bucks defending the privacy of people who never felt harmed. The real bad guys, stealing your data from the likes of Equifax, will escape (they always do).  

All this will show up as slightly higher prices for almost everything -- and, I imagine, better fire trucks in California.