When Data Becomes Capital: The Economics of Digital Identity

Your data is valuable because it helps define you both as a consumer and as a factor of production.  Both sellers and employers want to maximize their benefit from you, which requires knowing what will make you put forth the greatest effort.  Which products will you purchase regularly?  What are your strengths as a worker?  Do you own any assets to sell?  If so, under what circumstances might you be convinced to sell them at a below-market price?  Being able to know any of these things requires that companies have access to your data and your digital identity.  

Thanks to artificial intelligence (AI), firms can more easily process this digital data and use complex algorithms to determine what a selected person would be most valuable for in terms of consumption, labor, or purchasing assets.  This is a more sophisticated and targeted process than previous generations’ use of demographic and polling data.  Now, thanks to AI, individuals can be intricately analyzed and targeted with ads, job offers, and requests to purchase assets.

How Companies Monetize User Data as an Asset Class

These days, companies routinely share and sell consumer data.  This data is desired by sellers because it helps them tailor their goods and services to be more competitive.  There are many different types of consumer data, some of which a seller collects on its own.  Zero-party data is data that is shared by consumers to the seller through surveys, typically customer satisfaction surveys.  First-party data is collected by the seller from its customers, typically their behavior while browsing on the company’s website.  When that first-party data is sold to other companies, such as to give them insight as to where online shoppers are directing their attention, it becomes second-party data.  Companies can use purchased second-party data to improve their own websites to appeal more to consumers…and hopefully lock in more sales.

Third-party data is compiled data from many sources, including social media, and is also sold to companies.  This would be a modern iteration of demographic data and generic survey data from previous generations.  Companies that own considerable amounts of second- and third-party data can consider these assets that can be sold to generate revenue.  These assets can be very valuable, especially if they are marketed as a way to deliver warm leads (consumers who are searching for a specific product or service) to the purchasing firm.  For example, an online used car website might sell its data to car dealerships, which would know that browsers on the used car website are likely in the market for a vehicle.  The car dealership could then email those browsers with sale solicitations for their own used vehicles or lower-cost new vehicles.

Intellectual Property as an Asset Class

As an asset class, user data would be considered part of a firm’s intellectual property (IP).  These are intangible assets (non-physical, as opposed to tangible assets) that help produce revenue for a firm.  Traditionally, IP assets include copyrights, trademarks, and patents for useful and desirable products.  When a good is given these legal protections, competing firms cannot copy them, thus protecting the copyright holder’s revenue stream.  If the firm is going out of business, perhaps due to bankruptcy, it can sell its IP assets to a competitor to carry on the product and enjoy that revenue stream.  This is how specific brands and products, popular with consumers, often survive the company of origin.

Famously, the Twinkie snack cake was in jeopardy in 2012 when its creator, Hostess, went bankrupt.  Despite the closing of Hostess’ factory, the IP for its iconic snack cakes was purchased.  Today, the Hostess brand and the Twinkie are owned by The J.M. Smucker Company, which produces the snack cakes.  Undoubtedly, part of the decision to spend big on the Hostess brand, which included competition with PepsiCo, General Mills, and Mondelez International (the maker of Oreos), was consumer data indicating that Hostess snack cakes were still a hit with customers.

The Growing Value - and Risk - of Biometric and Behavioral Data

Many consumers know that their online behavior and demographic data is collected and, sometimes, sold to third parties.  This has raised privacy and ethics concerns.  Further intensifying the privacy debate is the rise of collecting biometric data.  This individualized data on consumers’ physical characteristics - including voice patterns - can be gotten from stores’ security cameras and calls to the company’s public service departments.  In public venues, after all, consumers have no reasonable expectation of privacy.  Some U.S. states have laws requiring customers’ consent before biometric data is collected.

Biometric data is often collected along with behavioral data, which records what activities consumers perform.  On camera, after all, customers can be seen engaging in different browsing behaviors.  In modern vehicles, various sensors can collect data on user driving habits and vehicle settings.  Privacy advocates worry that consumer desire for convenience, which involves using biometric safety features like fingerprint, face, and retina scans to access our devices, will lead to companies knowing more about us than we would ever want.  Consumers want their behavioral data logged to create algorithms that deliver only the content and features they want, but not necessarily for that data to be given to firms that are not the providers of that content.  

A current controversy is linking biometric and behavioral data with AI, creating systems that report when an individual is seen on camera.  Already, police departments can scan thousands of security camera feeds to search a crowded venue for a suspect using face recognition software.  Critics worry that law enforcement agencies will someday have access to all consumers’ biometric and behavioral data, potentially leading to abuses of power.  There are also fears that such technology could fall into the hands of stalkers, allowing them to track victims with unprecedented ability.

Your behavior as a consumer has value.  Is it theft, therefore, when data about your consumption propensities and habits is collected without you being compensated?  Most companies would argue no, saying that you gave up that information freely by engaging in public behavior and voluntary economic transactions.  However, there will likely be class action lawsuits over allegations that specific companies collected too much data.  Much of the success of these lawsuits may hinge on user agreements.  Unfortunately, the vast majority of consumers do not read such agreements when they purchase new digital items or create new user accounts.  Within these lengthy agreements are often terms stating that the seller can collect and sell user data.

It is likely up to legislatures in states and nations to craft new laws protecting consumers from excessive and intrusive data collection, as lawsuits will likely be decided in favor of the companies due to signed user agreements.  “You signed that you agreed,” the company lawyers will argue, and they have a point.  Thus, lawmakers will have to reshape the legal boundaries of commerce to protect the consumer, as the courts cannot.  Look for the next several years to be full of consumer data legislation as lawmakers try to rein in companies from collecting personal data about shoppers and Internet users.