Your personal data is not worth anywhere near what you think it's worth

I see a lot of Root Markets-like businesses. Companies creating a way for people to own their own data and profit from it rather than letting someone else profit from it. The idea is appealing: other people are selling your data, it's your data, why shouldn't you sell it yourself?

But most of the people I talk to don't have a good answer to the basic business question: can you sell your product or service for more than it costs you to buy or make it? In this case, can you sell personal data for more than it costs to garner it?

Well, can you?

The IAB says that in 2011 there was $31.74 billion in US interactive ad spend [pdf]. There were 245.2 million internet users in the US in 2011 according to Statista.com, using data from Nielsen and the ITU. That works out to slightly less than $130 in ad spend per internet user per year in the US.

Here is a breakdown of this per capita number, by channel, and a guess as to how much is potentially available for third party data sellers:

		$ per	Addressable
Channel		User	Market
Search	47%	$60.84	$0.00
Display / Banner	22%	$28.48	$7.12
Classifieds	8%	$10.36	$0.00
Digital Video	6%	$7.77	$1.55
Lead Generation	5%	$6.47	$3.24
Mobile	5%	$6.47	$1.29
Rich Media	4%	$5.18	$1.04
Sponsorship	4%	$5.18	$0.00
Email	1%	$1.29	$0.97
Total		$129.45	$15.21

The $130 needs to pay for several different functions. The $28 for display, for instance, pays for account management, creative, media planning, targeting, media buying, ad serving, analytics, verification, and--not least--the actual inventory the ad is placed in. I'm guessing that the maximum amount available to a company selling data to target display ads is 25% of the ad revenue*. The opportunity to use data to optimize lead gen is potentially larger, while the opportunity in sponsorship, classifieds and search is pretty much nil**.

If this is right, and given the fuzziness of the IAB numbers, it means that there is maybe $1.00 to $1.50 per person's data per month available to data sellers.

But keep in mind that Google does not need your data. Nor does Facebook. They are a large part of the market. Your data is competing with everyone else's data--first, second, and third-party data--for this $1 per month. And some of the data you are competing with is so closely tied to the awareness generating process that it can't be pried away and placed in a 'wallet' somewhere.

Take context. The context of an ad can account for somewhere between 50% and 90% of its effectiveness. Context correlates to demographics, purchase intent, state of mind, and behavior. If you are looking at a review of the new Mac Book Pro I don't need any personal information to make an educated guess that you are in the market for a new computer. I can confidently put a computer ad next to that article without any other data, and the only way someone else can intermediate my guess is by blocking the content or ad entirely. Same argument different data for Facebook, and for much mobile usage.

This means that of the $1 per month much less is actually available to you as a collector of the data.

The original Root business model was to allow users to own their data and rent it out to people who wanted to market to them. The problem: users think their data is worth far more than $1 per month. But $1 per month is all that is available, on average. To a single company, it's maybe $0.10 at best. And then there has to be a commission paid to the new intermediary--the Root-like company. The user ends up with maybe a dollar a year. Nobody cares about a dollar a year. There's no business model. I could even imagine a world where each user was worth $0.20 a month, but that price is still nowhere near where it has to be to have users take it seriously.

There is a business model for businesses that gather data very efficiently. There are several pretty large companies that do this. But they have figured out a way to gather the data for much less than $0.10 per person and to collect data on hundreds of millions of people. The Root model simply costs more per person than the data is worth.

I spent several years of my life trying to build a business that lets people take control of their own data while still leaving a way for marketers to find them. I believe in privacy. And I believe that marketers finding customers is key to economic efficiency. I would love to see someone square this circle, but the Root model is not the way to do it.

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* This takes into account the fact that I think the IAB/PwC revenue number is the amount paid to publishers, not the amount spent by marketers. The amount spent by marketers may be 50% to 100% more than that paid to publishers on average. Hard to know. This is an important point though: marketing is much, much more than advertising. The amount that companies spend on marketing in total is far higher than the amount that publishers make from selling ads. There are companies selling data that sell into this marketing market that are worth billions, they are not the focus of this post.
** The best businesses are the ones where everyone else thinks you're wrong. My saying there's no opportunity means that if you have a way to use data to optimize these channels, you may have an opportunity that no one else has seen. I like those.

You can't manage what you can't measure. Not at scale, anyway.

A year ago I wrote, re investing in social marketing, "The social loop will share superficial characteristics with the display loop, but it's really completely different... the area with the most near-term leverage will be tools that help communicators understand the impact of how they are communicating and then help them make better decisions." This has turned out to be completely true.

I've been thinking about social marketing for five years. It has seemed obvious that major advances in marketing technique will occur through the social channel, but it was never clear to me exactly what those would be. I looked at and worked with a couple dozen social media marketing companies before throwing up my hands and declaring non-prescience.

My rule of thumb is that when the evolution of the landscape seems unknowable it is usually because the technology that will underpin the advance is still in flux. The obvious solution is dropping a level deeper in the stack and looking for investments there. In mobile, that meant Flurry four years ago and Media Armor a year ago. In social, it meant Awe.sm.

The smartest guy I ever knew in the ad business (like being the tallest dwarf, I know...) said, of managing people, "Whatever chart you put on the wall goes up."

-- Clay Shirky

That was me, the tallest dwarf, from back when I knew Clay, when he was just another guy.

I worked at IBM during the heyday of the Six Sigma movement. I was a design engineer, trying to optimize a very small piece of the central processor of what became the System 390 series of mainframes. As a design engineer there were several layers of abstraction between me and the silicon: the design language was a visual one--I wrote a flowchart which was compiled into a set of logic gates which were then mapped onto silicon. Aside from tweaking the logic gate-level design to try to get better performance, I spent my time at the flowchart level, as did most of the engineers.

Six Sigma methodology has you measure processes, find causes of errors and remedy them. The idea is to improve processes until there are fewer than 3.4 defects per million. IBM had a company-wide mandate to implement Six Sigma. I was subject to this mandate.

I asked my manager how I was supposed to measure my 'defects' and why would I even want to if I had to define them in such a way that I essentially never, ever made that type of mistake. He said "How are you going to improve if you aren't noticing your mistakes and figuring out how to stop making them?" "I already do that," I said, "I'm just not marking them down on some stupid piece of graph paper thats been pre-printed with a normal curve." He said "But then how can we manage it?"

Ah, Bach.

You can't manage what you can't measure. Stupid as managing designers on the binary idea of defect/not-defect and on such a stringent scale, constantly knowing how well you are doing so that you can constantly improve is extremely powerful. This idea, probably more than any other, drives my investment strategy: things that are not being measured are being managed poorly; creating new ways to measure creates ways of doing things immensely better, it creates entirely new businesses.

The fact is, you do get what you measure, whatever graph you put on the wall will go up. But the moral of that pithy aphorism was meant to be: be careful what you wish for.

If what you are measuring in social marketing is Likes or Follows, that is what you will get. But how closely aligned are these measures with what a business really wants: happy and loyal customers, higher sales? You don't know. No one knows. This particular loop hasn't been closed. Because the social gesture cause and business result can't be tied together in a measurable way, it can't be managed and it can't be improved.

I invested in Awe.sm's seed round because they provide core social measurement functionality, the ability to tie social actions into their actual results, to close the loop. I re-upped into their Series A because they're now doing something even more interesting: they're providing this functionality to other developers via API. Instead of being just an analytics player, they're now enabling the creation of an entire social marketing infrastructure that can use measurement to provide a ever-improving feedback loop.

I may have gravitated to marketing in part because dealing directly with people is too messy to ever even approach Six Sigma, but the engineer in me still believes that by measuring you can improve, and by linking measurement and algorithms you can create a feedback loop that allows you to improve adaptively and in real-time. This idea has revolutionized online advertising over the past few years. It's going to revolutionize social marketing over the next few.

Information and Markets, Pork Chop Edition

In The Omnivore's Dilemma by Michael Pollan, a thought-provoking book, I came across this.

The fact that the nutritional quality of a given food (and of that food's food) can vary not just in degree but in kind throws a big wrench into an industrial food chain, the very premise of which is that beef is beef and salmon salmon. It also throws a new light on the whole question of cost, for if quality matters so much more than quantity, then the price of a food may bear little relation to the value of the nutrients in it ... As long as one egg looks pretty much like another, all the chickens like chicken, and beef beef, the substitution of quantity for quality will go unnoticed by most consumers...

Sounds like Akerloff's information asymmetry to me.

I have in the past conflated this type of information asymmetry, where lack of knowledge of quality drives high-quality items out of the market, with Gresham's Law, where a government requirement to accept unequal things as equal (such as silver and gold coinage) drives the more valuable out of the market. My bad. In both cases the bad drives out the good, but for different reasons.

Pollan's book, in addition to the above Lemon problem, also cites what I think is an example of Gresham's Law: the USDA definition of the word "Organic" conflates many farming practices but none entirely, allowing the least-common-denominator to appropriate the word in the marketplace. Perhaps this sort of informational hollowing-out is inevitable in marketplaces because of information friction. But what happens when information friction comes way down?

It's interesting to think about the different possible trade-offs:

[M]any consumers don't aim for such purity — particularly if they know that the meat is being raised ethically and in an environmentally sound manner. Many hog farmers raising animals according to various “natural” standards have found that customers come back once they learn about the practices each farm employs, even if they are not certified organic.

The 12-year-old Niman Ranch uses a network of small farms certified by the Animal Welfare Institute. They may feed hogs nonorganic corn, but otherwise meet USDA organic standards, said Paul Willis, a founder and director of pork for Niman Ranch, and the extra expense isn't worth the “piece of paper” that would certify his farming practices.

He compared his Iowa farm — a 20-acre pasture on 900 acres and 2,000 hogs — to an industrial farm down the road that has 6,000 pigs inside a building of no more than a couple acres. He composts pig manure on his fields, unlike his neighbor, who pumps thousands of gallons of liquid waste underground, where it can leach into the Iowa River.

His customers know his standards, and buy even [though] he doesn't have the “organic” label. “I guess,” Willis said, “it comes right down to how much of a purist you want to be.”

Niman Farms has invested in a brand name to communicate its practices to its customers. But the cost of building a brand is more than the cost of being organic, so many farms decide to be certified Organic instead. This is the marketing tradeoff: build a brand or commoditize.

The alternative, letting the customers bear the expense of finding a product that matches their particular needs, is too high: the vast majority of customers in most markets have such a large overlap of requirements that search costs are more efficiently borne by the seller.

But online, the search cost is the expense of tweaking the buying algorithm. This argues that, unlike many traditional markets, online markets should supply more information that can be used to determine quality and less commoditization.

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Other posts in this series:
Information and Markets, 1
Information and Markets, 2
Information and Markets, 3

Information and markets, 3

An anecdote.

A few years ago a private equity firm asked me to help them look at some lead-gen companies. One of the target companies had a network of many thousands of small lead buyers and were known to produce high-quality leads. They had worked years to build this reputation. They got good prices for their leads. But high quality leads are expensive to generate--and there aren't as many of them out there--and building and maintaining a large distribution network is also expensive so while they had historically made OK margins, they weren't blowing the doors off and their growth was steady but slow.

Then the founders started thinking about selling. They hired an investment banker a few months before the PE firm started looking at them. In that time, revenue had started to grow faster and margins had started increasing. The lead-gen company credited improved technology.

The PE buyer was enthusiastic. They asked me what I thought. I called a couple of people who were in the same lead sector. This is what I heard: "they're stuffing the channel, everybody knows that." Maybe everybody in the lead-gen business, but obviously no one in the PE business.

The company had decided that, to boost their valuation, they were going to generate lower-quality leads, and more of them. Since their customers generally bought a few dozen leads at most, they did not in the few months after the change notice when the average conversion went from about 5%-10% to something much lower*. This allowed the lead generator to raise revenue and margins. I warned the PE company that the buyers of these leads would not be fooled for much longer, that this way of doing business would come back to bite them**. And that is what eventually happened; the lead-gen company lost half its customers over the next six months, as the customers became aware that they were paying for high-quality leads and getting low-quality leads.

Any smart buyer knows that uncertainty exists: quality changes over time, for many reasons. The natural response to this is a concentration of buying. Larger buyers have more information, so will notice and respond to changes in quality much more quickly. Any market where quality information is not available will favor large buyers over small, causing the exit of small buyers. This will then cause the marketplace itself to suffer: a large buyer does not need an external marketplace, sellers will come to them. Without a competitive marketplace, the sellers suffer, both from lack of pricing power and lack of information about what is working for the buyers (reflected in varying price levels.) This then causes inefficiencies in production, leading to higher production costs.

This decline in overall efficiency of the ecosystem affects the sellers first, but also eventually affects the buyers. The process, though, can not be avoided by the buyers, even if they are aware of it: they are stuck in a prisoner's dilemma. The only solution is to have more open and robust quality information available.

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* Junior year I took a semester abroad. My alma mater did not believe that any other university, anywhere in the world, could possibly educate me nearly as well as they. As such, they would not allow me to include any class I took anywhere else on my transcript. The most they would do was allow me to take a test and place out of classes I took abroad. Because of this dynamic, I spent my time in London doing anthropological studies of the pub culture. When I got back I did pass the required tests and so placed out of statistics and a year of German. I now find that I can neither speak German nor do statistics unless I have had several pints of bitter. I was going to tell you how many leads a lead buyer would have to buy before they would have a good idea that quality levels have changed, but I wrote this post Sunday morning and I couldn't get my hands on a sufficient supply of ale.

** Oddly, they did not believe me. This turned out badly for them.

Information and markets, 2

Those most familiar with the cattle trade agree that there often exist wide differences between the actual selling price of cattle in the market and the previous estimate by the feeders sending them forward as to the prices they should bring. The small feeder, who seldom follows his cattle to market, has a poor chance to learn market conditions and requirements, but the regular shipper has an excellent opportunity to do so. Feeders must rely largely upon the market reports for their knowledge of the condition of the cattle trade... Inability on the part of the feeder to interpret correctly market quotations places him at a decided disadvantage either in selling his cattle to a shipper or in shipping to the open market.--Market classes and grades of cattle with suggestions for interpreting market quotations, Herbert Mumford. (1902)

Beef isn't assigned to quality grades--like prime, choice and select--to help buyers know what to buy. It's assigned quality grades so producers know what to produce. Mumford's groundbreaking work led, eventually, to the voluntary grading of beef and other commodities by the USDA.

Raising cattle that has a higher proportion of well-marbled, tender, Prime muscles is more expensive than raising one full of chewy, touch Select muscles. So even more than needing to know at what price they can sell cattle, cattlemen need to know at what price they can sell different quality cattle, so they can figure out whether it makes business sense to spend the money to raise high-quality beef.

Markets not only consume information, they generate information: primarily information about demand at different price levels. Price information, of course, is what drives efficient allocation of resources*. So, lack of public information about quality causes both

• Problems for the buyer when the seller knows quality but the buyer doesn't, and
• Problems for the seller, when the buyer knows quality but the buyer seller doesn't**.

The first case is relatively straightforward: as per Gresham's Law, bad commodities drive out good. The second case is more subtle. Because the buyers know what a quality product is worth to them but the sellers don't, buyers will tend to price goods at the lowest possible price level that ensures they will keep being produced.

In the lead-gen world, I heard over and over from lead generators that it took at least a year before a newcomer could make money. Not because they couldn't generate quality leads at a decent cost, but because it took a year to realize just how much the companies buying their leads were screwing them on price.

In the display ad world, the buyers have access to all the information they need to judge quality--context, customer, behavior, etc. But the sellers, the publishers, have let themselves be isolated from the information they would need to link quality and price on any inventory they sell through markets***. It shouldn't be surprising that the prices they get are rock bottom.

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* I'm sure you've read about it, but if you haven't actually read it, do: Hayek's The Use of Knowledge in Society. It's a good read, and short. It's also explains the key concept in how our economy works.
** If neither knows the quality of the good being sold, a robust market is still possible. The stock market, for instance.
*** Including the ad nets, the ad exchanges and the ad optimizers, all of whom run a type of market.

Information and markets, 1

There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. In this case there is incentive for sellers to market poor quality merchandise, since the returns for good quality accrue mainly to the entire group whose statistic is affected rather than to the individual seller. As a result there tends to be a reduction in the average quality of goods and also in the size of the market.

--The Market for Lemons: Quality Uncertainty and the Market Mechanism, George Akerloff. (1970)

Markets that don't have a good way to judge the quality of the goods being sold have a problem. As Akerloff noted, if buyers can not differentiate quality, they will pay for a statistically likely quality level. This will then drive away the higher quality goods (thus lowering the statistically likely quality level!) Buyers then adjust their price down, and this downward cycle continues until only the shoddiest goods are left.

One long-standing problem in the lead-gen industry (and, in a different way, in the display ad industry) is the inability to grade quality. There are high-quality leads and low-quality leads (quality here meaning likelihood to convert into a sale.) It's cheap to generate low-quality leads (think reg path or, if you've been around a few years, free ipod.) It's expensive to generate high-quality leads.

Problem is, once a lead is generated, it's pretty hard to tell if it's high quality or low quality. You can cross check address, telephone number and email, but you can't see from the face of the lead the key unknown: intentionality. Does the lead actually intend to buy the good or service they entered their information for. Anybody who's been the person calling the lead can tell you how often they hear "I'm not interested in a new car, I just wanted the free _____." This is a poor quality lead, despite all of the information being correct.

Imagine a lead market where the leads have a random quality from 1 to 100. Leads with quality 1 are worth $1. Leads with quality $100 are worth $100. What would you pay for a lead? Statistically it would make sense to pay about $50. On average, you would be getting your money's worth. But when the price level is $50, the people who are selling the leads with quality greater than 50 all leave the market (and, probably, start generating lower quality, lower cost leads.) The average quality now sinks to 25, so the price also goes to $25. Repeat until the quality reaches the lowest increment. This is Akerloff's point, and what I've seen actually happen in lead marketplaces.

Now, ask yourself, why is the inventory trading through the ad exchanges the worst inventory above remnant? Buying and selling through an ad exchange beats direct buying and selling in every single way that doesn't involve expense account meals. Yet both direct sales and ad network/rep sales have higher CPMs than the ad exchanges, because buyers believe the higher quality impressions are sold that way. Is there an information problem here?