Big data works only for those who hype it
(Bloomberg View) -- Margrethe Vestager, the Europen Union's competition commissioner challenging tech giants on several fronts, has opened another: "big data."
In an interview with The Wall Street Journal, she singles out data as an important competitive advantage that should be more seriously considered in antitrust reviews and investigations. Buying the mostly groundless big data hype is, unfortunately, often the flip side of a healthy concern with privacy.
"In some areas, these data are extremely valuable," she told The Wall Street Journal. "They can foreclose the market -- they can give the parties that have them immense business opportunities that are not available to others." She added that Google, Facebook and even German carmaker BMW could have an unfair advantage over competitors because of the data they're accumulating and the way these data help them reach customers and cut costs.
That view is an extension of the concept in which we pay for free services with our data, which companies can easily convert into currency -- for example, by precisely targeting commercial offerings through advertisements. In reality, though, the hype has been easier to convert into cash than the actual data.
In 2011, McKinsey & Co. put out a report hyping up big data's business potential, predicting it would become "a key basis of competition." The company said retailers could increase their operating margins by 60 percent if they could harness its potential. It would be a direct result of microtargeting and "the automatic fine-tuning of inventories and pricing in response to real-time in-store and online sales."
In December 2016, McKinsey returned to those predictions in another report, saying U.S. retail had only realized between 30 and 40 percent of big data-related potential due to a "lack of analytical talent" and "siloed data within companies." Even that, however, is a generous assessment. The U.S. retail industry's operational margins are slightly lower today than they were in 2011. Even Walmart, praised by McKinsey as an early adopter of big data-based technology in the 2016 report, hasn't seen any discernible increase in operating margin in recent years.
If big data as used by Google and Facebook really helped manufacturers and retailers, retail sales in the countries where these companies are especially strong would have registered steep increases. Nothing of the sort happened. As Google and Facebook swelled, U.S. retail sales growth has been steady -- and below record levels.
This, of course, is not a perfectly scientific argument against the big data hype. Other factors, including increased competition and economic conditions, could have compensated for data-driven increases in retail profitability and volumes. So it's probably prudent, in the absence of recent research on big data's effect on company performance, to be agnostic about it. There's no evidence that the effect exists on a macro level -- and none that it has significantly benefited specific companies, except the ones that specifically sell their big data expertise, such as Google and Facebook.
It's intuitively clear that analyzing customer data should bring business advantages. A 2014 study sponsored by McKinsey found that retailers generally agree with this. That doesn't mean, however, that big data as we know it today -- information about people's online habits, bits and pieces of purchase histories that go back a few years, social network posts and interactions -- confers any major advantage on firms that try to use it.
There are major "garbage in, garbage out" problems with this information. Besides, anyone who has ever bought, say, a wallet only to be relentlessly pursued by wallet ads for weeks afterward knows that history-based targeting doesn't make too much sense. Google's and Facebook's targeting doesn't work much better than traditional media's time-honored approach of loosely fitting advertising offers to the audiences that consume certain kinds of content.
Knowledge, of course, is still power. Companies may be able to collect enough useful information about us to use it for noticeable sales increases, someday. Firms that figure out how to do that will gain a well-deserved competitive advantage which regulators like Vestager shouldn't necessarily be able to mitigate. I suspect it would require customers' cooperation in the data collection: Without it, too much of the big data is false, insufficient or just useless. And if people give up information voluntarily -- for example, so they can get a share of advertising revenue or significant discounts on products -- there will be no reason to limit what firms can do with the data.
As things stand, however, using snake oil won't give you a competitive edge. It'll just make the snake oil salesman rich. That kind of business should be of interest to regulators -- but not necessarily to antitrust ones.