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The value of content and the cost of privacy: a new equilibrium and its necessary scale

|Includes: AABA, AMZN, AOL Inc. (AOL), CMCSA

Two social media news stories last week stood out: Facebook’s resumed privacy scandals, and a fund created by Kleiner Perkins to specifically target social media for startup investing. Although these are on the surface independent events, on closer analysis these may be part of a theme that suggests a relationship, if not a direct connection, between the two. To understand the connection between a privacy breach and an investment fund, it is probably necessary to first establish a couple of working hypotheses: (1) To the consumer, the price paid for free content is not nothing, but rather the cost associated with sharing personal information with the content publisher; and (2) because the universe of free content has become highly fragmented, the value of such a product to the consumer has deteriorated, and continues to deteriorate.

The proximity of price paid for a product to the value received, and whether the difference is positive or negative, will influence consumers’ decision to consume. In the case of media content, the value of the product for the consumer can diminish with the presence of advertising, while the same is needed to produce revenue for the publisher. To bridge the gap, advertising technologies have been created to direct ads more subtly, more contextually, less intrusively, into published product, so that the value diminution from the consumer’s perspective suffers less. Publishers, for their part, have attempted to understand their audience better in order to promote themselves more effectively to advertisers, and by necessity publishers have begun to mine audience data and share this intelligence. In short, as advertisers and publishers have proactively gained access to and made use of personal consumer data, this has been in order to continue to offer consumers a product that is free of charge and still make money.

As privacy breaches and other uses of personal data have become publicized, the consumer population is in all likelihood now mindful of this reality, and the cost is recognized. Whether the sacrificed privacy is or is not a fair price to pay, that is a decision that consumers now make quite knowledgeably in relation to the procured product. Substance quality will always feature prominently in this decision, and in this the presence and conspicuity of advertising is factored. Additionally, in a fragmented market that is saturated with quality substance and targeted ads, quantitative issues will also matter. For example, a particular item will be impacted by its proximity to other quality items, its regularity and frequency, and the critical mass of ancillary features presented by the same provider.

As much as revenue efficiency may be achieved through advertising and data analysis, therefore, content value will also be optimized by scale. And as the limits of data mining and ad targeting are tested, expanding volume is a last value enhancement option that remains. At such a stage, the industry undergoes consolidation.

AOL seems to agree with this position, as does, to some extent, Yahoo! – both of which have sought to add to the scale and features of their content base in the fragmented field described. But these are both works in progress. A more concrete example of the case is Facebook: a platform with 500 million users, each of whom is a content creator, and each of whom is also a customer and member of a network that generates value through its sheer enormity. Facebook’s content value to 500 million users is evidently worth the cost of privacy sacrifice, as one after another of reported blunders is having no impact at all on Facebook’s popularity.

When Kleiner Perkins announced its sFund – in which Facebook is a partner, in addition to Zynga, Amazon, Comcast, and several other major media brands – some of the social media establishment scoffed at the idea, emphasizing the move’s seemingly anticlimactic arrival upon a scene that has been populated with venture funds for years. Seen in that light, the criticism may be fair enough; but seen from a different perspective – in my opinion, more appropriate – the new sFund is not late to arrive but rather the first of a new era. It marks a possible consolidation wave ahead – necessary, for reasons described – which may include collaboration, early-stage ventures, and a variety of strategies that don’t necessarily result in mergers, but lead to sizable impact. 

Disclosure: No positions.