Expect privacy concerns to be the eventual catalyst that ultimately bursts the Internet investment Bubble 2.0. It is rare when there is a profound disconnect and suspension of reality between industry behavior/investment expectations and customer wants, needs and expectations, but that is precisely what is at work in Bubble 2.0.
- Almost by definition, investment bubbles are unsustainable; what goes up must come down, it is only a matter of how and when -- not if.
- Simply what fuels Bubble 2.0 is the patently false core assumption that the current unfettered, widespread, and largely clandestine data mining of individuals private information in order to target specific individuals with personalized online advertising:
- Is aligned with real user interests;
- Is a forthright business practice consumers are aware of and have meaningfully consented to;
- Will not be legally constrained in the future; and
- Will become the accepted norm -- meaning that the populace and governments will adapt to the wishes and desires of the online-ad- industry and not the other way around.
- In a word, is online tracking, profiling and data mining a consumer-driven model? -- or a consumer-dragged model?
This is deja vu for me. I've seen this movie before when I had a front row seat as the original dotcom Bubble 1.0 wiped away $4 trillion in market valuation in a few weeks.
- In 2001 in my previous career, I was the first investment analyst to warn investors that Internet traffic was in fact growing sixteen times slower than the market assumed, protecting investors by debunking the bogus dotcom hyper-growth story months before the dotcom bubble burst in 2002.
- Back then everybody assumed there were no real limits or constraints on the growth potential for Internet advertising dotcoms -- sound familiar?
Let's drill down on the key assumptions of my thesis to test if it is valid.
1. Is there a Bubble 2.0?
There is wide recognition we are experiencing Internet investment Bubble 2.0 given that:
- Private markets are valuing private Internet startups at post-successful-IPO-like valuations like Groupon at $6-10b, Twitter around $10B, and Facebook at $50b; and
- Venture money is flooding the space per the WSJ's outstanding Scott Thurm piece: "Online Trackers Rake in Funding," which spotlights that "since 2007, venture firms have invested $4.7 billion in 356 online-ad firms."
2. Is the bubble predicated on data mining?
Per Jafco Ventures' Nick Sturiale who described the online-ad game: "They're trying to find better slices of data on individuals... Advertisers want to buy individuals. They don't want to buy [web] pages." [bold added]
- The holy grail here that has everybody so excited in the online-ad industry is that they understand that the more private details they can secretly learn about an individual user, they have a vastly higher chance of influencing them to do what they want them to do.
- That's why "advertisers want to buy individuals," they want to own and control that individual from a marketing standpoint.
3. Do consumers want, need, or expect privacy?
They certainly do! All the recent national polling (see here, here, here, & here) show very consistent results that are in stark contrast to the online-ad industry's representations, model and practices, i.e.
- Consumers want privacy online, think they have it, and believe they should be the ones that really control it; and
- Consumers don't like online advertising and are not clamoring for the purported "benefits" on personalized advertising.
Moreover, respect for privacy and privacy protections are bipartisan political values; for example the Precursor-Zogby poll found 3/4 of conservatives and 4/5 of independents and liberals want a Do Not Track privacy option like Do Not Call.
Online-ad industry -- you have a problem. A big problem. The whole predicate on which online-ad growth is based, is at odds with what consumers need, want and expect.
- The industry and investors are willfully suspending awareness and belief, assuming that what they have done largely secretly and without meaningful consent, they will be able to continue to do the same way when consumers and government come to realize what is being done massively, pervasively, and invasively against their interests, needs, wants and expectations.
- This is an obvious collision we are witnessing; the only questions in my mind are when the collision occurs and what entity damages the other more when they collide.
In addition, you know the online-ad industry has a serious problem with Government on privacy when their main argument against privacy legislation or Do Not Track, is that it would put the industry out of business.
- The obvious problem with this tactic is that the industry is essentially admitting it is currently seriously violating consumers' expectations of privacy.
- Moreover, that tacit confession is also like throwing themselves at the mercy of Congress by claiming the online-ad companies are the real victims of their industry's victimization of consumers' privacy.
In sum, privacy will burst Bubble 2.0. Investment valuations in online-ad companies are based on the fantasy of unfettered future growth in online advertising.
- The online-ad industry and its investors imagine themselves as an irresistible force, but they are deluding themselves about the immovable object they are careening towards, the clear needs, wants, expectations, and will of the vast majority of American citizens.
Let me be clear, I am not saying the bubble will be burst by privacy concerns anytime soon, only that they eventually will.
- From an investment perspective, the original private investors in online advertising are encouraging and pumping up a frothy market in private shares of online ad companies so they can cash out and take money off the table because they know this story and bubble is unsustainable.
- They are taking advantage of the well-known "greater fool theory."
- Unfortunately it will probably take some of these Bubble 2.0 private companies to go public in an IPO in order to drive these sky-high valuations from the stratosphere into deep space.
- Sadly it could be public shareholders who eventually will be left burned when the online-ad fantasy growth thesis eventually falls to earth; that's the way these things too often play out.
Lastly, as privacy rights are to property rights, a couple of the current online ad companies enjoying great success based on abusing people's privacy without their meaningful consent, eventually could turn out to be the privacy version of high-flying Napster or Grokster, if they continue to ignore the privacy needs, wants and expectations of consumers.