Previously, I wrote about the new phase of big data, and how this data revolution has the potential to shape the fortunes of firms. Clive Humby, the co-founder of DunnHumby, a UK-based customer data science company, is widely credited as being the first to coin the phrase “data is the new oil”. Much like crude oil which needs to be processed into finished products such as gasoline, data must be broken down and analyzed in order for it to be of value. With this in mind, data will lead to companies being split into winners and losers. It’s worth drilling into why firms that have the best data, and are able to appropriately mine that data for insights, are able to generate a lead over their competitors.
Let’s consider Facebook as an example. It’s well known that Facebook collects a treasure trove of personal data from users: how old you are, your interests, your educational status, so on and so forth. In addition, Facebook also tracks the websites people visit. It is able to do this via “trackers” such as cookies – small pieces of software that webpages deposit onto your device that are able to identify you anonymously, but nonetheless signal valuable pieces of information such as your interests so that advertisers can target you. By virtue of its approximately 2 billion monthly active users, who spend material time on its various apps sharing often very personal details, Facebook has cemented its status as a data-collection behemoth.
Not only does Facebook have the data, but they also have some of the best and brightest software engineers working arduously to extract insights from this data. These insights are capable of producing an individualized profile for each Facebook user – something that is immensely valuable to advertisers who want to maximize the return on investment of their ad spend. Facebook has the most relevant, and granular data on its users, which allow advertisers to direct their advertising spend to specific groups who are likely to be the most interested in their product or service. Historically advertising followed a scattergun approach (think of a national TV campaign); these days, advertising can be incredibly targeted and is likely to have a much higher, and measurable impact.
Facebook’s lead in data makes it extraordinarily hard for anyone to compete with Facebook for advertising dollars, as they are unable to build as accurate a picture of their target audience. It is perhaps unsurprising that Facebook and Google are capturing virtually all of the growth in digital ad spending.
YouTube, the video platform owned by Google parent Alphabet, is another example of a business using data to improve the user experience. As you watch YouTube videos, YouTube records your viewing activity and runs the data through a very advanced recommender system. Your author can attest to some very obscure, but very cool music, being recommended to him as a result of YouTube’s recommendations.
This recommendation system is incredibly hard to replicate, given that it requires: (i) an expansive library of videos for people to watch so that data can be collected on people’s viewing interests (building the video platform alone is an enormous feat); and (ii) the capabilities to analyze this data for predictive insights, which includes overcoming data quality issues, given that the user-generated metadata such as titles and video descriptions may be inaccurate and incomplete.
YouTube’s incredible recommendation system has improved user engagement, and this has the effect of providing further data that YouTube can use to refine its recommendation algorithms. The task of trying to replicate YouTube’s recommendation engine from scratch is virtually insurmountable, and highlights how data can be used to improve the user experience and widen a firm’s competitive moat.
Data is likely to only grow in importance going forward, and many firms are only beginning to grasp its importance when competing in the age of big data. In the realm of investing, it is always worth trying to understand a firm’s data capabilities and whether it can transform any insights into a meaningful competitive edge.
The Montaka Global Fund holds shares in Facebook (Nasdaq: FB)
George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.