The GDPR is coming

In less than a month, new EU regulations will come into effect that go by the name of General Data Protection Regulation (or GDPR). These regulations are designed to give internet users substantially more control over how their information is shared and used; and creates significant penalties for noncompliance. At first glance, this might sound like terrible news for digital advertising behemoths, Alphabet (NASDAQ: GOOGL) and Facebook (NASDAQ: FB). But somewhat counterintuitively, we believe there is a high probability that these businesses will benefit from this regulation.

The basic principles of GDPR can be summarised as follows[1]:

• Everything must be consent based;
• You can only collect what is adequate, necessary, and not excessive in relation to the specific service you offer;
• People have the right to transparency;
• People have the right to be forgotten; and
• IP addresses are also considered to be personal information.

Now, the business models of large-scale advertising can be simplified as follows:

• Collect user data that is valuable to advertisers;
• Use AI-based algorithms to allow advertisers to present the right ad, in the right format, to the right person, at the right time.

And given the very high ROI of such personalised ad-targeting to advertisers, businesses such as Google and Facebook can charge advertisers a lot for this unique service.

Naturally, if Google and Facebook were no longer allowed to collect user data, then their ability to provide advertisers a highly-targeted search platform would become impaired over time. So, the question is: to whom will consumers provide consent for their personal data collection?

Here’s a thought-experiment:

• If Google were to offer you continued free use of Gmail, Maps, Youtube (etcetera) in return for your consent to share your data for the purposes of personalised, targeted advertising – would you agree?
• If Facebook were to offer you continued free use of Facebook, Instagram, WhatsApp, Messenger (etcetera) in return for your consent to share your data for the purposes of personalised, targeted advertising – would you agree?

Our hypothesis is that most would agree on the basis that the value they receive from the free use of these technology platforms is adequate compensation for the provision of personal data to be used for personalised, targeted advertising (which often results in a better user experience anyway).

On the other hand, if OpenX asked for consent to use your personal information, most would probably ask: “Open-Who?” Or AppNexus? Or many others. You see there are numerous tracker services that are embedded into web-pages by publishers to gain access to your personal information for the purposes of targeted advertising. And chances are, these services are going to be significantly less successful in gaining user consent than the likes of Google and Facebook.

And if true? Many publishers might have a problem. You see publishers also sell targeted advertising, just like Google and Facebook. But, going forward in the EU, they will only be able to do so if users consent to personalised tracking. And if they don’t, then publishers will need a new business model. One such model might be publishing via the Google or Facebook platforms. And if this is the way the industry evolves, then Google and Facebook stand to increase their share of digital advertising revenues even further.

On Facebook’s most recent conference call, management went to great lengths to point out this “relativity” argument:

• “I think it’s important to note that GDPR is affecting the entire online advertising industry. And so what’s really most important in winning budgets is our relative performance versus other opportunities presented to marketers. And that’s why it will be important to watch kind of how this plays out at the industry level.”

All of the above said, predicting the future is hard. We do not know what the impact of the GDPR will be and we continue to monitor closely. But we can certainly envisage a scenario in which Alphabet and Facebook do quite well out of this new regulation.

Montaka owns shares in Alphabet (NASDAQ: GOOGL) and Facebook (NASDAQ: FB).

[1] Source: baekdal.com