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How The New Privacy Regulations Could Benefit Alphabet & Facebook

On 25 May, new EU regulations take effect giving internet users substantially more control over how their data is shared and used, and creating significant penalties for noncompliance. At first glance, this looks like terrible news for digital advertising behemoths, Alphabet (which owns Google) and Facebook. But these businesses could actually end up better off.

The new regulations go by the name of General Data Protection Regulation (GDPR). According to industry observer, Baekdal, the basic principles of GDPR can be summarised as follows: 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; and use AI-based algorithms to allow advertisers to present the right ad, in the right format, to the right person, at the right time. Given the very high return-on-investment 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?

Or 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?

One 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.

All of the above said, predicting the future is hard. No one knows what the true impact of the GDPR will be. But one can certainly envisage a scenario in which Alphabet and Facebook do quite well out of this new regulation.

The Montgomery Global Funds own shares in Facebook and Google. This article was prepared 01 May 2018 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Facebook or Google you should seek financial advice.

View More Articles By The Montgomery Team

Roger Montgomery is the Chief Investment Officer of Montgomery Investment Management, montinvest.com, and author of blog.rogermontgomery.com.

Roger's step-by-step guide to valuing the best stocks and buying them for less than they're worth, Value.able, is available exclusively at rogermontgomery.com. Skaffold is an online stock-picking application that rates ASX-listed stocks from A1 to C5. Watch a demo of Skaffold at www.skaffold.com.



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