Google and facebook have released their latest quarterly results with an impressive increase in revenues for both Facebook (up 49% YoY) and for Google (up 26% YoY).  This may come as a surprise to many expecting that the Cambridge Analytica case and the introduction of the new privacy regulation -GDPR–  in Europe next year would punish those giants and their revenues.

In fact, as some of us expected, the complete opposite has happen. This has two main causes:

First of all, their products are so good that nobody seems to really care about sharing their data with them. For example, the net amount of facebook users that have left the social platform after the Cambridge Analytica case is indeed unnoticeable.

And what about GDPR? Well, as the Wall Street Journal wrote in an article 23.4 with the title Google and Facebook Likely to Benefit From Europe’s Privacy Crackdown:

When the European Union’s justice commissioner traveled to California to meet with Google and Facebook last fall, she was expecting to get an earful from executives worried about the Continent’s sweeping new privacy law.

Instead, she realized they already had the situation under control. “They were more relaxed, and I became more nervous,” said the EU official, Věra Jourová. “They have the money, an army of lawyers, an army of technicians and so on.”

In fact, GDPR has given Facebook and Google the opportunity of creating a new competitive advantage leveraging on their direct relationship with their users. The digital advertising ecosystem is quite complex. So called data brokers collect information about users in the background when you surf the internet. Then, they use this information to help publishers with targeted ads. In addition, they sell them through so called “partner programs” to Google, Facebook and other internet services with direct interface with the user. These services then use those data together with their own in order to enhance the user profile and make ads even more targeted. Data brokers get a cut of the revenue in exchange. for facebook and Google, these partners are thus indeed also competitors.

Until now, because, as Marketwatch explains:

On May 25, the EU will begin enforcing the new rules, which in many cases require companies to obtain affirmative consent to use European residents’ personal information. The change has sent shudders through the digital-advertising sector, from online publishers to the analytics firms, data brokers and buying platforms that use personal data to aim ads at individuals in real time.

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The problem that data brokers face with the implementation of GDPR is that the user doesn’t know who they are. They know Google and Facebook and Snapchat and Twitter, which are now in a much better position to ask users for permission and continue collecting relevant data for ad targeting. Indeed, Google and Facebook have so much data already now, that they don’t necessarily need third parties. In fact, facebook has already announced the end of its partner program globally, cutting off those invisible players. Publishers with European users will thus have to rely even more on Facebook and Google for digital advertising, and the giants won’t need to share any revenues with other parties.

Mr. Market knows this and sent the share price of Acxiom, one of the biggest data brokers, down 27 percent right after Facebook announced it was cutting data brokers off. Some data brokers have withdrawn form Europe altogether.

Europe and GDPR have indeed helped facebook and Google get ridd of their competitors. What to expect next?

  • First of all, Google and facebook, already accumulating over 80 percent of global digital advertising – excluding china-  will see their revenues increase  even more – until the market saturates.
  • Second, at some point Google too will probably cut off third parties of digital ad
  • Other countries may follow the example of EU (Brazil is taking steps in that direction), making Google and Facebook even more powerful.
  • Data brokers will have to consolidate, re-brand themselves and collaborate with publishers in order to make themselves known to the end user and gain their trust.
  • Alternatively they will have to develop entirely new business models. developing services aimed directly to the end user or focusing on other segments, like B2B.
  • Some data brokers may also be bought by internet services with direct contact with their users and interest in knowing more about them. Amazon, who has entered the digital advertising business already, is a probable taker. Others like Walmart or big names from the East like Alibaba, Tencent and Softbank are also relevant.
  • Startups and smaller companies with business models based on data will have a hard time and will probably try to migrate to geographies where privacy legislation is milder and Facebook and Google aren’t dominant. Read China.

GDPR is, as I have defended before, a necessary first step towards privacy protection, but we europeans cannot think that it won’t come at a price. We are already seeing the unintended consequences of this legislation. It may concentrate the market power of the same internet giants even more and strangle innovation coming from new companies relying on data as the basis of their business model.

In addition, along the journey, we may have made Chinese internet players even more powerful when they eventually enter the European market. Investors should take note of that.

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