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How to value personal data?

Posted on: Friday 21st of June 2013

The Financial Times’ recent exercise to help individuals value their data has caused something of a stir amongst those interested in personal data.

It’s unfortunate that, in a world where data is increasingly recognised as a critically important raw material, the FT chose to base its calculations on the one tiny corner of the data industry that’s facing a mortal threat: data broking.

Data brokers make their money out of selling individuals’ data. It’s mostly unpermissioned (therefore lacking social and consumer legitimacy), collected and used out of context (therefore not relevant), and devoid of utility (e.g. used for targeting marketing messages that people don’t want). So, in effect, the FT asked the question ‘if you take a valuable asset and strip it of virtually all of its value, how valuable is it?’ Surprise, surprise! Not much.

But if the FT has the wrong end of the stick how can we measure the value of personal data? Believe you me, we’ve struggled with this one many times over. The answer is (sorry!) ‘it depends’ – on exactly how you frame your question and what exactly you want to find out.

Here are some of the slippery questions you – we – need to wrestle with to pin this down.

How do you value something which is ‘free’?

A huge amount of data today – the data collected by companies’ web sites, Google search terms, Facebook postings etc – are provided by individuals for free.

If something is ‘free’ does that mean it has no economic value? Obviously not. Google alone has a market capitalisation of £290bn, and virtually all of that value comes from the information users provide it ‘for free’.

Even though we know ‘free’ things can be very valuable, there’s a strong tendency to think that if it’s free it hasn’t got any economic value. Clean air and fresh water came free, and we didn’t realise their economic value until we were faced with the costs and problems created by polluted air and putrid water. Today, ecologists routinely value natural resources by estimating the value of the ‘services’ they provide. It’s a difficult calculation. It’s also a sobering one.

By the way, there’s something else that needs noting about ‘free’. Free markets are based on the price mechanism. Competition sees prices go up or down according to the relative value provided. People ‘bargain’ in the market with their money: are they prepared to buy at that price or not. If something is provided free there is no price mechanism and no competition around price. There is, therefore, no free market. I’ll say that again: markets dominated by free services are not free markets. While people may (or may not) be getting excellent value, they are also disempowered because they have nothing to bargain with.

Or do they? They have their data, which they can choose to volunteer or withhold. Hmmm? In a world dominated by free services, perhaps data, rather than money price, is becoming the pivotally important bargaining token. What is the value of data in this role?

What are you valuing? The thing in isolation or what it enables?

Imagine your life without electricity supply. No electric lights at night, no TV, no fridge, no electronic devices, etc. Now ask yourself. What is the value of electricity? There are two levels here. There is the money electricity suppliers can charge, and there is the value of the goods, services and economic activities that electricity enables. Electricity creates a huge economic surplus and electricity suppliers take just a tiny fraction of this value for themselves.

The same goes with personal data. Imagine a modern economy without personal data. No billing systems. No tax systems. No banking systems in their current form. No credit referencing systems and perhaps, a much smaller credit industry. No CRM systems. No direct marketing. And so on. To get a true idea of the current value of personal data to organisations and the economy, you would need to add up the total economic contribution of all these activities and the effects, and costs, of not being able to do them.

The big difference between electricity and personal data is that at least the electricity supplier gets a tiny fraction of the value creation and money-making they make possible. Individuals are the ultimate suppliers of personal data, and while they benefit from many data-enabled services, currently they’re not getting paid a penny.

How are you valuing this asset?

What is the value of a video game? One way of valuing it is to ask what price people pay for it. But over the decades since video games were first invented, their price has more or less stayed the same, or perhaps even fallen. Does that mean modern internet enabled games with the rich graphics and social participation are less valuable than Pong?

Economists have been debating this one since the year dot. There is quantity (price) and there is quality (user experience). They are incommensurable. The one cannot be transmuted or captured by the other. Modern video game users have a much richer experience, even if they pay more or less the same price. That’s valuable, and analysts have invented a term for it: ‘consumer surplus’ – a ‘surplus’ or customer value that is not monetised by the firm providing the service.

They invented this term because they couldn’t put a number to it … And then (of course) to make it ‘real’ they try to put a number to it. So, for example, the latest BCG report ‘The Value of Our Digital Identity’ estimated that the total European market for personal data would be worth €1 trillion by 2020 – of which two thirds is ‘consumer surplus’ that won’t be monetised by firms.

How real such numbers are is up for debate. But they raise a crucial point. If you want to understand the dynamics of markets – how they are unfolding, where they are going and why – rather than just valuing them, the scale and nature of this ‘consumer surplus’ is pivotal.

With personal data, huge amounts of its value are driven by this consumer surplus: the ability to free up time on administrative chores, to make decisions that are right for my needs and circumstances, the convenience of good logistics (exactly the right thing at exactly the right time and place), personalisation, customisation.

For service providers there is a constant headache: ‘how do we monetise this value?’. But from the point of view of the economy as a whole, the value is palpable. Going forward, how we create a sustainable and equitable connection between these two points of view is vital.

How do you measure the sound of a dog that’s not barking?

The obvious answer is ‘You don’t. There isn’t any sound to measure.’ But in a few seconds time, when the dog has stopped sleeping, it could be barking very loudly indeed. There is a big difference between measuring the actual and measuring the potential, and if you focus on one and exclude the other you are not seeing the full picture.

That’s particularly important in personal data because right now we’re only seeing one side of the coin in terms of actual uses of the data. We’re seeing the value organisations get from using personal data. But we’re not seeing the value individuals could get from using personal data – from all the personal data-driven services individuals could use to manage their lives better.

This is a massive new industry. In fact, to say we’re only seeing half the story is probably an underestimate because, as is becoming clear, the interaction between services managing data for individuals and services managing data for organisations has the potential to unleash breakthrough efficiencies – driving down costs and improving efficiencies on the first (organisational) side of the coin too.

So: when we measure the value of markets, do we only take account of the evidence at hand right now (the non-barking dog) or do we also take account of its potential?

What purpose / utility are you measuring?

Answering the question ‘what is the value of personal data?’ by ‘it depends’ may seem like a cop out, but it’s not. You can only get the right answers if you ask the right question. The answer depends on further questions like ‘value to who? (Organisation, individual, economy?); ‘in what context?’

Personal data is not a ‘commodity’ with a single price. It’s a stem cell resource. Its value can be expressed in a wonderful variety of different ways. It can be aggregated to identify patterns and trends. It can be deployed at the opposite end of the scale to drive information logistics, to get exactly the right information and service to the right person at the right time.

The same piece of data (say, name and contact details) can be used for multiple different purposes, by multiple different parties. An address may be used to deliver a postcard, or it may be used by a hitman on a lucrative contract. Same piece of data. Different uses. Different economic value.

Useful versus unhelpful questions

There are good ways of answering the question ‘what is the value of personal data?’ and bad ways. The FT chose a bad way. The good way is to clarify what ‘it depends’ on – contexts, purposes, participating parties. That will generate thousands of different answers. And the total value of personal data encompasses them all.