The Big Data Bubble
Article written by guest contributor Debashish Sakunia
The famous economist Gregory Mankiw outlined 10 principles of economics. The first amongst the principles state that people face trade-offs. In other words, he meant to say that there is nothing such as a free lunch. The same principle applies to the internet. When we browse through endless websites and use apps on our cell phones, we give away valuable data. This data, if analyzed properly can reveal everything about us.
Today, there are many startups working on data collected over the internet to get a market advantage over others. This demand for data makes it a valuable resource. But we must understand that resources available to many tend to depreciate in value. So while a lot of start-ups and internet organizations are investing in collecting data on the cost of revenue, they might be missing the point that almost every organization with its presence on the internet is doing it too. What I mean to say here, and what you might have figured by now is that in order for data to be valuable, we need stricter regulations but also, in order to escape the monopoly of big data giants, we need either very strong regulations or make our data available to everyone. Undoubtedly, the first option is suited better!
What I am saying is understood better with the help of the concept of marginal utility. At this stage, it is important to understand that anything marginal is the frontier at which a change is expected to happen. The law of diminishing marginal utility states that the marginal utility derived from every additional unit declines. Let us assume a company with your personal data for a certain segment as a single unit. Now, with every additional unit, the marginal utility derived from the unit is decreased. Take this concept to the internet. Big giants such as Facebook, Google and Amazon are already acquiring data about its user on every frontier and then there are companies who have data about the customer on specific frontiers.
Now, let us get back to Gregory Mankiw and understand his 4th principle: “People respond to incentives”. He means to say that an incentive induces a rational customer to act. Think of it in terms of data generation. All that data, or at least one specific frontier, can be collected over an application or a website providing regular incentives — incentives sufficiently small to stop the customer from uninstalling the app or making the customer visit the website regularly. In a cost-sensitive economy, with fairly low switching costs — at least with online aggregator services — similar data is shared with many players. Now, get back to the concept of marginal utility. What do you think will be the impact of multiple players having the data with the same potential? Will that data fetch the expected price?
Data might just be the new buzz in the town with a value in the short run. But that is it, just the short run! If the current rate of data acquisition continues, data might just be the most abundant resource on our planet. We all know about the value of abundant resources!
Undoubtedly, it has great potentials but without proper analytical tools for large scale data and the fact that we generate thousands of gigabytes of data everyday, companies might run out of storage units and loose on the data - new or old. So what's the point of burning cash to acquire a resource if you won’t be able to use it anyway?
Whenever an entrepreneur makes an investor pitch saying their app would be available for free on the App Store, they often justify the revenue model by emphasizing the value of the data to be generated from the many prospective customers. However, neither the data nor the customers are unique. The recent surge in demand for data might increase the valuation of such companies, but this ‘surge’ is surely to be short-lived. One could go as far as saying that the biggest investment firms in the world are involved in a ponzi scheme: they make you believe in the non-existing success of a start-up. As a result, they enforce people's beliefs of quick returns and fast firm growth — which is not always the case.
Most unicorns in the country are aggregator services who thrive on their customer database. Such firms are growing fast, and most of this is threatened by new players which will collect the same data that big giants like Google and Facebook consider their most valuable possession. I believe that this data bubble will burst someday and when that happens, it will change the world of business as we know it.