Exploring the economic value of personal information from firms’ financial statements

Highlights

• Economic analysis of personal information has been qualitatively conducted, linked to privacy issues.

• This is not acceptable as prime online business models are dependent on personal information use.

• Company-level financial data can be used for approximating the value of personal data.

• Performance figures needs to be turned into a reliable economic value by considering future returns.

• It seems realistic that there are considerable regional differences in the economic value of a profile.

Abstract

Currently personal data gathering in online markets is done on a far larger scale and much cheaper and faster than ever before. Within this scenario, a number of highly relevant companies for whom personal data is the key factor of production have emerged. However, up to now, the corresponding economic analysis has been restricted primarily to a qualitative perspective linked to privacy issues. Precisely, this paper seeks to shed light on the quantitative perspective, approximating the value of personal information for those companies that base their business model on this new type of asset. In the absence of any systematic research or methodology on the subject, an ad hoc procedure is developed in this paper. It starts with the examination of the accounts of a number of key players in online markets. This inspection first aims to determine whether the value of personal information databases is somehow reflected in the firms’ books, and second to define performance measures able to capture this value. After discussing the strengths and weaknesses of possible approaches, the method that performs best under several criteria (revenue per data record) is selected. From here, an estimation of the net present value of personal data is derived, as well as a slight digression into regional differences in the economic value of personal information.

Introduction

Since marketing techniques initially made the importance of client-focused strategies clear, companies have been collecting customer data and using them to create value. When there was just a real world, those data were difficult to collect and were stored inside the firm “as the miser watches over his hoarded gold” (Douplitzky, 2009). The Internet, or rather information and communication technologies (ICTs) have radically changed this situation. Currently, data gathering is done on a far larger scale and much cheaper and faster than ever before. While we communicate, exchange and access information using electronic communications systems, data records can be and are collected on who we are, where we are, what we do, and how we do it. Even more significant, personal data¹ are easily shared or transferred across companies, markets and industries, irrespective of geographical boundaries.

Arguably, the most striking feature of this scenario is the emergence of a particular type of company for whom personal data are the key factor of production. The business models of quite a number of companies operating in online markets – including many of the Internet giants – are based on targeted advertising, which in turn relies on behavioural profiling. Personal data are thus becoming one of the main assets of many modern markets, to the point that they can be considered “the new oil of the internet and the new currency of the digital world” (Kuneva, 2009).

Surprisingly, this type of statement is still based largely on theoretical grounds. Few would deny that personal information generates value for companies but, at the same time, almost no academic paper can be produced to help estimate how large this value is. Until now, the economic analysis of personal information has been conducted from a qualitative perspective, mainly linked to privacy issues (a review of the economic literature on information privacy can be found in Pavlou, 2011). However, there is a pressing need to progress from those qualitative statements to quantitative results. This is not least because some of the main data collectors are traded on stock markets and are quickly ascending the list of the biggest world companies.

This article seeks to shed light on this topic, trying to approximate the value of personal information for companies, in particular for those companies that make their business precisely through the handling of personal information. In the absence of any systematic research or methodology on the subject of study, an ad hoc procedure has been developed. The accounts of a number of key players in online markets have been examined. This inspection has tried first to determine whether the value of personal information databases is somehow reflected in firms’ books, and second to define performance measures able to capture – alternatively or complementarily – this value. After discussing the strengths and weaknesses of these possible approaches to valuing personal data, both from a conceptual and practical (obtaining the figures for key players) perspective, the method that performs best is selected. Taking those values as a departure point, and after further processing, an estimation of the value of personal data is derived.

Along these lines, the article is structured as follows. After this brief introduction, the next section introduces the complexities involved in the valuation of personal data. The use of company reporting for the valuation of personal data, both from a theoretical and practical perspective, is analyzed in detail in the following section. From this discussion, the results obtained through the different possible methods employed are displayed, as well as discussed in terms of their different merits. Finally, the paper closes with the calculation on the net present value of personal information, a brief investigation of regional differences and some conclusions on the relevance and applicability of the valuations obtained in the paper.