New legislation in Europe (GDPR and ePrivacy) and moral outrage at the tech giants in the United States are putting pressure on news publishers and other firms to limit their collection of user data.

If data is the new oil, as it has been argued, this begs the questions: Are we about to enter the first digital oil crisis? And, if so, how should news publishers maneuver in such as crisis?

Is data the oil of the digital economy?

Clive Humby, British mathematician and consultant for Tesco, is usually credited with coining the maxim that data is the new oil. His argument was that while refined oil was the key resource powering the industrial economy, processed data plays a similar role in the digital economy. Accordingly, in the digital economy, user data powers everything from search services and content recommendations to subscriber acquisition and programmatic advertising.

To extract value from user data, a system has evolved in which user data is collected, among other things, via news Web sites by third parties. Subsequently, the data is processed and reintegrated into the offerings of news publishers in the form of content recommendations and targeted advertising, for example.

The result is a system in which user data flows like oil from news publishers to a great number of third parties before being processed and reintegrated in content recommendations or targeted advertising, in the case of this example.

These user data flows where mapped in 2016 (in the United States) and 2017 (in Denmark) and are vividly illustrated in the figures below. (A disclaimer: I helped carry out the mapping while also while working at JP/Politikens Hus and it has informed the strategies we use at Ekstra Bladet.)

While having beneficial effects for the quality of news offerings and digital advertising, user data collection and processing is also characterised by negative externalities. Unlike oil, this is not pollution stemming from oil spills, but rather invasion of privacy stemming from data leakage, for example, and an occasionally uncanny relevance of editorial content, advertising, or search results.

To manage this negative externality, legislation such as the GDPR and ePrivacy shows that policymakers in Europe are seeking a new balance between privacy and user data collection. More specifically, the GDPR does so by introducing eight data-related rights for EU citizens as well as requiring data controllers to have a clear legal basis when collecting user data which usually involves obtaining informed consent from the users.

The legal changes are expected to affect the flows of third-party data (that is, most of the flows illustrated with red lines in the figure above), while first-party data is expected to be affected to a lesser extent.

The dynamics of the first digital oil crisis

Perhaps the most common objection to the analogy between oil and data has been that data, unlike oil, is not a scarce resource. However, it seems clear that GDPR, the ePrivacy directive, and (perhaps) moral outrage at the tech giants in the United States will introduce a new form of artificial user data scarcity in the digital economy.

Even though it is not possible to quantitively predict the effects of user data scarcity, the analogy between oil and data provides a window into the likely dynamics of the first digital oil crisis. We can look through the window by extrapolating tentatively from what happened when scarcity of oil was introduced in the industrial economies of the 1970s:

  1. Short-term contraction of the digital economy: In the short term, the digital economy must be expected to be impacted negatively by the new artificial scarcity of user data. The same phenomena happened in the oil crises of the 1970s where scarcity of oil made industrial production less efficient. In the first digital oil crisis, most products and services powered by user data will lose some of the qualities that high quantities of user data enable, thus reducing the value generated by them.
  2. Increasing value of user data: The price of user data will increase. In the oil crisis of the 1970s, scarcity of oil gave rise to steep increases in oil prices with great benefit to the collectors and controllers of oil (such as the Gulf States, Texas, and Norway). In the digital economy, the beneficiaries of data scarcity must be expected to be those who are still able to collect and process user data, which usually will include actors with direct access to engaged and loyal users (such as the first parties).
  3. The creation of a more efficient and healthy digital economy: In the longer term, the system supporting a data-powered economy will adapt and become able to use data more efficiently. Following the oil crisis of the 1970s, this type of adaptation occurred across the industrialised economies involving more effective methods for oil extraction as well as a new focus on more efficient uses of energy. In the digital economy, scarcity of user data might give rise to similar dynamics: the development of new methods for user data collection that are less intrusive, the processing of data with less data leakage, and more efficient utilisation of less extensive data sets.

Who will win the first digital oil crisis?

Now, what will this mean for news publishers? In most crises, there are both winners and losers. And if the dynamics derived from oil-scarcity shocks are valid, the first digital oil crisis will produce both.

The third parties that have data collection, processing, and (re)sale as their key activities must be expected to be the losers of the first digital oil crisis. The reason is they rely on news publishers or other “first parties” with direct access to users for access to user data. This access will increasingly depend on both the willingness of news publishers (among others) to obtain consent to collect and process user data on their behalf, and on the willingness of the users to give consent to third parties they might not even have heard of.

The tech giants, such as Google and Facebook, will also find their ability to collect and process data constrained — in particular, when they themselves act as third parties collecting user data from publishers’ Web sites. However, at the same time, tech giants with direct access to users (for example, via their own widely used search engines and social networks) will benefit from the increasing value of the user data that they themselves control.

This benefit will be significant, as the tech giants themselves generally process the user data they collect rather than relying on third parties to do so for them. For that reason, the tech giants appear as the likely winners of the first digital oil crisis.

Finally, news publishers are likely to experience short-term challenges from reduced availability of user data in the digital economy. The main short-term challenge stems from the fact many news publishers’ digital advertising businesses rely on the ability of advertisers to use third-party data to target advertising on their Web sites. At the same time, news publishers’ direct contact with engaged news users puts them in a unique position to benefit from increasing prices of first-party user data.

To exploit this benefit, however, news publishers need to internalise data collection and processing rather than relying on third parties to do so on their behalf (as it is currently the case as noted in the figure above).

Now, creating a first-party data infrastructure is not a silver bullet for news publishers. Building an infrastructure capable of collecting, processing, and using first-party data is demanding. In addition, its value depends on advertisers accepting and adopting both the first-party data and the data infrastructure provided by news publishers, which speaks for a gradual approach.

If news publishers and other actors adapt to data scarcity in this way, news publishers stand to benefit greatly from ownership over the user data powering their Web sites and applications. Also, publishers will contribute to a more efficient and healthy digital economy where fewer actors are involved in the collection and processing of user data, creating more transparency, and giving users more control over their data.