The ‘shadow value of personal data’: What value does something apparently “free” have for the consumer?


Various events are being held this week to celebrate World Consumer Rights Day, a day in which civil society and regulators defend the rights of citizens-consumers. This year, the date takes on a special relevance. This is because it is being held in the midst of major discussions within the European institutions that are designing one of the most important regulatory frameworks for the coming years, that is, the ‘Digital Acts’ regulatory package: DSA, DMA, and DGA.

In this new regulatory archetype, which is in the discussion phase in the Parliament as well as in the Council and the Commission (the latter closes the deadline for inputs on March 31), references to protecting the consumer through new instruments that impose special obligations on the so-called ‘gatekeepers’ are plentiful. In this sense European legislation follows the same path outlined in recent years, that is, of increasing regulations on the exchange and use of personal data. Nevertheless, the most important element has still not come up in the debate, which is the absence of an economic calculation on the consumer-platform relationship.

Without an economic calculation it is impossible to determine if an exchange of data is beneficial or harmful, given that at least one of the parties does not know the value that the exploitation and use of their data has for the other party. This reality is even more negative when the service provided is “free” or, in other words, does not require a monetary exchange between the client (final consumer) and supplier (platform or virtual counterpart). It is precisely in this environment where the large majority of consumers – who have the perception that the “Internet is free” and only react when some email, messaging, social network, or cloud database that was initially free sets a price for its services once the user is inside – circulate.

Thus, the lack of an explicit market value for data created by consumers in exchange for receiving an apparently free service from providers is a serious problem, one that is not resolved with more regulation to protect the final consumer (and even more so in regard to the use providers might be making of this data outside the European market). On the contrary, it is necessary to construct mechanisms that show the consumer the “real value” that commerce with their personal and professional data or simply with their online preferences has for them.

In spite of the fact that, right now, the consumer is not receiving economic value for their data does not mean it does not exist. This price that is really being paid but which the consumer does not perceive is called the “shadow price” of data. It is a concept arising from microeconomic theory, which is based on the indirect additional value that the provider receives when its available resources increase by one unit. Transferred to the world of data, it would be the extra profit a service provider (a chat, a social network, or an email server, for example) obtains for use of the data handed over by each new user gained or each additional piece of data that this same user gives “freely”. In other words, for the user it is the opportunity cost of not receiving a price for use of their data. Given that at this time it is a “shadow price” on non-homogeneous online products and services, making an estimate is not easy.

Given that at this time it is a “shadow price” on non-homogeneous online products and services, making an estimate is not easy. In recent years, various analysts and researchers have made significant advances in this subject, even within the legislative area, with the goal of establishing what price per month or year the technology companies should pay users for the use of their data.

In spite of the fact that, right now, the consumer is not receiving economic value for their data does not mean it does not exist

The first relevant legislative initiative in this regard was the one promoted by senators Mark Warner and Josh Hawley (the first, a democrat from Virginia, and the second, a republican from Missouri). In it, technology companies that collect data from their users would be required to detail what type of data they store, what economic return they obtain, and what is the value created with its disaggregated use by user type. Nevertheless, to date no exercise in transparency has been produced on what economic return is being obtained from users’ data and, consequently, how much they should be compensated.

A simple albeit superficial approximation would be to share out the added value from the advertising market by user, adjusting for the value created based on the use of personal data. Assuming that 50% of added value comes from the exploitation of personal data that allows personalised advertisements to be created for the user, with the latest yearend figures and prior to COVID-19 to avoid distortions (2019 data offered by the European business association for the digital advertising industry), a yearly value is obtained of €81.61 per user or €6.80 per month per user.

But a more qualified approximation is the one given by BCG (2013) and Van Lieshout (2015). According to BCG, the size of the European market in personal data will reach 8% of GDP in 2020, with an estimated average annual accumulated growth of 22%. In the absence of 2020 closing data, and in spite of the pandemic, it is possible that this estimate falls short.

Van Lieshout’s approach is broader and encompasses different applied methodologies, differentiating the market value for the company and the market value for the user who hands over their data. Both for one as for the other, handing over data does not happen just once and for all, but rather there is a continuous flow of use and reuse of the same or comparable data. While there is no total destruction of the data, it is transformed, copied, and redirected without losing its quality or its power, which increases the value that can be extracted from it.

With this perspective, the price of the user’s data should be measured in a range that compares the provider’s income, its market capitalisation, and its margin. Taking the case of Facebook (currently considered the provider that collects the most personal data from a user), at the close of 2020, income from advertising and per user for Facebook in Europe reached an historic peak of €14.07 yearly or €1.17 monthly. In the case of market capitalisation, Facebook produced at the close of 2020 a value of €196.72 per user (€16.39 per month).

This last figure is probably a closer approximation to the reality of how much data provided by the user is worth. Although this only corresponds to Facebook, it includes extraordinarily popular applications and, except for WhatsApp, the ones that collect and use the most data from the user. Under the same methodology, Alphabet, with a market capitalisation of $1.39 billion and 4 billion users, generates a price for the data of a single user of €264.14 per year (€22 per month). Aggregating the rest of data brokers and other platforms, the value of the data for each user would be situated above €500 yearly, coming close to the estimate made by BCG in 2013.

In short, consideration of data as a fourth factor of production in the economy necessarily leads to analysing what is the offer and what is the demand to be able to determine, based on this, the market mechanisms and pricing system as if this were any other good or service in the economy. This, in the specific case of the commerce in free data, is even more important now as a mechanism for society to become aware of the value that is handed over in exchange for a set of apparently “free” services.

Javier Santacruz Cano

Fundacion Civismo