When it comes to a breaking report of a consumer app or service having a breach leading to an invasion of customer privacy, not a week seems to go by without some news. This constant barrage of bad press for consumer services, that use a business model that hinges on advertising, has deep impacts I’m yet to see anyone fully grasp. So in this analysis, I’d like to offer some food for thought about how these events will lead to a new challenge for consumer startups.
The Heightened Awareness of Consumers Over Privacy
The adage that consumers don’t care about privacy is no longer a new truth. It may have been true at one point, I like to debate this, but it is no longer true. Consumers have awoken to a heightened awareness over the privacy issues with many of the apps and services they use which cost them nothing but their personal data.
Just yesterday, an report in the NY Times uncovered a story on how many apps which have been abusing consumer location sharing data. From a consumer standpoint, this kind of stuff is very scary. These stories begin to erode away consumer trust and could lead to a much more steeper wall for consumer startups to have to climb to get any kind of scale. Before I dig into that, consider these statistics I found from a recent study fielded by behavioral analysis firm UE Group.
- 72% of consumers polled said they are more aware now than they were 12 months ago about how companies collect and use their data
- 70% say they are more concerned now than they were 12 months ago about their online privacy
- 39% say they feel they are in control of their online data
- 45% say they trust online/social companies less now than 12 months ago
- 75% said they do not want to be tracked online by ads
- 43% said their confidence in companies ability to keep their data safe has declined since 12 months ago
A New Business Model
If this data is a leading indicator, and I think it is, then free with ad-supported business models will come into question. What is interesting about this point, is the vast majority of venture capitalists out there are/were funding these type business models on the basis of their belief it is the only way to get scale at a consumer level. Most of these VCs have funds of massive proportions which are fueled by big consumer bets that could yield 10-20x returns if they achieve massive scale. What I present as food for thought is if the consumers are less likely to sign up for a free with ad service, then it is likely that we are witnessing the end of true consumer global scale of a product or service. If the business model changes, then so do the addressable market. Getting scale with a free service was hard enough, having to do so with a different business model may be even harder. If we can argue scale is dead, then so are consumer unicorns.
In discussing this recently, it was rightly brought up by a friend that not everyone can afford to pay for all these apps and services to have an ad-free and/or non-tracking experience. This is true, and I’m fond of the saying that advertising is a tax on the poor, but the reality is a huge portion of those more affluent consumers would likely choose to pay to keep their data private and not accessible by advertisers. Which, if all the ad industry is left with is non-affluent consumers, then advertising itself is in trouble at a broader level.
Many apps today do offer a free version with ads and a paid version that gets rid of the ads. But I wonder if the paid version would have a higher conversion rate if it also guaranteed you would not be tracked. Because we all know many of those apps still collect data on you even if you paid to eliminate the ads.
Now, keep in mind I’m throwing out food for thought on this matter. I shared the data and added some context, and a part of me feels we are heading in a direction where true consumer scale may no longer be achievable. But we will need to watch these trends for the next few years to tell. While it is a fact consumer awareness and concern over privacy is at an all-time high, we still need to see how consumer behavior changes if it changes at all.