This blog post is the translation of an opinion column I published in Capital (french magazine). Privacy is important to businesses and this is exactly why I created Secrecy, the first PaaS environment for authentication, end-to-end encryption and personal data protection for serverless applications.
Investments in new technologies have been decreasing since the spring and have caused a collapse in valuations. This crisis highlights the weaknesses of the current business model which is based on the acquisition of users and the collection of their personal data, and which could be seen as pyramidal, as it is financed by new investments in the sector.
Since Facebook’s IPO in 2012, with a record capitalization of $104 billion despite revenues of only $3.7 billion, tech valuations had soared so far, without corresponding to immediate economic performance. To try to explain this surge, new signals such as the number of users have been substituted for purely financial indicators, such as operating income.
Tech companies have therefore been encouraged to concentrate their efforts on these variables, which are perceived by VCs (venture capital funds) as the prospect of high revenues in the future. Chamath Palihapitiya, a former Facebook executive turned investor, compares this mechanism to a Ponzi scheme: VCs push startups to acquire users at any price, so as to inflate their valuations and multiply their stake at the next round.
One of the justifications for this valuation method is the ability to generate revenues from a large number of users, by leveraging their personal data to optimize their experience and display personalized ads. Usage, browsing history, or location information are thus commonly sold to ad networks. Applications such as Flo and Grindr have gone so far as to respectively provide data on the menstrual cycle and HIV status of their users.
In this surveillance capitalism described by Shoshana Zuboff, professor emeritus at Harvard Business School, human experience is translated into behavioral data, which is sold to produce predictions. However, user awareness, legislation such as the GDPR (General Data Protection Regulation) or Apple’s privacy measures are thwarting this model. In addition to the ethical issues, the profitability for advertisers is sometimes questioned. Companies such as Procter & Gamble, Chase, Uber and eBay have observed that the return on investment of targeted advertising was greatly overestimated and have reduced their spending.
In the end, even the economic activity of tech, based largely on advertising, appears overrated because a large part of its advertising revenue is fueled only by new fundraising. According to Clearco, 43% of the capital raised by start-ups is spent on advertising, to increase their visibility. This money is therefore used, indirectly, to finance tech companies specialized in data exploitation, including Google and Meta. Until now, this mechanism had worked in favor of the sector’s growth. But the current recession has set off a chain reaction: as investment declines, companies are not achieving their expected results, and this accelerates the decline in investment.
In response to this bubble, privacy is emerging as an indispensable alternative. According to Eurobarometer, 46% of European citizens are concerned about the use of their personal data and according to Cisco, 91% of companies consider privacy a business imperative. Technologies that promote data privacy, such as end-to-end encryption, are therefore increasingly popular with users.
Following the messaging apps (WhatsApp, Signal and Telegram) that have made these technologies standard, it is Apple that has positioned itself commercially as the only web giant to sell them instead of personal data. Protecting privacy is therefore in the interest of companies, not just as a marketing argument, but also as a means of fighting against data leaks, which are damaging to reputation. Finally, the technological investments required for this model, far from increasing the systemic risk of the sector, will gradually deflate the bubble.