Smart, Connected Products and Big Data: New Economic Challenges

By Patrick Waelbroeck | 16/04/2015, 8:27

Using Big data algorithms and smart, connected products generates three main risks to security, privacy and competition.

Translated from French: http://www.latribune.fr/opinions/tribunes/objets-connectes-et-big-data-les-nouveaux-enjeux-economiques-469298.html

Private and public data now represent the resource that will deeply modify the way consumers and citizens daily interact with private and public services. Sensors, smart, connected objects, cameras and surveillance drones are everywhere and will blur the frontier between the online and the real world increasingly porous to create what Google already calls the “physical Web”. The economic benefits of data ecosystems are: improved quality of products and services, better management of energy resources and transportation systems, better forecasts, better matching between supply and demand (CRM and VRM), more effective management of healthcare systems, better self-knowledge, etc. However, there are risks and costs that have to be analyzed, so that the digital development does not come at the expense of a loss in the confidence that economic agents have towards each other.

Security

Risks of security breaches are multiplied in connected infrastructures, made of sensors, servers and software. We have to think about the life cycle of personal data. Some experts even propose the “silence of chips” to express the idea that security issues should perhaps be integrated directly into the computer code that handles data transmission. The right economic incentives to key industry players should also be implemented to make them reduce as much as possible safety holes and prevent them from transforming our daily connected objects into “virus nests”. Therefore, responsibilities and property rights associated with data transmitted by smart, connected products should be clearly defined.

Privacy

Sensors of smart, connected products threaten privacy. Even if customer identification contributes to better targeted advertising, there are risks that consumers will be left with fewer choices for two reasons. First, if a person who has a joint bank account wishes to make a purchase without the other co-holder’s approval, he/she will not use the associated credit card and will prefer an anonymous means of payment, such as payment in cash, prepaid cards, SMS payment. Anonymity can increase economic activity. Secondly, personal recommendation can lead to filter bubbles that prevent people from seeing all possible choices: they end up consuming always the same type of products.

Competition

Smart, connected products and Big data algorithms will change the nature of competition between firms traditionally organized in vertical silos relatively closed and independent. Companies may have strategic interests to make their data communication and processing systems incompatible with those of their competitors, or to filter data and publish biased information. The economic nature of data is such that the companies which are closest to the final consumer will also have a competitive advantage. Some form of neutrality of connected objects should be studied, which would allow data to freely flow on the Internet of Things. The economy of Big data and smart, connected products should bring innovations in a healthy competitive environment.

Patrick Waelbroeck earned a PhD in economics from the University of Paris 1 Panthéon-Sorbonne. He teaches industrial economics and econometrics at Télécom ParisTech. His research and teaching focus on the economics of innovation, the economics of intellectual property, Internet economics and the economics of personal data. Patrick Waelbroeck is also a founding member of the Chair “Valeurs et Politiques des Informations Personnelles” (Values and Policies of Personal Information), Institut Mines-Télécom, that addresses legal, economic, technical and philosophical issues related to personal data. He teaches Internet and data economics in the master Big Data at Télécom ParisTech.

The economic value of personal data: an introduction

Patrick Waelbroeck
Télécom ParisTech

Three concepts related to information are often confused: the cost of production, the quantity and the value of information. If cost is generally proportional to the amount of information exchanged, there is seldom a direct link between the amount of information and its value. Consider two examples of smart, connected products involving highly sensitive personal data: home automation data and health data. Nest (acquired by Google in January 2014 for $ 3.2 billion) manufactures smart thermostats to control temperature in the different rooms of a home based on environmental parameters such as the number of people in each room. Withings started by selling smart scales but now also sells activity trackers, blood pressure indicators, smart watches, sleep monitors and surveillance cameras. These are information services that produce information through sensors and transmit them via the Internet of Things. The cost of installing these sensors is not very high. The amount of information to be communicated and stored on servers costs more. But none of these quantities is directly related to the value of information. Indeed, a single bit of information indicating with certainty that a fire is about to break out in your home while you are away has a much greater value than the gigabytes of data corresponding to daily variations in the number of people in every part of your home during years. Similarly, a single bit of information indicating with certainty that you are suffering from a rare disease has much more value than the hundreds of gigabytes corresponding to the measurements of your heart rate or the number of your daily steps over several years.

The theory of information in economics experienced a sporadic development in the past five decades since the pioneering work of Jacob Marschak.  The difficulty arises from to the early attempts to analyze information as a homogeneous good with  a single market value. It is now clear that information is a differentiated economic good. In this short note, I review several important concepts: information as an economic good, information theory in economics and the willingness to pay for information, the market for personal information as an equilibrium between supply and demand for personal information.

Read full article on ssrn: http://ssrn.com/abstract=2690109

 

 

Welcome on IDRESEARCH

ID research is a blog updated by researchers from Telecom ParisTech working on the economics of big data, digital identities and the Internet of things. We will shortly post articles on the economic value of personal data, on strategies around user-generated content, on the evolution of online trust from a panel of Internet users in France and on the relationship between online purchases and financial privacy.