Does Public Trust in Tech Companies Matter in the Near Future?

Day Trade Review  |

It seems like a new tech "scandal" hits the headlines every day. Tech companies like Google  (GOOGL) and Facebook  (FB) have been under scrutiny for their management of user data. It's fair to say that public trust in these companies has waned over the past few years. The question is, does it matter?

Will the public's trust in tech companies have an impact on earnings in the near future?

To answer this question, let's start with a story that dates back to September 2017.

The Equifax Hack of September 2017

On September 7, 2017, it was reported that hackers breached Equifax's  (EFX) security and gained access to sensitive data from 143 million Americans. The headlines were disastrous for Equifax, a company who manages consumer credit reports. The EFX stock, which closed at $142.72 on September 7, 2017, opened at $121.82 the next day. In the coming days, the stock hit a low of $89.59, representing an overall drop of 37% in a week. Did this spell the end for Equifax? Would it be possible for Equifax to earn the public's trust back after such a major data breach?

One year later, the EFX stock hit a high of $138.69, meaning it had basically recovered from the damage. Does this mean the public forgave and forgot?

Of course not. It means that in spite of Equifax's data breach, they were still able to maintain strong earnings that kept investors happy. The reason for this recovery is more relevant now than ever.

Equifax doesn't generate the bulk of their revenue from the consumers who were affected by the hack. They generate the bulk of their revenue by selling data to bank and credit card companies.

Keep that in mind as we shift the conversation back to tech companies.

How Do Big Tech Companies Make Money?

Facebook and Google are at the forefront of the online privacy discussion. It's safe to say that the public perception of these companies has taken a hit in the past year. Users of these platforms range from passively wary to outright livid after discovering how these companies use their data.

In most cases, upset customers leads to lower revenues. If people aren't satisfied with a product or service, they will stop buying it. Angry tech users have every right to protest these services. But, wait a second, what was the last thing you bought from Facebook or Google?

Companies like Facebook and Google make the bulk of their revenue from advertising dollars. Advertisers pay Google and Facebook for access to their inventory of impressions on newsfeeds, search engines, and other websites. This means that the advertiser is the "customer" for big tech companies and, it could be argued that the users are the "product."

Let's address both of those points.

How Will Advertisers React to Distrust in the Tech Industry?

There are a few arguments to be made here, but I think the point is best made with simple logic.

A business has one primary objective - to make money. Sure, businesses aim to please customers and have a positive global impact, but profit motive is the ultimate driver.

If companies can maintain a positive ROAS (return on ad spend), they don't have much incentive to pull advertising campaigns from a network. It would be bad business. If you could make $2 from every $1 you spent on Facebook Ads, would you pull your campaigns in light of recent headlines? Survey 1000 companies and I would bet you receive an overwhelming amount of "no's."

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Facebook and Google account for a massive percentage of paid advertising spend. Even if advertisers wanted to pull their campaigns, they would have very few large-scale alternatives. Advertisers go where the customers are and the biggest tech companies provide access to billions of people.

This leads to our next point - users.

How Will Users React to Distrust in the Tech Industry?

Tech users have expressed distaste for how big tech companies handle their data, but how many of them have taken action?

How many users of Facebook and Google services have actually withdrawn from these companies completely?

Keep in mind, that slowing user growth numbers are not the same as large drops in a user-base.

Tech users may be frustrated, but they have nowhere to turn. There are a few reasons for this.

1. The Network Effect

Let's jump back to the comparison that advertisers are the "customers" and tech users are the "product" (as dehumanizing as it may be).

Basic economic principles state that as product supply increases, value decreases. The "network effect" is a unique phenomenon in which the opposite is true. As supply increases, value increases as well.

To put it simply, this means that tech services benefit from having large amounts of users.

Companies like Facebook and Twitter thrive because they have large user-bases. You want to be on Facebook because everyone you know uses Facebook. If a company created an exact replica of Facebook with no ads or data sharing, you probably wouldn't switch unless everyone in your network switched.

Whether we like it or not, we rely on and benefit from "big tech" and don't have many alternatives.

2. Lack of Alternatives

Assume that the majority of tech users are disgruntled and ready to take action. Where do they turn?

Complete abstinence from tech is unfeasible, so the natural course of action is to switch to an alternative product or service. For example, if you're fed up with the service at your local deli, you don't stop eating; you find a different restaurant.

In most cases, the market provides many alternative products and services, however, in big tech, this isn't the case. Try answering these questions:

  • What's a viable alternative to Facebook?
  • What's a viable alternative to Instagram?
  • What's a viable alternative to Gmail?
  • What's a viable alternative to Google Docs?
  • What's a viable alternative to Google Search?
  • What's a viable alternative to Twitter?

The keyword here is "viable." You can use Yahoo Mail instead of Gmail, but that assumes that Yahoo manages data better than Facebook. You can use a private forum instead of Facebook, but you won't have access to the same group of people.

Additionally, many of the alternative sites are connected to the same "big tech" ecosystem through the use of third party data tools like Google Analytics and the Facebook Pixel.

There really is no alternative that fulfills all of the following criteria:

  1. Fulfills the same need
  2. Has the power of the network effect
  3. Applies better data privacy protection

So, What Happens Next?

The purpose of this article isn't to paint a dark picture of a monopolistic industry that forces tech users into complacency. Most of us actually benefit from all of the free services provided by tech giants. The points discussed in this article relate to the near future. What happens ten years from now is anyone's guess.

Right now, the industry is scattered and there is a tension between tech companies and their users.

In the age of tech, data has been used as a currency to fund free services through advertising, and many consumers were unaware of this exchange.

A metaphorical negotiation needs to take place. Tech users need to decide how much of their privacy they're willing to compromise for access to free services, and tech companies need to find a healthy balance between data collection and user satisfaction.

DISCLOSURE: I have no positions in any of the companies mentioned.


The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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