Digital Identity: More than What Meets the Eye
At Konvoy, we have been keenly interested in the innovation around digital identities (two previous newsletters on this topic: Our Investment in Ready Player Me, Digital Identity Update: One to Rule Them All?). As people continue to spend more and more time within video games, more is invested in the “digital-self”. The discussion around digital identity has primarily revolved around the visual aspects of digital self-expression of individuals in virtual environments. In this piece, we want to emphasize another key aspect of digital identity, which transcends what merely meets the eye: personal data.
The opportunity of innovation in identity data and personalization
In a direct parallel to the real world, our digital identity has multiple layers of depth that cannot be seen. This includes both qualitative and quantitative information such as:
- Personal Information: name, age, gender, date of birth, contact information, and other demographic information
- Financial Data: Online transaction history, cryptocurrency exchange interactions, loyalty programs
- Online Behavioral Activity (non-financial): browsing history, search queries, social media activity, blog posts, shows watched, and any other trackable online information.
- Biometric Data: Digital data that ties to a person's physical attributes, such as fingerprints, iris scans, and facial recognition
- Health Information: Medical records, prescriptions, and health-related searches that a person has made online.
Today, much of the above data is especially valuable to the digital advertising industry. In 2022, digital ad spend surpassed $600b and is expected to grow by 45% by 2026.
The considerable and continuous growth of this market is not solely attributed to increased “datafication” - turning online actions into quantifiable data. Other areas include:
- AI/ML: Rapid advancements in artificial intelligence can enable companies to build smarter models to identify and quantify the upside of high value customers. Machine learning is already a core part of all ad networks and helps brands target the right users (Science Direct).
- Personalization: On the demand side, customer expectations for personalization have increased 73% YoY as shoppers want brands to understand their unique needs and desires (Insider Intelligence).
- Blockchain: While blockchain has certainly not yet achieved majority consumer adoption (the market leading exchange Coinbase only has 110m verified users), we do believe that the underlying technology has the potential to add incremental commercial value to the individualization of data, ownership, and financial asset security.
Consumers: increasing control of their data
Customers are increasingly owning their data (at least in part). We believe that some of the most successful companies in the future will give customers control over their data, allow them to financially benefit from the value of their data, and they will be able to selectively share their data to allow for more customizable experiences. There are three ways we believe companies can do this well:
1) Consumer control (or opt-in) of their data: Consumers are increasingly interested in protecting their data. According to the 2022 Cisco Consumer Privacy Survey, 76% of respondents say they would not buy from a company who they do not trust with their data. This rising trend over the past decade has prompted governments around the world to introduce stronger consumer privacy protections (e.g. GDPR, CCPA). Even big tech companies have made strides to increase customer privacy. In April 2021, Apple released iOS 14.5 which required developers to request permission to track their users outside of in-app use. It is worthwhile to note that opt-in rates have been abysmal (see chart below); only 1 in 4 users have chosen to allow tracking (Flurry Analytics).
Google also has a similar model in place. However, it is important to note that opting-out only disallows 3rd party applications from collecting and using consumer data. Apple and Google are still able to collect, store, and use all data within their ecosystem. Platform owners are in a strong position as they control the user’s data and they will certainly use that for their own commercial benefit.
Companies that allow users to control who sees their data (whether in full or in part) will likely be perceived more favorably than those that do not. If companies allow users to benefit financially, and not just experientially through customized experiences, that may be an incremental unlock for some companies, platforms, and brands. This will, however, mean they share part of their top and bottom lines, which adds an additional layer of consideration.
2) Transparency on data collection policies: Despite consumers' general fear of the misuse of their data, behavior-based advertising has driven impressive results and better user experiences. Today, 91% of consumers are more encouraged to purchase when a brand personalizes its communication (Forbes). Additionally, 54% of consumers are willing to share their anonymized data to improve AI products (2022 Cisco Consumer Privacy Survey).
It is clear that users understand the benefits of companies leveraging their data in a constructive way, but concerns remain around the opaque collection practices. To address this concern, we believe companies that clearly outline their data collection practices and corresponding consumer benefits will reap the rewards of consumer trust in their products.
3) Seamless integration and user experience: The collection of data must fit into the consumer’s already streamlined online experience that exists today. Better still, if the integration of a data collection tool makes the consumer’s life easier.
For example, Honey is a seamless integration that effortlessly saves people money. Honey, which was acquired by Paypal in 2020 for $4b, collects vast amounts of online purchasing data while seamlessly integrating into the point-of-sale (PoS). The browser extension enables users to automatically find and apply coupon codes at checkout.
At the time of acquisition, the extension had 17m monthly active users and had saved customers over $2b to date (TechCrunch). Consumers are happy to share their online purchasing data in exchange for economic value and a seamless user experience.
Structural hurdles for new entrants
Google, Apple, Microsoft, Meta, and Twitter have each utilized Single-Sign On (SSO) and/or social networks to compile large repositories of user data that inform their proprietary ad networks. However, we believe that there is still room for startups to compete in this space as these incumbents only solve for “seamless integration”. The ecosystems that each of these companies has created do not enable customers to have strong controls over their data (reminder: Apple and Google’s ad networks utilize user data regardless of opt-in status) or financially benefit from sharing their data.
While there is opportunity in this area for early-stage companies to explore, there are three large structural barriers that a newcomer would need to consider:
1) What data do you actually need?: While a holistic digital identity (or “footprint”) is ideal, the range of applicability of a user’s online footprint is so vast that a startup stage company is unlikely to build a product that collects data and creates valuable customer profiles for every use-case. For context, there is not a single centralized user identifier that contains the full breadth of consumer data today.
It is far more reasonable to expect that a newcomer will build for a single application as a tip of the spear before slowly expanding.One go-to-market scenario is building for a single industry vertical where the value is particularly simple for consumers to understand (online retail, video gaming, loyalty programs) or building to identify a niche audience where targeting is very difficult (high value yet low conversion customers).
2) Quantity of integrations: Depending on the type of data aggregated, the number of integrations required increases in order to create a holistic customer profile. The more integrations, the larger the hurdle for an early-stage company that does not have those proprietary data sets in-house already.
For example, if a company is creating a platform that specializes in maximizing spend on professional sports products, data that they might find beneficial would include:
- Demographic - Is this person of drinking age and is able to buy alcohol in a stadium? Is the user located where the professional team is based and could attend home games? Does this person have kids that could eventually become fans?
- Social media - Does this person follow and interact with a particular team or sport? Do they have close friends who would attend games with them?
- Financial information - How much does this person spend on fan items? How many in-person events has this person bought tickets for in the past?
3) Validating one account = one person: The data given to companies and brands are typically anonymized. They do not necessarily care that you are John Smith, they care that your value as a customer is $X and that they have a Y% likelihood to convert you as a customer. It is assumed that every anonymous profile is one person. However, if the value of individual profiles increases, the benefit of a bad actor creating mass repositories of “fake” digital identities, or bots, skyrockets. Especially if there is a financial benefit to having multiple anonymous accounts, this creates an issue that early-stage companies need to monitor very carefully.
Takeaway: We believe that the most successful companies creating digital fingerprints for users will offer consumers three things: 1) control (or partial control) of their data; 2) a share in the economic value that is created; and 3) seamless integration into the consumer’s online behaviors. Today, many companies might have one (or perhaps two) of these aspects, yet we believe all three will be key aspects of some of the world’s most valuable consumer facing companies going forward. In video gaming, there is a natural convergence of digitally native consumers who are quite savvy about their digital footprint. We expect that gaming companies, especially the next wave of early-stage founders, will play a major role in this trend as it unfolds over the next five years.