Big Data Does Not Shield Tech Companies From Competition

by Anja Lambrecht, London Business School, and Catherine Tucker, MIT Sloan School of Management

Big data is the next frontier in technology. As our economy grows more digital by the day and consumers develop ever larger online footprints, amassing enormous datasets has become easier than ever before. Powerful and inexpensive computing resources are now widely accessible, and we see companies taking advantage of complex data analysis from day one to innovate and kickstart their new ventures.

For example, many new businesses, such as online real estate tool Zillow.com, have used data to not only innovate, but also to build valuable platforms that provide better services to users. While in its early days Zillow used publicly available information on house prices to attract users, it quickly grew into a highly successful platform by incorporating user-generated content to hone its estimates and, now, provide users with a nearly real-time assessment of their property’s value.

For companies like Zillow that invest in this kind of data-driven innovation, could data be a source of sustainable competitive advantage? This question will be top of mind for European regulators this month as the French and German competition authorities prepare a report on the “data economy”, expected to be released this April.

Despite concerns to the contrary, we conclude in our recent paper that a large repository of data gives firms less of an advantage than a first glance suggests. At the heart of our analysis is the idea that for something to be a source of sustainable competitive advantage, a firm’s rivals must not be able to replicate the benefits. There is a number of reasons why this is unlikely to be the case for big data.

First, the tools for gathering and analyzing big data are commonplace and cheap; companies big and small have the ability to integrate meaningful insight from big data into their business operations.

Second, there are alternative sources for obtaining data from other firms, or even from the firm’s own customers. Data is nonrivalrous, which means if one company consumes a piece of data, this does notaffect its availability to others. As a result, information from Comcast’s TV viewing data to Bluekai’s online behavioral data is commercially available on the open market, allowing new entrants to gain insights similar to those that incumbent firms have already gathered.

There is no doubt that, when used properly, data can help firms better understand their customers and potentially elevate their businesses. However, it is clear that, by itself, data is not inherently valuable. To unlock the potential insights data holds, a company needs competent, data-savvy employees that are capable of implementing rigorous experiments or algorithms to eliminate the noise and tease out useful insights. In other words, while data may be useful, the true value lies in a business’s employees and the processes and strategies they set in place to mine this trove of information for actionable insights.

However, the clearest indications that a company with big data is not invincible to its competitors are the numerous examples of startups that began with a distinct data disadvantage but quickly grew to challenge and even outpace their more established rivals. These upstarts indicate that data is not in fact “non-substitutable”: There are many paths to success for innovative companies seeking to provide a better service to their customers. WhatsApp faced off against traditional telecommunications firms. It did so not by exploiting a data advantage over its rivals — which already had large data sets regarding the messaging habits and pricing preferences of their customers — but by introducing an easy-to-use and extremely low-cost messaging service.

Additionally, entrants in the sharing economy, such as Uber or AirBnB, outmaneuvered their more established competitors and thrived because they presented consumers with options that were more affordable, convenient and reliable.

The prevalence of such startups makes it clear that ownership of big data is not the key factor driving success in digital markets. Instead, innovative business propositions, ideas that put the customer’s wants and needs first, and smart and savvy employees are what drive success in this sphere. Rather than an anti-competitive force that limits the ambitions of new entrants, big data may in fact create more competitive industries than ever before, resulting in inventive new services and products that meet consumers’ needs in ways that were not possible even a few years ago.

Data is not a silver bullet with the power to destroy competitors and keep an unimaginative company on top. It is the quality of analysis and not the merely the quantity of data that determines success.

Anja Lambrecht, Ph.D., is an assistant professor at London Business School. Catherine Tucker, Ph.D., is the distinguished professor of management science at MIT Sloan School of Management. This piece is based on their recent paper “Can Big Data Protect a Firm from Competition?”

This writing is originally posted on the Guest Blog at BlogActive.eu and reposted here with permission from the authors.