Data is the new oil: New economy heralds opportunities and risks
These are exciting times that can benefit your portfolios, writes Martin Pelletier.
Over the past few weeks I’ve visited both American coasts, including meetings with venture capital companies in Silicon Valley and attending the recent Personal Data Week conference in New York. One thing that I’ve really noticed is the tremendous level of energy south of the border, especially in these regions. Both are booming and, in my opinion, even more so than during the run-up to the financial crisis of 2008.
This got me thinking about what is different this time. The prior period was characterized by technological advances but constrained by higher interest rates and limited supplies on resources due to competition from the rapid urbanization of emerging market economies such as China.
However, since then, ultralow interest rates and cheap capital in combination with new technology being embraced by U.S. oil and gas companies have resulted in an astounding supply response that quickly removed the previous constraints. In addition, demand growth for oil has moderated somewhat due to greater efficiencies and the early stage build-out of alternative sources of energy such as solar and wind.
Consequently, in the absence of capital and resource constraints, the pace of technological innovation has been able to accelerate to unprecedented levels thereby creating tremendous opportunities for those positioned properly in this rapidly growing ecosystem. The key difference is that this ecosystem now depends on a new resource to grow — data.
The current landscape is not altogether different from the early days of Henry Ford and his assembly line, which was at the forefront of American industrialization. Almost overnight the demand for gasoline rocketed higher to keep pace with the automobile. Oil was suddenly the new gold, rapidly drilled for, extracted, transported and refined and therefore commodified during the process.
In today’s world, one could say data is the new oil as it is in high demand due to something called the network effect. This is where a company accumulates data, uses it to improve the product or service being offered to attract more users in order to generate even more data and so on.
Jack Mohr, vice-chairman of the International Personal Data Trade Association and former chief investment strategist at TheStreet.com, adds some great perspective on this.
“Organizations can expect to gather 10 to 10,000 times more data over the next 12 to 18 months, or 2.5 quintillion bytes of data created every day. For perspective, one quintillion pennies laid out would cover the surface of the Earth five times.”
All of a sudden we now have a data rush, in which it is being drilled for, extracted, transported and refined to match the rapid growth in new technologies among various sectors including communications, transportation and banking. This rush is also just beginning as more than 90 per cent of the total data in the world was created in the last two years, according to IBM.
For example, in the midstream space, the introduction and rapid expansion of connected devices and the internet of things have only recently provided the conduit of data connection between consumers and service providers. Then you have the advent of artificial intelligence which is refining data like never before, providing solutions in minutes that would have previously taken years to process and analyze.
All of this doesn’t mean it’s game over for traditional resources such as precious metals, oil and natural gas. However, it does suggest that investors should adjust their growth expectations accordingly as the industry shifts toward a low-cost manufacturing business which will also benefit from new technologies and the data ecosystem.
For those looking to invest directly in this new data economy, we think there are tremendous opportunities along with risks. This could mean choosing the later-stage growth-equity companies, otherwise known as the thoroughbreds, as they have a greater chance of finishing the race than the one-in-a-million unicorn startups trying to make it to the end of the rainbow.
One thing for certain is that these are exciting times with a quintillion different ways to not only benefit society but also our investment portfolios.