Archive for month: November, 2019

Article written in partnership with The Conversation
Winston Maxwell, Télécom Paris – Institut Mines-Télécom

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[dropcap]T[/dropcap]he US consumer protection regulator has issued a record $5 billion fine to Facebook for personal data violations. This fine is by far the largest ever issued for a personal data violation. Despite some members of the US Congress saying that this is not enough, the sanction has allowed the FTC to become the most powerful personal data protection regulator in the world. And yet, the USA does not have a general data protection law.

To transform itself into a “super CNIL”, the American FTC relied on a 1914 text on consumer protection that forbids any unfair or deceptive practices in business. France has a similar law in its Consumer Code. In the USA, there is no equivalent to CNIL on a federal level. Therefore, the FTC have taken this role.

It was not easy for the FTC to transform a general text on consumer protection into a law on personal data protection. The organization faced two obstacles. Firstly, they had to create a legal doctrine that was clear enough for businesses to understand what constitutes an unfair and deceptive practice in terms of personal data. Then, they had to find a way to impose financial sanctions, since the 1914 FTC act did not include any.

Proceedings against Facebook

A Facebook office. Earthworm/Flickr, CC BY-NC-SA

To clearly define a deceptive personal data practice, the FTC created a legal doctrine that punishes any business that “fails to keep their promises” in terms of personal data. The FTC had started a first lawsuit against Facebook in 2011 accusing them of deceptive practices due to the discrepancy between what Facebook told consumers and how the company acted. To spot a deceptive practice, the FTC will examine each sentence of a company’s privacy policy to identify a promise, even an implied promise, that is not being kept.

An unfair practice is more difficult to prove, which explains why the FTC prefer to use the term ‘deceptive’ rather than unfair. The FTC considers an unfair practice to be any practice that would be both surprising and not easily avoidable for the average consumer.

The FTC Act does not allow the FTC to directly impose a financial penalty. To do this, they have to ask the US Department of Justice to file a lawsuit. To work around this issue, the FTC encourages settlement agreements. The FTC Act allows the regulator to directly impose sanctions in the event of a breach of these agreements. The most important thing for the FTC is to get an agreement signed at the time of the company’s first violation. This means that in the case of a second violation, the FTC is in a position of strength. The Facebook incident follows this pattern. Facebook signed a settlement agreement with the FTC in 2012. The FTC have now found that Facebook violated this agreement by sharing personal data with Cambridge Analytica. The violation of the agreement made in 2012 allows the FTC to hit back strongly and negotiate a new agreement that will last 20 years, this time with a $5 billion fine.

Settlement agreements

If settlement agreements allow the FTC to increase its powers, why do companies sign them? Companies put themselves in a weaker position by signing settlement agreements and the contract prepares the FTC to make these companies more vulnerable in the case of a second violation.  However, most companies prefer to negotiate an agreement with the FTC instead of going to trial. As well as the large cost of a lawsuit and the negative effect it has on a company’s image, if a company loses a lawsuit to the US government, the door is then opened for other parties to sue them, in particular with consumer class action lawsuits. Companies fear the snowball effect. In addition, a settlement agreement with the FTC does not set a precedent since the company does not admit that they are guilty in the agreement. This means that the company can claim their innocence in other lawsuits.

As well as increasing the FTC’s sanctioning powers, the settlement agreements allow them to establish detailed requirements for personal data protection. A settlement agreement with the FTC can become a mini-GDPR and binds the company for 20 years, which is the usual duration for these agreements.

The new agreement states that Facebook must gain the explicit consent of the user before they use their facial recognition data for any purpose, or before they share their mobile phone number with a third party. The 2012 agreement already required Facebook to carry out impact assessments and this obligation was reinforced in the 2019 agreement. The new agreement requires Facebook to put in place a committee of independent administrators who will manage the implementation of the agreement within the company. As well as this, Facebook’s status will have to be changed to ensure that Mark Zuckerberg is not the sole person who can dismiss those in charge of managing the obligations. The new agreement requires Mark Zuckerberg to sign a personal declaration stating that the company will comply with the commitments made in the agreement. A false declaration would put Mr Zuckerberg at risk of criminal penalties, including imprisonment. Most importantly, the agreements oblige Facebook to document all its risk reduction measures and carry out an audit every two years using an independent auditor.

The 2012 act already included a biannual audit. Following the Cambridge Analytica investigation, the EPIC association was provided a copy of an audit carried out for the 2015-2017 period. The audit did not identify any abnormalities relating to data sharing with Cambridge Analytica and other Facebook business partners. This caused the FTC to question the effectiveness of audits, leading them to strengthen the audit regulations in the new 2019 agreement.

Although the 2012 settlement agreement did not prevent Facebook from crossing the line in the Cambridge Analytica scandal, it did allow the FTC to strongly intervene and sanction this second violation. As well as the $5 billion fine, the new 2019 agreement contains several accountability measures. These measures ensure that the commitments agreed by Facebook are applied at every level of the company and that any violation will be detected quickly. Facebook’s management will not be able to say that they were not made aware and Facebook will have to adhere to these governance commitments for the next 20 years.

In the USA, it is common for companies to negotiate agreements with the government. This process is sometimes criticized as a form of forced negotiation. The $8.9 billion fine against BNP Paribas was a “negotiated” agreement, although whether the negotiation between the French bank and the US government was balanced is questionable. In Europe, there are no settlement agreements for personal data violations, but they are common in competition law.

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Winston Maxwell, Télécom Paris – Institut Mines-Télécom

The original version of this article (in French) was published in The Conversation. Read the original article

Over the past 5 years, major digital technology stakeholders have boosted the data broker business. These middlemen collect and combine masses of traces that consumers leave online. They then offer them to the companies of their choice in exchange for income. Above all, they use this capital to manipulate markets around the world. These new powerful stakeholders are greatly misunderstood. Patrick Waelbroeck, an economist at Télécom Paris, studies this phenomenon in the context of the Chair he cofounded dedicated to Values and Policies of Personal Information.

Data brokers have existed since the 1970s and the dawn of direct marketing. These data middlemen collect, sort and prepare data from consumers for companies in need of market analysis. But since the advent of the Web, data brokers like Acxiom, Epsilon and Quantum have professionalized this activity. Unlike their predecessors, they are the ones who choose the partners to whom they will sell the information. They employ tens of thousands of individuals, with turnover sometimes exceeding 1 billion dollars.

As early as 2015, in an article entitled The Black Box Society, Franck Pasquale, a law professor at the University of Maryland, identified over 4,000 data brokers in a 156-billion-dollar market. In 2014, according to the American Federal Trade Commission (FTC), one of these companies held information on 1.4 billion transactions carried out by American consumers, and over 700 billion aggregate items!

Yet these staggering figures are already dated, since technology giants have joined the data broker game over the past five years. Still, “economists are taking no notice of the issue and do not understand it,” says Patrick Waelbroeck, professor of industrial economics and econometrics at Télécom Paris. In the context of the IMT Chair Values and Policies of Personal Information, he specifically studies the effect of data brokers on fair competition and the overall economy.

Opaque activities

“There are supply and demand dynamics, companies that buy, collect, modulate and build databases and sell them in the form of targeted market segments based on the customer’s needs,” the researcher adds. Technology giants have long understood that personal data is of little value on its own. A data broker’s activities entail not only finding and collecting data on or offline. More importantly, they must combine it to describe increasingly targeted market segments.

5 years ago, the FTC already estimated that some data brokers held over 3,000 categories of information on each American, from first and last names, addresses, occupations and family situations to intentions to purchase a car and wedding plans. But unlike “native” data brokers, technology giants do not sell this high value-added information directly. They exchange it for services and compensation. We know nothing about these transactions and activities, and it is impossible to measure their significance.

A market manipulation tool

“One of the key messages from our research has been that these data brokers, and digital technology giants in especially, do not only collect data to sell or exchange,” says Patrick Waelbroeck. “They use it to alter market competition.” They are able to finely identify market potential for a company or a product anywhere in the world, giving them extraordinary leverage.

“Imagine, for example, a small stakeholder who has the monopoly on a market in China,” says the economist. “A data broker who has data analysis indicating an interest in this company’s market segment for a Microsoft or Oracle product, for example, has the power to disrupt this competitive arena. For a variety of reasons—the interest of a customer, disruption of a competitor, etc.—they can sell the information to one of the major software companies to support them or, on the other hand, decide to support a Chinese company instead. ”

As a practical example of this power, in 2018, British Parliament revealed internal emails from Facebook. The conversations suggest that the Californian company may have favored third-party applications such as Netflix by sharing certain market data, while limiting access to smaller applications like Vine. “In economics, this is called a spillover effect on other markets,” Patrick Waelbroeck explains. “By selling more or less data to certain market competitors, data brokers can make the market more or less competitive and choose to favor or disadvantage a given stakeholder. ”

In a traditional market, the interaction between supply and demand introduces a natural form of self-regulation. In choosing one brand rather than another, the consumer exercises countervailing power. Internet users could do the same. But digital market mechanics are so difficult to understand that there are no users doing this. Although users regularly leave Facebook to prevent it from invading their privacy, it is unlikely they will do the same to prevent the social network from distorting competition by selling their data.

Data neutrality?

“One of our Chair’s key messages is the observation of a total ignorance of the influence of data brokers,” Patrick Waelbroeck continues. “No one is pondering this issue of data brokers manipulating market competition. Not even regulators. Yet existing mechanisms could be used as a source of inspiration in countering this phenomenon.” The concept of net neutrality, for example, which in theory enables everyone to have the same access to all online services, could inspire data neutrality. It would prevent certain data brokers or digital stakeholders from deciding to favor certain companies over others by providing them with their data analysis.

Read more on IMTech What is Net Neutrality?

Another source of inspiration for regulation is the natural resource market. Some resources are considered as common goods. If only a limited number of people have access to a natural resource, competition is distorted, and the rejection of a commercial transaction can be sanctioned. Finally, an equivalent measure for intellectual property rights could be applied to data. Certain patents, which are necessary in complying with a standard, are regarded as raw materials and are therefore protected. The companies holding these “essential patents” are required by regulation to grant a license to all who want to use them at a reasonable and non-discriminatory rate.

The value of the data involved in digital mergers and acquisitions

In the meantime, pending regulation, the lack of knowledge about data brokers among competition authorities is leading to dangerous collateral damage. Unaware of the true value of certain mergers and acquisitions, like those between Google and DoubleClick, WhatsApp and Facebook, or Microsoft and LinkedIn, competition authorities use a traditional market analysis approach.

They see the two companies as belonging to different markets–for example WhatsApp as an instant messaging service and Facebook a social network–and in general conclude that they would not gain any market power in joining forces than they had individually. “That is entirely false!”, Patrick Waelbroeck protests. “They are absolutely in the same sector, that of data brokerage. After the union of these duos, they all merged their user databases and increased the number of their users. ”

 “We must view the digital world through a new lens,” the researcher concludes. “All of us–economists, regulators, politicians and citizens–must understand this new data economy and its significant influence on markets and competition. In fact, in the long-term, all companies, even the most traditional ones, will be data brokers. Those unable to follow suit may well disappear. ”

Article by Emmanuelle Bouyeux for I’MTech

Businesses are increasingly turning towards selling the use of their products. This shift in business models affects SMEs and major corporations alike. In practice, this has an impact on all aspects of a company’s organization, from its design chain to developing collaborations, to rolling out new offerings for customers. Xavier Boucher and his colleagues, researchers in industrial systems design and optimization at Mines Saint-Étienne, help companies navigate this transformation.  

Selling uses instead of products. This shift in the business world towards a service economy has been emerging since the early 2010s. It is based on new offerings in which the product is integrated within a service, with the aim of increasing value creation. Leading manufacturers, such as Michelin, are at the forefront of this movement. With its Michelin Fleet Solutions, the company has transitioned from selling tires to selling kilometers to European commercial trucking fleets. But the trend also increasingly affects SMEs, especially as it is recognized as having many benefits including new opportunities to create value and drive growth, positive environmental impacts, building customer loyalty, increasing employee motivation and involvement.

However, such a transition is not easy to implement and requires a long-term strategy. What innovation strategies are necessary? What services should be rolled out and how? What company structures and expertise must be put in place? It all depends on market developments, the economic impacts of such a transformation on a company and the means to implement it, whether alone or with partners, to achieve a sustainable transformation. More generally, shifting a company’s focus to a product-service system means changing its business model. With his team, Xavier Boucher, a researcher at Mines Saint-Étienne, supports companies in this shift.

In the Rhône-Alpes region where he carries out his research, the majority of manufacturers are developing a service dimension to varying degrees through logistics or maintenance activities. “But out of the 150,000 companies in the region, only a few hundred have truly shifted their focus to selling services and to product life-cycle management,” explains the researcher. Nevertheless, his team is facing increasing demand from manufacturers.

Tailored support for companies

The transition from a model of selling products to a product-service system involves a number of issues of company organization, reconfiguration of the production chain and customer relationship management, which the researchers analyze using models. After a diagnostic phase, the goal is often to support a company with its transformation plan. The first step is changing how a product is designed. “When we design a product, we have to consider all the transformations that will make it possible to develop services throughout its use and throughout all the other phases of its life cycle,” explains Xavier Boucher. As such, it is often useful to equip a product with sensors so that its performance and life cycle can be traced when in customers’ possession. But production management is also impacted: this business strategy is part of a broader context of agility. The goal? Create value that is continually evolving through flexible and reconfigurable industrial processes in alignment with this purpose.

To this end, Xavier Boucher’s team develops different tools ranging from strategic analysis to decision support tools to bring a solution to market. “For example, we’ve created a business model that can be used while developing a new service offering to determine the right value creation chain to put in place and the best way for the company to sell the service,” says the researcher. Using a generic simulation platform and a customization approach, the researchers tailor these economic  calculators to manufacturers’ specific circumstances.

This is important since each situation is unique and requires a tailored business model. Indeed, marketing a mobile phone and deploying a cleaning robot will not rely on the same channels of action. The latter will call for services including customized installation for customers, maintenance and upgradability as well as management of consumables and measuring and guaranteeing cleaning quality. Moreover, companies vary in terms of their progress toward servitization. The researchers may collaborate with a start-up that has adopted a product-service model from the outset or with companies with established business models looking for a tailored, long-term transformation.

What are the steps toward a product-service system?

Companies may call upon the expertise of the Mines Saint-Étienne researchers at various stages in their progress toward this transition. For example, a manufacturer may be considering in advance how selling a service would impact its economic balance. Would such a change be the right move based on its situation? In this case, the models establish a progressive trajectory for its transformation and break it down into steps.

Another type of collaboration may be developed with a company who is ready to move towards selling services and is debating how to carry out its initial offering. Researchers use their simulation tools to determine three possible business models: the first is to market its product and add on the sale of services throughout its lifecycle; the second is to shift the company’s business to selling services and integrate the product within a service; and finally, the third model sells performance to customers.

The researchers helped the SME Innovtec develop an autonomous robot offering for industrial cleaning. “We developed computer-aided design tools: modeling, organizational scenarios, simulations. The goal was to expand the traditional product-oriented tools by adding a service package dimension,” explains Xavier Boucher. The company thus benefitted from different scenarios: identifying technologies to ensure its robots’ performance, determining which services were appropriate for this new product etc. But the projections also address topics beyond the production chain, such as whether it should integrate the new services within the current company or create a new legal structure to deploy them.

A final possibility is a company that has already made the transition to servitization but is seeking to go further, as is the case for Clextral, a SME that produces extrusion machines used by the food processing industry, which was supported through the European DiGiFoF project (Digital Skills for Factories of the Future). Its machines have a long service life and provide an opportunity to create value through maintenance and upgrading operations. The researchers have therefore identified a service development focus based on a retrofitting service, a sort of technical upgrade. This consists of exchanging obsolete parts while maintaining a machine’s configuration, or modifying the configuration of a piece of equipment to allow for a different industrial use than originally intended.

Digitization and risk management in multi-stakeholder context

The current trend towards servitization has been made possible by the digitization of companies. The Internet of Things has enabled companies to monitor their machines’ performance. In several years’ time, it may even be possible to fully automate the monitoring process, from ordering spare parts to scheduling on-site intervention. Smart product-service systems to combine digitization and servitization is a research focus and is a central part of the work carried out with elm.leblanc, a company seeking to put in place a real-time information processing to respond to customers more quickly.

However, this change in business models affects not only a company, but its entire ecosystem.  For example, elm.leblanc is considering sharing costs and risks between various stakeholders. One option, for example, would be to incorporate partner companies to implement this service. But how would the economic value or brand image be distributed between the partners without them taking over the company’s market? Research on managing risk and uncertainty is of key importance for Xavier Boucher’s team. “One of the challenges of our work is the number of potential failures for companies, due to the difficulties of effectively managing the transition. Although servitization has clearly been shown to be a path to the future, it is not associated with immediate, consistent economic success. It’s essential to anticipate challenges.”

Article written (in French) by Anaïs Culot for I’MTech