Digital Disruption: The Rise of Data Clean Rooms

How shifts in consumer privacy and cookie deprecation are impacting digital marketing

For decades, brands have collected consumer information on various digital properties to build shopper profiles, which are used to deliver personalized advertisements online. This is how digital marketing functions–to the tune of $566 billion to be spent on digital advertising worldwide in 2022.

It’s big business. But it’s a business that cannot function without collecting, storing, and sharing consumer data.

The problem is consumers think cookies, trackers, and other tools used by online marketing to collect consumer data are intrusive and infringe upon their privacy. Consumers don’t feel in control of their data and, more importantly, don’t trust how brands use it. According to Pew Research, a whopping 79% of Americans question how companies use their data. This groundswell of consumer sentiment has forced governments to act.

Over the past couple of years, numerous privacy regulations have rolled out globally, such as the General Data Protection Regulation (GDPR) in the EU; the California Consumer Privacy Act (CCPA), California Privacy Rights Act (CPRA), and Health Insurance Portability and Accountability Act (HIPAA) in the US, and the Personal Information Protection and Electronic Documents Act (PEPIDA) in Canada. Around the world, businesses are being held accountable for how they safeguard the customer data they collect. In the US alone, nine states have active or signed privacy laws on the books today, while an additional 24 are considering legislation.

These laws are causing turmoil for digital marketers. “The digital marketing world has been thrown into an existential crisis as its way of working — powered by third-party cookies and programmatic advertising — is turned upside down,” explained Shiv Gupta, founder of U of Digital LLC.

As cookies disappear and third-party data sources become riskier or more costly, marketers are making unprecedented moves to safeguard consumer data and invest in data collaboration solutions that provide next-gen solutions for targeting consumers in a privacy-compliant manner. Data clean rooms are rapidly emerging as an important tool in a marketer’s arsenal.

This global push profoundly affects data collection and collaboration strategies, and Big Tech is taking it seriously. At the recent IAPP Global Privacy Summit, Tim Cook, Apple CEO, called protecting privacy “one of the most essential battles of our time.” Besides Apple, other Big Tech platforms are responding by erecting barriers to accessing consumer information, safeguarding sensitive customer data, and solidifying their competitive advantages through the construction of “walled gardens.”

Privacy push

The trend toward more consumer privacy is happening because, according to Pew Research Center, 79% of Americans question how companies use their data. People are upset and governments around the world are responding by passing regulations requiring businesses to safeguard the consumer data they collect.

In the EU, the GDPR standardized data protection law to grant its citizens greater control over how their personal information is processed or transferred when it went into effect in 2018. In the US, the CCPA in 2018 and CPRA in 2020 created heavy pressure on brands to reform how they gather, process, and share consumer data.

Under pressure, Big Tech is responding. Google announced plans to deprecate third-party cookies by the middle of 2023, though this date has already shifted several times and may move again. Apple’s Safari and Mozilla’s Firefox have already deprecated third-party cookies, so if anything, Google’s plans herald a definitive end to the era of third-party cookies.

Cookie deprecation is important because third-party cookies drive a huge portion of digital ads. Epsilon tells us that around 80% of advertisers currently depend on third-party cookies and, without them, advertisers need to find a new way to reach customers and prospects. The prospect of no more cookies on Chrome, the world’s most popular browser with 65% of the market share, has resulted in a tremendous change to the digital marketing ecosystem writ large.

Digital marketing disrupted

It’s becoming difficult and riskier to target consumers across advertising channels using third-party data sources. As third-party sources wither away, advertisers lose the ability to see and learn what happens in a user’s path to understand behavioral trends, and attribution — the pinnacle of marketing — is completely changing.

In this environment, advertisers will no longer be able to buy and learn from third-party data to prospect new customers, which is huge considering many companies use third-party data to drive their personalized marketing efforts. Lower levels of personalization will reduce conversion rates and return on marketing investment (RoMI) for every ad dollar spent.

These privacy laws were written to make it difficult to engage in retargeting using third-party data without significant safeguards in place to ensure consumers are protected. CCPA, for example, grants consumers the right to make data subject access requests (DSARs) to discover what data an organization is retaining about them, why they are holding that data, who their data is disclosed to, and how their data is used by the organization.

Under these laws consumers also have the right to opt-out and have their profiles removed from all systems, including those maintained by third parties. Believe it or not, CCPA protects any information linked to a consumer or household that can be used for targeting and holds organizations accountable for third-party actions in their marketing ecosystem.

Because upwards of 10-12% of marketing budgets are currently spent on third-party data and 59% of marketers say they rely on third-party data for retargeting, we can expect media spend will be less efficient as targeting is curtailed. Plus, the inability to use frequency capping within a closed ad system — i.e., a walled garden — may make spend optimization more difficult and expose the marketplace to potential fraud.

Walled gardens

As third-party cookies disappear, Big Tech firms are pivoting to erect walled gardens. A walled garden is a closed platform or ecosystem in which all the operations are controlled by the ecosystem operator. In recent years, Google and Apple have gone to great lengths to build such ecosystems, ostensibly to protect consumers but also to safeguard commercial interests.

While consumers benefit from advances in consumer privacy that materialize when a walled garden is erected, these moves also dramatically increase the value of platforms to advertisers by keeping competitors at bay and cementing competitive advantages. In the long run, history has shown monopolies (or oligopolies) are ultimately bad for innovation and consumers, so this trend merits a closer look in coming years as the marketplace changes.

To provide advertisers with better privacy solutions, Google’s Privacy Sandbox seeks to offer an environment that protects people’s privacy online and gives marketers tools to build compelling digital experiences. While ostensibly aiming to create a safer, more secure Internet, critics pan Google’s efforts and claim they will ultimately consolidate the company’s control over a broad swathe of online marketing.

The argument goes that Privacy Sandbox is trying to replace an “open and interoperable technology with one that is Google-controlled,” said a spokesperson from Marketers for an Open Web (MOW). “This will force marketers into their walled garden and will spell the end of the independent and open web.”

Apple has also been especially active in this area and — due to its closed ecosystem — has built perhaps the most effective walled garden today. Over the past couple of years, the company has aggressively positioned itself as the most privacy-sensitive Big Tech firm. Privacy is mentioned as part of nearly every new product or feature the company releases. Apple’s campaign for Safari, its Chrome-alternative Web browser, touts Safari as a browser with “intelligent tracking prevention for built-in privacy.”

With the launch of iOS14 in September 2021, Apple introduced new functionality that allows users to decide if they want apps to track their data, effectively killing the Identifier for Advertisers (IDFA), which allows marketers use to personalize ads across apps. The change in iOS14 made IDFA opt-in, essentially forcing consumers to opt in to allow tracking across apps. Not surprisingly, most iPhone users keep the box unchecked and curtail this ability.

When iOS1 first launched, no one was sure how many consumers would opt out. At the time, some estimated as much as 75% would do so. Roughly eight months later, in May 2021, a study by Flurry revealed a whopping 96% of US users opted out of app tracking in iOS 14.5. This greatly exceeded predictions, and the impact on online advertising was immense.

With no way to track users across third-party apps, platforms were suddenly limited in their ability to build meaningful user profiles or serve up targeted content across the online world. The impact of IDFS’s demise on digital marketing was especially profound because the iPhone — including IOS — comprises more than half of the US smartphone market, and 57% of the global premium smartphone market.

In Meta’s 2022 Q1 earnings report, CFO Dave Wehner explained these changes would meaningfully impact the social media company’s sales. “We believe the impact of iOS overall is a headwind on our business in 2022 … on the order of $10 billion.” Later that day, Meta’s stock plunged by approximately $74, losing roughly 20% of its value.

The data clean room

To uphold their commitment to protecting customer data, many firms are rolling out new technologies to anonymize customer information, which can be used to segment and personalize ad placement within their ecosystem. The data clean room is a new technology advertisers use explicitly for this purpose, and it has gained significant traction over the past few months.

Data clean rooms address privacy and cookie challenges by providing a secure data collaboration service that enables marketers to analyze data sets from multiple parties in a secure workspace that restricts access to the underlying raw data. Clean rooms offer a secure place to bring data together for joint analysis without revealing the underlying personally identifiable information (PII) or user IDs with other collaborators, meeting CCPA, GDPR, and other privacy laws’ requirements.

Data clean rooms support a full spectrum of marketing, advertising, and customer experience (CX) use cases. Common features include:

• First-party data enrichment — Enables advertisers to leverage the data they already manage to enhance advertising efficiencies at scale while layering on additional data from third-party sources in a privacy-compliant manner.
• Audience analysis — Analyze and understand audience behaviors through cross-platform overlaps, incrementality, and insight into descriptive audience attributes to inform segmentation potential.
• Segmentation and activation — From newly gained insights and enriched first-party data, marketers gain the ability to construct and activate identified high-value audience segments within advertising platforms.
• Enhanced measurement — Advertisers gain a clearer picture of advertising performance within specific ad platforms, helping marketers make informed decisions on campaign efficacy without compromising consumer privacy standards.

While data clean rooms are a relatively new technology, their popularity is on the rise, and it is believed most large brands will soon employ a data clean room or similar technology. It’s reported that 80% of advertisers with media budgets of $1 billion or more will stand up a data clean room by 2023.

For more on data clean rooms, check out how Slalom and Amazon Ads have partnered to help mutual customers better utilize privacy safe clean room environments.

Data collaboration

As data clean rooms gain in popularity, it’s more than likely there will become a standard solution that large brands use to address their broader data sharing and collaboration needs. The pace of investment is already speeding up. Forrester Research found that more than 70% of global data and analytics decision-makers are expanding their ability to use external data, and another 17% plan to do so within the next 12 months.

Marketers will make these investments because, across the board, data collaboration solutions have been proven to drive RoMI. In fact, Gartner predicts that by 2023, organizations that promote data sharing will outperform their peers on most business value metrics.

The opportunity is vast. The World Economic Forum estimates connecting data across organizations will unlock $3 trillion in annual value in the coming years globally. Many organizations will make investments in secure data-collaboration capabilities that combine first-party data assets with data from outside sources to accomplish business goals.

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