Facebook's move to block third-party data providers from its advertising platform limits what companies know about users' shopping habits – and renders an industry of personal information brokerage less effective. But industry insiders say that the move is mostly about optics, and could actually increase Facebook's control over the data that advertisers rely on to target customers, putting Facebook more firmly in the driver's seat in its relationship with advertisers. Facebook announced on Wednesday it was removing Partner Categories, an advertising option that allowed companies to use third-party data to find customers. One company that provides those information services, Axciom, said its revenue could drop as much as $25 million next year, causing the stock to tumble more than 30 percent. "It feels like a knee-jerk reaction and Hail Mary to stop the bleeding of #deletefacebook — although TBD on if that's actually making an impact — but more importantly to show Wall Street that they can protect consumer data," said Matt Borchard, group media director for advertising agency Noble People.

Facebook founder and CEO Mark Zuckerberg. Getty Images

"This is an optics-based move that harms advertisers and doesn't actually do much of anything to protect user privacy," said David Eisenman, CEO of advertising agency Madwell. The changes would force advertisers to rely on Facebook's own data for targeting, "potentially boosting their own profits as a response to their own mistake," Eisenman said. "By denying advertisers the ability to utilize outside data partners, they further cement themselves as a walled-garden ecosystem—asking advertisers to trust and use their data exclusively. It's bulls---." When presented with these critiques, Facebook reiterated that the changes were driven by the need to protect people's privacy, and referred back to the company's original announcement on the change.

How third-party data targeting works

Companies like Axciom, Oracle, Experian and Epsilon provide purchase data to advertisers so they can target their ads to specific Facebook users and households. They obtain the information from other organizations, like credit card companies or loyalty cards. This data is important for companies that might not directly know who is purchasing their products, especially consumer product goods brands. However other sectors like financial services, automakers, pharmaceutical companies and retailers who sell through other companies also use the information. "This method of targeting is the predominant way that advertisers target audiences," said Michael Horn, managing director of data science at digital marketing agency Huge. "They don't only look at demographics. They look at purchase behavior." For example, a person may purchase Coke each week and scan their grocery loyalty card each time. That loyalty program then sells this data to a third-party data provider, which then compiles it with other information signaling that this person is a likely Coke customer. The data provider then sells this information to advertisers and agencies. Or, say a cable company is looking convert satellite customers. It could use subscription information provided by one of these third-party data providers to find who these potential clients are and offer them lower deals. "If those capabilities are shut off, that's a huge value for targeting on Facebook that has been decimated," said Harry Kargman, CEO of mobile marketing firm Kargo. "That is the primary way that brands will run on Facebook. I don't know what the value proposition is to brands."

The likely impact

Uploading third-party data isn't available for all markets that Facebook serves -- only the U.S., Brazil, France, Germany, the U.K., Australia, and Japan. But Europe is getting a lot stricter. The General Data Protection Regulation (GDPR), which takes effect in May, will require people to opt-in before their behavioral data could be used to target advertising towards them. So Facebook would have had to make major changes to data policies in many countries anyway. Even so, this ban could further encourage agencies and advertisers to further shift away from these third-party data companies. One media buyer, who asked to remain anonymous, said Facebook's decision wasn't a complete surprise to the advertising community, given how wary consumers have become about ad targeting on the platform. However this person characterized it as a conservative move, considering many of the third-party data providers Facebook allows are established companies. Regardless, advertisers are going to have to find a new way to reach customers within the next six months. There are still benefits to using Facebook, which has other targeting methods. The company already has a wealth of personal data from users, provided to them directly when people update their accounts. An increasing number of advertisers are also using their own (first-party) data, which can be obtained when customers sign up directly for an email newsletter or shop direct. Using first-party data is usually cheaper because third-party data providers charge a premium for their services, the media buyer noted. But it could mean advertisers have to reach a broader audience, since they won't have as much insight into exactly which people on Facebook are also loyal customers. All this could open up an opportunity for Google to gain more advertising revenue, Horn and Kargman said, since the company still allows third-party data providers. But with the public growing more concerned about personal information being shared, Google may also start shifting towards Facebook's policy. Agencies are waiting to see what its next move will be.

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