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Instant Analysis: Supercookies Cost Verizon $1.35 Million - and Some Tasty User Data

By Jamal Carnette, CFA - Mar 9, 2016 at 6:10PM

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The latest FCC fine was pocket change for the wireless giant, but the changes that it'll have to make in tracking its customers may sting a little bit.

It's the other type of cookies that cost Verizon $1.35 million. Source: Flickr user Images Money

What Happened?
The Federal Communications Commission's Enforcement Bureau has resolved its investigation into Verizon Wireless' (VZ 0.80%) use of "supercookies," or unique identifier headers, in order to track subscribers' browsing activity. In order to settle the case, Verizon paid $1.35 million in fines and has agreed to change its policy and obtain opt-in consent from consumers before employing unique identifier headers.

The ruling was supported by privacy advocates, who were disturbed by Verizon's latest activity-tracking technology for a few reasons: First, the company employed supercookies before getting its customers' consent, or even notifying them they were being tracked. Second, Verizon was sharing these unique identifiers with every website you visited. Third, unlike normal Internet cookies that could be deleted, Verizon's unique identifier headers were permanently stored.

Does it matter?
What certainly doesn't matter is the amount of the fine. Last year, Verizon reported $131.6 billion in consolidated revenue last year, making $1.35 million -- about 1/1000 of a percent of revenues -- essentially a rounding error. The case itself has the potential to hurt Verizon, though, but the negative effects will most likely be muted. The biggest risk to Verizon, a wide-scale loss of wireless subscribers, is unlikely. Those who are truly motivated by privacy are most likely already aware of the presence of Verizon's supercookies, and the company's churn rate last year was the lowest it's been in three years. If there were going to significant defections, they would have surfaced by now.

Instead, perhaps the most likely negative effects will be felt in the company's AOL division. In an attempt to diversify its business beyond wireless, wireline, and television, Verizon paid $4.4 billion last year for AOL, hoping to take advantage of its mobile advertising leadership. AOL's CEO Tim Armstrong remarked mobile was a "$40 billion opportunity."

How will AOL win more market share in this growing $40 billion market? Effective ads. As Verizon Chief Privacy Officer Karen Zacharia said, "We are going to be sharing segment information with AOL so that customers can receive more personalized advertising." Verizon sharing information like gender, age, shared interests, etc., with its AOL division should allow for highly targeted, effective advertising. But now that Verizon will have to ask for its customers to opt into this data collection program, the resulting reduction in data collected may impair the company's ability to deliver more effective ads on AOL. In the end, however, that's a small part of Verizon's revenue, and should not change the investing thesis.


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