“(In the publishing business) the readers are the product, and the customers are the advertisers.” – Dave Winer

It started with Path last week, and now we learned that Facebook, Twitter, Foursquare, Instagram, Foodspotting, Yelp, and Gowalla all either upload your contacts’ phone numbers or email addresses to their servers for matching purposes.

As the post on Venturebeat states:

“Some of these applications perform this action without first requesting permission or informing you how long they plan to store this data. Foodspotting is the worst of the bunch, as it appears to transmit your data over an unencrypted HTTP connection (in plain text), making it even easier for mischievous parties to intercept.”

It’s a sign of a major problem.

Tulip Mania. Railway Mania. Poseidon Bubble. Japanese asset price bubble. Dot-com bubble. Rice bubble. Housing bubble. Bubbles after bubbles. After the housing bubble, one would think we’d have enough of bubbles for a long time to come. Think again.

The dot-com crash had nothing to do with technology. It had everything to do with the business model used to pay for the technology, which was primarily either display advertising revenue or VC money advanced with the expectations of returns based on display advertising. Display Advertising was trackable, it would be more effective online than offline. The bubble burst, crazy valuations went away and the digital ad market boomed. Ad Networks, DSP’s and exchanged drove down the value of ad impressions. CPM’s went from $100 for premier placements to $10. And impression junk was and is still anywhere. Suddenly, new businesses that relied on advertising revenue to support their model had to pivot.

Welcome to the age of user data.

Massive assumptions are now being made based on revenue generated (or soon to be generated) by personally targeted advertising drawing on user data. Facebook has a business model but their valuation is based on future realization of user data. Twitter doesn’t have a sustainable business model yet but it’s worth billions of dollars.

Often, companies don’t even know what to do with this data, they just have it because one day it will rain gold. You can’t open your computer without reading of the promises of Big Data. Your user data, goes the theory, allows ads to be specifically targeted to you. Should you buy a big bag of dog food, you will likely receive more ads for dog products, sometimes coupons. You’ll be grouped in a segment with other “dog food buyers”, your age and location will be determined, and a data model of you will be developed. A very simplistic one-dimensional model of you is living in some data warehouse and that’s why you encounter all those online ads.

The problem is not with the use of data to make decisions – the problem is with the simplistic one-dimensional use of data to make decisions. And the other problem with this assumption is that it believes in the rational consumers. Targeted advertising draws on the idea of our observed behavior presenting a coherent and realistic picture of our desires and needs.

It doesn’t.

My spending behavior in 2010 bears no relation to my spending currently or in the future – economies change, circumstances change, tastes change, opportunities change. More importantly, we are social beings, not rational beings. We are more driven by emotions and our clique than anything you can find in our brains.

As we know, targeting works on a limited scale. It does lift metrics, it improves performance. But the user data dream that one day all served ads will be relevant and lead to immediate conversion is just that: a dream. I’m not trying to minimize the opportunities at the intersection of data and human behavior, as explained in “How companies learn your secrets.” from the NY Times. I just don’t believe the way to collect and use data right now will lead to a pot of gold.

Tulips have value. Houses have value. Data has value. But the value is not as high as people tend to estimate while the user data bubble is expanding. It’s highly questionable if even a small part of these valuations can be realized. At least, I haven’t see any evidence of that, yet.

Nobody wants to hear things like that, when everybody is enjoying the user data ride. Just like nobody wanted to listen to Nouriel Roubini when he predicted the financial crisis. Nassim Taleb the “Black Swan”. Or Dave Winer the end of the data bubble. But something is wrong here, very wrong.

VCs spend billions of dollars investing in companies based on the user data model. They even tell kids to leave college early to participate in the gold rush. “You can be the next Mark Zuckerberg.”

They fund companies that need our personal data to succeed, just like the mortgage bundlers needed the junk mortgages to create fictitious AAA ratings. One day, when reality sets in and the fundamentals don’t add up anymore, the bubble will burst. A lot of money will be lost. A lot of people will be hurt.

Out of the ashes, new companies will spring up that have realistic expectations about the value of user data. And, who knows, even give us control over the data. Now, that’s valuable. Correct, Doc Searls?