Cookie Deprecation

• The Bottom Line: This is the end of the internet's old, invasive tracking system, creating a major business shake-up that will separate companies with genuine customer relationships from those that were merely renting an audience.
• Key Takeaways:
• What it is: A technology shift, led by Google, to phase out “third-party cookies”—the small files that track your activity across different websites for advertising purposes.
• Why it matters: It fundamentally changes the economics of online advertising, potentially widening the economic_moat of data-rich giants while creating significant business_risk for companies reliant on the old methods.
• How to use it: As an investor, you must now scrutinize how a company acquires its customers, prioritizing businesses that own their customer data over those dependent on third-party tracking.

Imagine you walk into a coffee shop. The barista recognizes you and remembers your usual order. That's a first-party cookie. It's helpful, convenient, and happens directly between you and the business you're visiting. The coffee shop's website remembering your login is the digital equivalent. It enhances your experience. Now, imagine a stranger in a trench coat follows you out of the coffee shop. He follows you to the bookstore, then to the grocery store, and finally to the bank, taking detailed notes on everything you look at. Later, when you're walking down the street, he pops out and shouts, “I noticed you were looking at mystery novels and whole wheat bread! Have you considered this new crime thriller about a baker?” That creepy stranger is a third-party cookie. For decades, this has been the hidden engine of much of the internet's advertising. Invisible tracking files, placed on your browser by companies you've never heard of, would build a detailed profile of your interests based on your browsing history across countless unrelated sites. This data was then sold to advertisers to show you “relevant” ads. Cookie deprecation is the global movement, spearheaded by Google's decision to block these third-party cookies in its Chrome browser (which holds a dominant market share), to finally get rid of the stranger in the trench coat. This isn't just a small technical tweak; it's a seismic shift in the internet's infrastructure, driven by a growing global demand for user privacy, codified in regulations like Europe's GDPR and California's CCPA. For businesses, it's like the gold rush ending. The easy, cheap, and often invasive methods of finding customers are disappearing. They must now find new, more direct, and more honest ways to build relationships with people.

“In business, I look for economic castles protected by unbreachable 'moats'.” - Warren Buffett

As we'll see, cookie deprecation is a major test of a company's moat. It will wash away the flimsy bridges some companies used to reach customers, while revealing the true strength of the deep, fortified moats built on trust and direct relationships.

A value investor isn't interested in the fleeting trends of ad-tech. We are interested in the long-term, durable earning power of a business. Cookie deprecation matters immensely because it directly impacts this earning power, acting as a great filter that separates high-quality businesses from fragile ones. Here’s why it’s a critical topic for your investment analysis:

• It Widens the Moats of the Strongest Castles: Companies with massive, logged-in user bases have a treasure trove of first-party data. Think about Google (your search history), Meta (your social graph), Amazon (your purchase history), and Apple (your app ecosystem). They don't need the “stranger in the trench coat” because their customers live inside their walled gardens. For them, cookie deprecation is a godsend; it makes their proprietary data even more valuable and cripples smaller competitors who relied on the open-web tracking system. Their economic_moat doesn't just hold; it widens and deepens.
• It Exposes Hidden Fragility: Many businesses, especially in e-commerce and digital media, looked successful but were built on a foundation of sand. They used cheap, cookie-based “retargeting” (when an ad for a product you viewed follows you around the internet) to drive sales. Their customer_acquisition_cost (CAC) was artificially low. As cookies disappear, their CAC is set to skyrocket. This will squeeze their profit_margin and threaten their very survival. As an investor, this is a major red flag and a form of business_risk that was previously hidden.
• It's a Litmus Test for Brand Strength: Does a company have a brand so strong that customers seek it out directly? Do people willingly type `nike.com` into their browser, or do they only find Nike products after being chased around the web by ads? Companies with powerful brands, loyalty programs, and essential services will be far less affected. They have a direct line to their customers. This shift forces you to ask: is this company a destination, or is it just a roadside billboard?
• It Elevates the Importance of Management_Quality: A great management team saw this coming years ago and started preparing. They invested in building their own customer databases, creating valuable content to attract direct traffic, and developing loyalty programs. A poor management team is now scrambling, complaining about the changes, and looking for a quick fix. How a company's leadership team discusses this issue in their annual reports and earnings calls is a powerful indicator of their foresight and competence.

Essentially, cookie deprecation is a stress test for a company's customer relationships. A value investor seeks businesses that have earned the trust and loyalty of their customers, not ones that had to rely on digital surveillance to get their attention.

This isn't a number you can calculate, but a qualitative factor you must assess. It's a critical part of understanding a company's business model and competitive standing. Here is a practical method to incorporate this into your investment research.

1. 1. Analyze the Revenue and Marketing Model:
   • Question: How does this company make money, and how does it find its customers?
   • What to look for: Dig into the company's annual report (10-K). Look for terms like “digital advertising,” “customer acquisition,” “programmatic,” “top-of-funnel,” and “performance marketing.” If a significant portion of their revenue depends on advertising, or if their growth strategy is heavily reliant on paid digital ads, you need to dig deeper. Be especially wary of companies in the “ad-tech” space whose entire existence is predicated on orchestrating third-party data.
2. 2. Evaluate the First-Party Data Strategy:
   • Question: Does the company own its customer relationships, or is it renting them?
   • What to look for: Look for evidence of strong first-party data collection.
     • Does it have a popular login-based app or service?
     • Is there a robust loyalty or membership program (e.g., Starbucks Rewards, Costco Membership)?
     • Does it have a massive email newsletter list that people actually want to receive?
     • Is it a subscription-based business?
   • A company that has convinced millions of people to willingly hand over their data in exchange for value is building a powerful, future-proof asset.
3. 3. Scrutinize Management's Commentary:
   • Question: Is management prepared for this change, or are they in denial?
   • What to look for: Use the search function on earnings call transcripts and investor presentations. Search for “cookie,” “privacy,” and “first-party data.”
     • A prepared management team will speak proactively about their investments in their data infrastructure, their focus on brand marketing, and their strategy for a “post-cookie world.” They see it as an opportunity.
     • An unprepared management team will either be silent on the issue or will talk about it as an uncontrollable external risk, blaming Google or Apple for their future problems. This is a major red flag.
4. 4. Assess the Competitive Landscape:
   • Question: How is the company positioned relative to its direct competitors?
   • What to look for: Compare your target company to its peers on the first three points. If your company is heavily reliant on third-party ads while its main competitor has a massive loyalty program, that competitor is likely to gain market share and pricing power as the industry landscape shifts.

Let's compare two hypothetical companies to see this principle in action: “LuxeLeather Goods” and “GadgetBargains.com”.

A value investor would immediately recognize that LuxeLeather Goods is a far superior business. Its strength is not dependent on a temporary technological loophole. GadgetBargains.com, despite potentially high revenue growth in the past, is revealed to have a fatal flaw in its foundation.

Analyzing a company through the lens of cookie deprecation offers clear benefits, but you must also be aware of the pitfalls.

• Reveals True Moat Strength: It's a powerful tool for stress-testing a company's competitive advantage. It separates businesses with real brand equity and customer loyalty from those that were simply good at exploiting the old system.
• Uncovers Hidden Risks: It allows you to identify business_risk that may not be obvious from looking at past financial statements alone. A company that looks profitable today could be on a collision course with a margin-crushing reality.
• Focuses on the Long Term: This analysis forces you to think like a business owner, not a speculator. It prioritizes the durable asset of a direct customer relationship over short-term, ad-driven sales bumps.

• Uncertain Timeline and Outcome: Google has delayed the full phase-out multiple times. The replacement technologies in its “Privacy Sandbox” are complex and their effectiveness is still unproven. You should analyze the risk, but avoid making precise predictions about timing.
• Don't Underestimate Adaptability: A well-managed company that is currently reliant on third-party cookies isn't necessarily doomed. A key part of your analysis is judging their ability to adapt. Look for evidence of a changing strategy, not just the starting point.
• The Regulatory Counter-Risk: While the “walled gardens” (Google, Meta, etc.) are clear initial winners, their growing power attracts intense scrutiny. Don't forget to factor in regulatory_risk, as antitrust actions could limit their ability to fully capitalize on their data advantage.

• economic_moat
• customer_acquisition_cost
• business_risk
• margin_of_safety
• management_quality
• network_effect
• regulatory_risk