Big data specialists are piling up the profits

Companies have always understood that knowing their customers well is crucial to commercial success. Now big data allows them to know them in far more detail than was possible before.

The amount of data being generated is phenomenal. Already, the world has 2.7 billion internet users - 39% of the global population - as well as 6.8 billion active mobile device subscriptions. It's not just traditional data - think Word documents or Excel spreadsheets - that is being generated; unstructured data is proliferating at an astonishing rate.

Every single minute of the day, for example, Facebook users upload 208,000 photos while Twitter users post 350,000 tweets. The US market research house International Data Corporation reckons that in 2014 alone, the volume of data generated globally will exceed six zettabytes - one zettabyte is equivalent to roughly 250 billion DVDs.

David Prosser reveals the top companies and funds to take advantage of the potential of big data, here.

Valuable insights

The tale is just one tiny example of the power of "big data" and the analytics technology that can extract valuable insights from this information. Companies have always understood that knowing their customers well is crucial to commercial success. Now big data allows them to know them in far more detail than was possible before.

The amount of data being generated is phenomenal. Already, the world has 2.7 billion internet users - 39% of the global population - as well as 6.8 billion active mobile device subscriptions. It's not just traditional data - think Word documents or Excel spreadsheets - that is being generated; unstructured data is proliferating at an astonishing rate.

Every single minute of the day, for example, Facebook users upload 208,000 photos while Twitter users post 350,000 tweets. The US market research house International Data Corporation reckons that in 2014 alone, the volume of data generated globally will exceed six zettabytes - one zettabyte is equivalent to roughly 250 billion DVDs.

Big data specialists talk about the "three Vs": volume, variety and velocity. It is not just the volume of data that is staggering, the variety of data being generated is equally mind-boggling and the velocity at which this data can be processed is accelerating all the time.

In itself, all this information has no value. However, organisations with analytics technologies capable of separating the wheat from the chaff can extract priceless commercial insights from such data.

Better decisions

Ben Rogoff, manager of Polar Capital Technology investment trust, says: "If a machine can look at all the inputs automatically and analyse the probabilities based on what such data has meant in the past, it will make far better decisions than any human analyst ever could."

Applications for this kind of analysis are almost endless. Insights generated in this way might give rise to an idea for a new product, service or marketing campaign, or an improved company process.

Often, insights will be generated and acted on almost instantaneously. Supermarket shoppers, for example, can look forward to receiving personalised special offers on their mobile phones just as they wheel their trollies into the aisle housing products that analysis suggests they should be interested in.

Businesses the world over are tremendously excited about the potential of big data and analytics. And so they should be. A McKinsey study published last year claimed that mainstream adoption of the latest analytic tools by the global retail and manufacturing industries would boost their output by £194 billion a year.

Research from business consultancy EY argues that companies already using big data and analytics technologies are outperforming their closest rivals by 20%.

What companies want above all is "predictive analytics", says Hugh Campbell at technology consultant GP Bullhound. "Predictive analytics is the single most exciting frontier today," he says. "It is the ability to infer likely future scenarios from data - and therefore [to pinpoint] the optimal course of action today."

Predictive analytics

GP Bullhound cites the example of credit referencing company CallCredit, which has used predictive analytics to improve default rates by 9.7% compared with older referencing models.

Retailer Next is using predictive analytics to identify the perfect selections for forthcoming collections and catalogues, based on customer data.

Amazon's "customers who bought this also bought..." recommendation function is powered by predictive analytics, and 35% of its sales now come this way.

The big data specialists that can help more businesses realise this potential are in huge demand. Jeff Kelly, lead big data analyst at market research firm Wikibon, reckons sales of big data-related hardware, software and services will total $28.5 billion (£17.1 billion) this year, rising to $50.1 billion by 2017.

Kelly observes that businesses will need both the equipment to capture, store and process data and the knowledge to generate information from it. They'll also need suppliers that understand their commercial needs.

Kelly says: "While over the long term big data practitioners will generate significantly more value than big data vendors, there is significant opportunity for vendors that can deliver big data solutions that speak to business rather than technical value."

Investors looking for exposure to the 38% compound annual growth that Kelly foresees the big data sector generating between 2011 and 2017 can choose from an increasing number of listed companies.

US firms lead the way

One company, Splunk, which helps firms analyse huge streams of data, has seen its share price almost double in the two-and-a-half years since its debut on NASDAQ. Investors in Tableau Software, which floated in September 2013, enjoyed share price gains of more than 25% in the first six months.

US firms lead the way in big data technology, but Europe also has some stars. Giles Hargreave is manager of several small-cap funds, including the top-performing Marlborough UK Micro-Cap Growth. He says of the European picture: "Big data or enabling companies to process it more effectively is an emerging and potentially very lucrative theme in the tech arena that has garnered much interest."

Pure plays are not the only way to benefit from big data. "In one sense all internet stocks are big data driven," says Rogoff. "They're led by Google, because it has the biggest data set of all. Facebook is now powered by big data and has the right business model to exploit it."

Ultimately, argues Brian Hopkins at technology consultant Forrester, big data could be that rare thing: a disruptive technology that changes the way an industry or business operates. "The data explosion has changed how we do business," he says. "Every interaction, every communication, every touch-point creates a digital 'bread crumb' - a piece of data that can be analysed and manipulated."

We have begun to see its impact. In entertainment, for example, Netflix is changing the way television is delivered and shaping its product on the basis of the data generated by users. Taxi firm Uber is doing something similar in its sphere, courtesy of smartphone data.

Of course, big data investments carry risks. People are increasingly protective of their personal data, which may limit companies' ability to obtain the information they require to feed their analytics tools. Moreover, data privacy or security breaches can be hugely damaging.

Above all, a lack of imagination may hold back big data in the short term. "For now the applications feel a little prosaic," says Rogoff.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.