The Future of Facebook Privacy, Politics, and Advertising Revenues

Recommended by elsterama on June 2, 2010 via Inside Facebook

Over the last few weeks and months, there has been a lot of commentary in the media on Facebook and online privacy. Much of the criticism that has been directed at Facebook has focused on either the absence of or poor usability with privacy settings – issues that Facebook made moves to try to address with the release of updated privacy controls last week.

But fortunately and unfortunately for the company, this won’t be the last time that privacy issues cause it to make urgent product adjustments. These days, Facebook users often don’t publish the kind of information they share on it anywhere else on the web, putting the company in a unique and central position the future of online privacy. As a result, it is now responsible for setting and managing the expectations of 1) 500 million users who trust it with their data, 2) millions of businesses who trust it with their money and marketing plans, and 3) hundreds of national governments who have the power to regulate it whenever enough of either users or businesses get upset.

Facebook’s challenge is to continually adapt its privacy products to meet the varied and evolving needs of each of these diverse groups. When expectations and products get out of whack – even if the problems are unspecific and/or exaggerated unfairly by media – the company could quickly find itself in situations like it did a month ago with Senators teeing up the Facebook football on the steps of the Capitol. (And just this week, it also received an inquiry from the House Judicial Committee.)

Privacy and Politics

Facebook has shown it can survive the regular bans it gets from smaller countries (for example, Facebook was banned in both Bangladesh and Pakistan recently for facilitating for free speech/obscenity reasons – not privacy), but those countries only represent a small portion of Facebook’s user base. And in cases like these, those governments have usually reversed the ban relatively soon when internal political pressure subsided (although in the Pakistan case, Facebook deleted an offensive group to help get access restored more quickly). But the stakes are much higher when talking about US government regulation.

Thus, Facebook is ramping up its Congressional staffer briefing efforts to try to educate and manage Washington better, especially in this election year. Unlike Google, Facebook doesn’t have many alumni high up in the Obama administration, so it’s going to have to start the Beltway dance quickly to make sure it isn’t underheard.

One of the key challenges Facebook will face in the months and years ahead – besides trying to keep privacy watchdog groups under control – is getting Congress to think with broader context when it comes to online privacy, instead of targeting it, specifically. Because of its success, Facebook is now a poster child for how new technology is affecting our notions of online privacy today – much like the leading e-commerce companies who were the first to handle big volumes of online credit card transactions in the “wild west” days of the consumer Internet. As informed observers like Tim O’Reilly recently noted,

When I wrote last week about Facebook privacy flap, I was speaking out of the frustration that many technologists with a sense of perspective feel when we see uninformed media hysteria about the impact of new technology. (How many of you remember all the scare stories about the risks of using a credit card online from back in the mid-1990s, all of them ignoring the risks that consumers blithely took for granted in the offline world?)…

There are real privacy issues to be faced in the data collected by web companies. But they are part of a far bigger picture of how the world is changing.  We need thoughtful understanding of what the real risks are, not finger pointing by the media (and even more frighteningly, by members of Congress) at companies that are easy targets because they make good political theater.

Mark Zuckerberg has been telling us for years that his vision for Facebook is to create a public/private hybrid model for sharing information – meaning Facebook will encourage users to make some information private, and some information public. As Facebook continues to tweak and change its products over the coming months and years, it will have to continually tweak its privacy controls as well to sufficiently match the expectations of consumers, businesses, and governments. It won’t always be exactly right, but it is in Facebook’s interests to continually protect and cultivate its greatest asset – the trust that people put in the company by virtue of how they use Facebook to develop their online identity and build their part of social graph.

Privacy and Revenue

When it comes to the intersection of privacy issues and Facebook’s revenues, one important point to note is that Facebook is trying hard to reiterate that its in-house advertising model is not dependent upon its privacy model. In other words, people see the same Facebook Ads, no matter what their privacy settings are. In general, this is the simplest way that Facebook has avoided bigger problems with regulators. By handling the serving and optimization itself for most ads shown on Facebook.com, Facebook is working on building a large business that doesn’t require it to share personally identifiable information with advertisers.

The broader strategy question connecting privacy and revenue for Facebook, however, is that of the Facebook Platform. Here, there are actually two competing dynamics at play:

1) By allowing third parties to get access to some user information when users authorize applications, Facebook is enabling these third parties to in effect compete with it by creating their own advertising products that key off of user data obtained through the Facebook Platform. For example, if a user authorizes an application to access their list of music interests, that application might be able to provide a compelling ads or offers for concert tickets or other music-related items. If that application has access to advertising inventory that Facebook doesn’t, then it could, in a sense, capitalize on Facebook by plugging into its API.

We’ve seen this at play over the years as a variety of companies have created third party ad networks on the Facebook Platform to varying degrees of success. While there were aggressive players in this area during the first couple years after the Platform launched, Facebook has tightened the rules on third party data access here over time. In general, most of these companies have complained that Facebook hasn’t given them sufficient access to user data to create a larger opportunity, especially compared to Facebook’s own ad business, and we’ve seen some consolidation in this market over the last 18 months. (Most of the new advertising efforts are now focused on virtual currency – see our previous coverage for more details on issues in that area.)

2) But the broader strategic goal of the Platform of course is to make Facebook’s social graph the underlying infrastructure for all parts of the Internet that depend on social context. For example, if Facebook can get many media sites to personalize content based on your Facebook identity and friends list, or many e-commerce sites to personalize their stores based on your Facebook identity and friends list, it would then play an important role in many internet services, apart from ads. If Facebook succeeds here, more of the Internet will depend on it for increasingly valuable parts of its functionality, increasing Facebook’s leverage as a growing part of the value chain.

Several years out, Facebook’s revenues will be increasingly affected by its off-Facebook.com activities. Here, the privacy questions get more complicated. Will Facebook be able to provide value to advertisers without sharing user data with publishers in a way that publishers will be willing to accept – or will Facebook need to create new rules for sharing user data with publishers on its network? For example, would a travel website which depends on Facebook for social context allow Facebook to completely handle all the advertising on its site as well, or would it want greater control over its user and monetization data? If Facebook didn’t share any data with the publisher to follow the same type of third party privacy standards it does on Facebook.com today, the value proposition to the publisher would be less attractive. But if Facebook were able to create a service that worked well anyway, it would be able to grow its advertising business substantially on the back of the Platform. However, this is a much longer term question.

Conclusion

If Facebook is able to navigate these near- and intermediate-term waters successfully, it will be in a very strong and unique position for many years to come. After all, for many of Facebook’s 500 million users, Facebook is the exclusive platform on which they are publishing and sharing any personal information online that’s tied to their authentic identity, enabling Facebook to continue to build a strong advertising business.

Fundamentally, a lot of people both like and trust Facebook, as shown by how they use and share information on it. But there are certainly going to be a lot of potholes ahead. Like the issues Facebook has faced in recent weeks, many of these won’t actually have any immediately measurable impact on user behavior – but will be symptomatic of the work Facebook has to do with government, advertisers, and the media.