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Facebook IPO: How could privacy concerns affect revenue?
Now that Facebook has set its share prices, valuing the company between $77 billion and $96 billion, the question is whether it will be able to convince investors that it’s got a sustainable business model, can keep growing and find new ways to generate revenue.
And because advertising revenue is such a big part of Facebook’s business model, user privacy will have to be a major consideration for potential investors.
“If you use Facebook, you’re the product, not the customer,” said Bill Kerrigan, chief executive of the privacy company Abine, in an interview with The Washington Post. “The company’s financial success requires it to collect more personal information and make available to advertisers.”
Facebook itself is clearly aware of how important it is to keep up a good reputation on privacy, especially after settling with the Federal Trade Commission over complaints that it was making data public without user permission.
In the list of risk factors that the company has put in its S-1 filing, the company has listed that “changes in user sentiment” about the network’s “privacy and sharing, safety security or other factors” could have a bad effect on the company and its revenue.
As the company continues to build upon its vision of becoming a platform for application developers and other Web services, it will have to carefully consider how best to protect privacy. More partnerships with third-parties can lead to more revenue, but it also means that users will be sharing more information about themselves through apps.
That’s not inherently a bad thing — Facebook is a sharing platform, after all — but it does open up more potential for consumer confusion about managing their privacy settings. Users can manage their app settings through Facebook’s privacy menu. But many skip over or may simply not understand the data sharing terms they agree to when they use their Facebook account to log into an app such as Draw Something or Spotify.
A recent study from Consumer Reports found that — based on extrapolated data from around 1300 Facebook-using households surveyed for the group’s “State of the Net” report — 13 million of the site’s 900 million users (150 million in the U.S.) said they still have never set or didn’t know about the social network’s privacy tools.
That group is shrinking as awareness about the company’s data use policies grows, said Kerrigan. According to his metrics, the only thing that’s growing faster than Facebook is the user group managing privacy.
In fact, a February study from New York University Polytechnic of 1.4 million Facebook users found that 12 percent of Facebook users hid personal information such as their age or hometown in 2010. By 2011, that number had jumped to 33 percent, according to a report from TechJounal. And in February, the Pew Internet and American Life Project found that 58 percent of Facebook users have made their profiles private to friends.
Kerrigan said that Facebook users’ tendency to make more information private and to be more concerned with learning how the social network collects and uses data leads to a “natural tension point, between user privacy and Facebook’s future success.”
Xavier Le Hericy, Director, Security & Privacy at Webtrends, said that he believes Facebook will be able to adjust to navigate those challenges. “Facebook has proven to that it can adjust quickly to a changing landscape and is very responsive to user feedback on privacy. Maybe it’s because of the software engineering roots of the company, but Facebook carries the engineering concept of agile development to the business level. I wouldn’t discount their ability to keep adjusting as they’ve done so far.”