Will privacy concerns limit Facebook's growth?

The last week has been troublesome for the world’s biggest social network Facebook, with (false) allegations of a timeline privacy flaw, worries over its new data-sharing partnership, and – most importantly – a dramatic dip in confidence from potential investors. The once mighty company is now looking somewhat vulnerable. It begs the question, to what extent will privacy concerns clip the wings of Facebook’s future growth?

Privacy missteps

Facebook has faced three PR issues recently. The first was a story that initially broke on TechCrunch this Monday. The website began receiving a number of messages from concerned readers, who claimed that private Facebook messages, written in 2009 and earlier, were being displayed publicly on their timeline. Only it turned out that the private messages weren’t actually private in the first place. According to Facebook, and TechCrunch’s own investigation, they were in fact wall posts (although it must be noted that a number of the users involved disagree with Facebook’s explanation).

On the same day Facebook was forced to switch-off its facial recognition technology in Europe, following an investigation by the Irish Data Protection Commission. The IDPC found that while Facebook had implemented some its privacy recommendations, “full compliance has not yet been achieved” and that Facebook “still needs to be monitored going forward”. Facebook, which has its European HQ in Dublin, says it wants to reinstate the feature once it meets the IDPC’s guidelines.

Then, a day later, news emerged that Facebook has partnered with a controversial company Datalogix - an online advertising company that tracks whether people viewing ads go on to buy products. The Financial Times says the partnership comes amid “growing pressure for the social networking site to prove the value of its advertising”. While privacy advocates at The Centre for Digital Democracy say “We don’t believe any of this online-offline data should be used without express consumer approval and an opt-in.”

Wall St woes

Facebook has endured plenty of attacks over online privacy, so nothing about this is new. However, unlike the past PR disasters, we haven’t been able to measure the impact on the one metric that really counts – Facebook’s stock price.

When Facebook embarked on its IPO this May it was greeted with fanfare. Mark Zuckerberg went on the road, soliciting high-profile investors. The company, with the help of Goldman Sachs, estimated its value at $38 dollars per share and had no problem raising $16 billion from early investors. In fact, responding to extraordinary demand, Facebook floated a further 84 million shares worth $3.2 billion and the stock opened at $42.05 per share.

Fast forward just four months and Facebook shares this week plummeted to $20.83 with influential investment company Barron’s stating the stock is worth just $15. The glowing headlines pre-IPO, have now turned into navel gazing commiserations.  Now, the reasons for this are multi-faceted. But they largely rest on Facebook’s inability to effectively monetise via advertising. More precisely, investors are worried that Facebook cannot make enough money from advertising via its mobile app, which is expected to be the most common way to access the social network over the coming years.

Mobile restrictions

Now you have to ask why is it harder for Facebook to make money from mobile advertising? Well it’s not just Facebook’s problem. It’s hard to make money from mobile advertising across all platforms. This is because advertisers are reluctant to spend money on mobile due to their inability to track and target mobile users like they can target desktop online users. Why can’t they target mobile users? Chiefly because of privacy concerns.

Despite a number of high-profile screw-ups – or perhaps because of them - Apple is sensitive to user concerns about privacy. Unlike Google, Apple does not have a vested interest in testing the limits of online privacy, because it makes the vast majority of its money through hardware sales and content sales (not advertising). This is why Apple had no problem ditching UDIDs earlier in the year (causing an uproar in the mobile ad industry). Apple has even gone as far as to introduce a UDID alternative that promises to protect privacy.

But the facts are 1) Apple doesn’t have to play ball with the advertisers and 2) Apple still controls a substantial amount of mobile and tablet connections 3) iDevice users are generally seen as more valuable to advertisers than Android users. This, combined with increasing sensitivities over mobile online privacy, will continue to make it problematic for the mobile ad industry to track users, and thus could very well continue to inhibit Facebook’s growth and value. Facebook is therefore facing a big problem: it needs to develop more targeted advertising to grow its business, but it can only grow in a space (mobile) where consumers and powerful vendors like Apple are much more sensitive and sympathetic to online privacy.

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Tags: Privacy

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