Why the Financial Future of Social Networks Depends on Solving the Privacy Puzzle

The business models of social networks could rely on an ignorance towards privacy from their users, experts say. But recent research indicates normal Facebook users have begun altering their privacy settings to control the information people (and potentially advertisers) can see, which could affect the ability of social networks to make money.

As social networks like Facebook and LinkedIn strive to formulate sustainable business models built upon advertising or the selling of premium services, the biggest hurdle they face might rest within their users' increased awareness of online privacy.

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The common assumption that social networking users don't care about privacy is misguided. The majority of people who use social networks (nearly 60 percent or more) have already modified their privacy settings, according to two separate research studies from the Pew Internet & American Life Project and School of Information and Library Science. Furthermore, privacy experts warn that an unfortunate (but perhaps inevitable) security breach that exposes user data over social networks in the coming years could cause a privacy tipping point in which users push back in a more substantive and widespread way.

"Privacy will become more important when the information is used for more nefarious reasons, like for stealing your identity," says Larry Ponemon, president of the Ponemon Institute, a privacy research firm.

For their part, executives at major social networking sites and their advertisers argue that a culture of greater openness on the Web will prevail. They also say increased user attention to privacy could actually be advantageous to their business: If people feel comfortable with who can see their Facebook profile, for instance, they are more likely to be honest with the information they contribute to the network, which helps in serving up relevant ads that people might click on.

"As people incorporate more openness into their lives, over time we can allow for that evolution with them," says Chris Kelly, Facebook's chief privacy officer. "There's a greater authenticity to their interactions online if they know who they are signaling their interests and activities to."

Why Privacy Is Gaining Traction With Normal Users (Hint: It's Not Beacon)

Social networking and online advertising experts like to analyze the fallout of the Beacon Advertising incident back in November 2007. This was the main idea behind Beacon: If a Facebook user bought an item from a third-party website participating in the Beacon ad program, that transaction would be published to their friends' Facebook newsfeeds, the main content stream that runs down the center of their home pages. (For example, "Your friend John Smith just bought two tickets to the new Batman move from Fandango.com.")

Despite the fact that major news outlets published stories about privacy concerns and activist organizations like Moveon.org took Facebook public relations for a ride, the incident only garnered the attention of a loud and influential minority — and little more. After Beacon, Facebook did right by its users and rolled out the most comprehensive privacy settings in the industry, but the general consensus was that people wouldn't use them.

"I don't think [privacy] has been a widespread concern for advertisers," says Hussein Fazal, CEO of Adparlor.com, which helps companies serve up on ads on top of social networks. "For now, there's only a small percentage of people who really care about that stuff."

But it turns out some users have fiddled with those privacy settings, after all. In research conducted by the UNC School of Information and Library Science this past fall, more than 70 percent of 495 college students surveyed claimed to have altered their Facebook privacy settings in some way. Around half of the students also said they limited access to their profile to "friends only."

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The research also indicates that their attention to privacy controls increases with their time on the service. During their first six months on Facebook, only 40 percent of students said they modified their privacy settings. After one year, that number jumped to nearly 80 percent.

As the social networking population ages, the attention to privacy holds steady. According to research by the Pew Internet & American Life Project, around 60 percent of adult users aged 25-34 have restricted access to their social networking profiles to "just friends." A little less (58 percent) restrict access to specific content contained within their profiles.

Although Joe Social Networker might not pay close attention to "inside baseball" incidents like Beacon, they do notice general trends in the media, says Fred Stutzman, a social networking researcher at UNC. "Each individual incident is too abstract for most users, but they do sense an accumulation of all these things," he says.

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