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Facebook Stirs Up Trouble for Silicon Valley

Online-Privacy Legislation Just Got a Big Boost From Social Network

By Published on . 11

NEW YORK (AdAge.com) -- It's larger than the population of the U.S. and is increasingly the nerve center of an interconnected world. But that didn't stop Facebook from getting blindsided from one of the most powerful legislators in Washington. Twice.

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Days after Facebook launched its "Open Graph Platform" that extends the social net's web across third-party sites, the Palo Alto-based social network got a surprise rebuke from New York Sen. Charles Schumer, who wrote a letter asking the Federal Trade Commission to develop guidelines for how Facebookers' information can be used. Two days later, and before contacting Facebook itself, Sen. Schumer held a press conference and brought in Sen. Al Franken (D-Minn.), Sen. Michael Bennet (D-Colo.) and Sen. Mark Begich (D-Alaska).

On Thursday, Facebook executives sat down with Mr. Schumer's staff to talk about their concerns. Namely, the changes Facebook made by automatically sharing user data with third-party sites, as well displaying user activities on those sites in the Facebook environment.

"We are listening and responding to concerns," a spokesman said about the meeting. "We want to make sure our innovations are understood and, if there are things we can do better, we will."

Facebook officially has a Washington problem. But it's not just Facebook.

Regulation on horizon
The flap couldn't come at a worse time for online advertising, facing the very real prospect that it will be regulated in the form of privacy legislation that would require publishers, networks or marketers to receive specific consent to use consumer data for a variety of purposes on the web.

Some 20% of online ads are targeted based on online behavior, but that's just the beginning. A new generation of companies, including Facebook and Twitter as well as Foursquare and GroupOn, are on the cusp of a new wave of location-based marketing. It's not about where you are or where you've been on the web -- that's so 1999 -- it's about who you are connected to and where you've shopped, dined out or just browsed shelves.

At the same time, a string of high-profile privacy stumbles are keeping this issue in the news and the minds of the public. Google took international flack from privacy advocates and governments over its Buzz platform, which shared users' contacts with other users; Blippy, a marketing startup, let user credit-card numbers slip onto Google search results pages.

Until now, the prospect of legislation has been confined to the House; Rep. Rick Boucher is expected to introduce legislation later this year, and both the FTC and Commerce Department will be releasing their own findings. But the addition of a powerful group of senators hopped up on the privacy issue changes the game.

"Privacy has not been a national political issue in the rank of the economy, war on terror or financial fallout; putting this on [Mr. Schumer's] agenda shows this has moved from insiders to a big of enough issue it gets on the national agenda," said Jules Polonetsky, former chief privacy officer at AOL and director of the Future of Privacy Forum.

Indeed, advocates for legislation see it as an accelerant for their cause. "We'd hope that having some real-world examples out there would give us some attention to those bills, and we can move them faster in the next Congress," said Ari Schwartz, chief operating officer of the Center for Democracy and Technology.

Human connections
The company sits on one of the most valuable troves of user information; not just interests but human connections -- thought to be the single most powerful determinant of consumer behavior. Facebook has, in many ways, been circumspect about monetizing that and generally puts the consumer experience first in everything it does. But for a company all about sharing information, it has shown remarkable clumsiness in communicating what it is doing to the public. It is, at its heart, a start-up run by a 25-year-old product genius who doesn't think privacy concerns are as important as many of Facebook's users do.

"Mark Zuckerberg has said in the past that, basically, there is no privacy," said Todd Dagres, partner at Spark Capital. "The Facebook presumption is that privacy is not important -- so if you really want privacy you have to opt-in and turn the dials to get the privacy you want. The issue becomes when people have different expectations of what privacy is."

That stung the company in the fall of 2007 when it launched Beacon, a service that broadcast online purchases to user feeds, before rolling it back after public outcry. But this is very different from Beacon; while the implications for the web and for users are immense, the changes for consumers are pretty subtle.

"From the user issue, there is no victim here," said Mike Lazerow, CEO of Buddy Media. "If I like something inside or outside of Facebook, that action is made available to my friends based on my privacy settings. The privacy settings are carried throughout the system, unlike Beacon, where people were doing things that were being exposed."

But the privacy settings aren't intuitive, and even sophisticated users find it hard to figure out how, exactly, to limit what is shared if you'd rather not have, say, an article you've read or song you've listened to shared with others.

Unprepared
"Facebook's new default privacy settings are the biggest, longest, proudest middle finger a site's ever given me," Chris Sacca, a prominent venture capitalist and Twitter investor, wrote on the micro-blogging service. News outlets like The New York Times and Mashable have published stories to help readers decode Facebook's changes.

Of course, Facebook needs to default to openness because that's where the service derives its viral nature. The more that is shared, the faster the Facebook web grows.

In many ways, Facebook is still a young company, unprepared for the battle it's stirred up. Think Microsoft in 1999 or Google in 2004. Facebook has all of four employees in Washington, compared to Google, which employs close to 30, and Microsoft, which has well over 100.

Facebook has a reputation for going it alone and not getting involved in "industry" issues, but one lobbyist wondered aloud whether this would be a "focusing event" in its history. What happens in Washington could affect the bottom line.

One former Schumer staffer told Ad Age the senator has a strong bias toward "opt-in" -- that consumers should be asked before their data is used.

That said, Mr. Schumer may determine that in the open web, there's no expectation of privacy, and that "opt-in" presents too big a burden on the nascent online ad industry. Mr. Schumer's office didn't return a call from Ad Age.

The stakes just got a little higher, which has the online ad business on alert. "It's too important an issue to be decided by folks who don't understand the intricacies of how the web works," Will Margiloff, CEO of Innovation Interactive, said.

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