1. Facebook, third parties and data security:
Embedded in the typically long recitation of “risk factors” designed to shield IPO issuers from shareholder suits should things go wrong is a section of the prospectus that warns:
Our efforts to protect the information that our users have chosen to share using Facebook may be unsuccessful due to the actions of third parties … If these third parties or Platform developers fail to adopt or adhere to adequate data security practices or fail to comply with our terms and policies, or in the event of a breach of their networks, our users’ data may be improperly accessed or disclosed. Any incidents involving unauthorized access to or improper use of the information of our users could damage our reputation and our brand and diminish our competitive position. In addition, the affected users or government authorities could initiate legal or regulatory action against us in connection with such incidents, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices….
Not explained here is what protective mechanisms Facebook has to prevent these kinds of third-party security breaches and other abuses. Is the privacy and data protection of Facebook users only as strong as the weakest link among these third parties? Is there an Internet equivalent of the Gulf oil spill out there waiting to happen, after which Facebook points fingers at these third parties?
2. Facebook and the ad business:
The prospectus summarizes Facebook’s revenue machine this way: “We offer advertising solutions that are designed to be more engaging and relevant for users in order to help advertisers better achieve their goals.” Or, as the New York Times put it: “Every time a person shares a link, listens to a song, clicks on one of Facebook’s ubiquitous ‘like’ buttons, or changes a relationship status to ‘engaged,’ a morsel of data is added to Facebook’s vast library. It is a siren to advertisers hoping to leverage that information to match their ads with the right audience … They reveal to the company not only their names (Facebook prohibits pseudonyms) and hometowns, but also their friends and family members and their tastes on everything from pop music to politics … Facebook offers advertisers a giant basket of information so they can find precisely the audience they covet: a Boston woman who posts that she is ‘engaged’ may be offered an ad for a wedding photographer on her Facebook page … Similarly, every press of a “like” button on Facebook signals a consumer’s preferences and shapes the ads that are shown.”
That was a good overview. But I’ve been waiting for a story that goes much further and lays out, with real numbers, how services like Facebook and Google — whose search advertising immediately targets people whose searches indicate they are interested in what the advertiser is selling — have changed the economics of advertising and threaten to crush competitors in more traditional media.