Privacy deal could dent Facebook's revenue

? Thomas Hodel / Reuters / REUTERS

A Facebook logo on a computer screen is seen through a magnifying glass.

By Roland Jones

Facebook has hit a potential stumbling block in its efforts to make money from its more than 900 million active users.

The social network has agreed to pay $20 million to settle a lawsuit in California claiming?it?publicized?that some of its users had ?liked? certain advertisers?but didn't?pay the users, or give them a way to opt out.

The so-called ?Sponsored Story? feature on Facebook is essentially an advertisement that appears on the site and includes a member?s Facebook page and generally consists of another friend?s name, profile picture and a statement that the person ?likes? that advertiser.

The agreement in California could potentially complicate Facebook?s efforts to accelerate advertising revenue, experts say.

Ever since the company went public last month, critics of the website have said it faces challenges when it comes to drawing in revenue because its users are sensitive to Facebook using their personal information to generate money, and because the website?s advertising is not obtrusive enough to grab the attention of users.

?The fact is the advertisements are not irritating users,? said Rob Enderle, an analyst with Enderle Group. ?Advertisers are not getting value because Facebook does not want to upset its users.?

Enderle notes that Facebook?s non-traditional forms of advertising -- using features such as ?Sponsored Stories,? or allowing advertisers to establish product-focused pages -- are not having the same effect as more established forms of advertising, which by their nature are conspicuous and direct.

Indeed, a Reuters/Ipsos poll earlier this month showed four out of five Facebook users said they have never bought a product or service as a result of advertising or comments on the social network site. And in mid-May General Motors very publicly yanked $10 million in Facebook advertising, saying paid advertising on the site isn?t effective.

Changing the ?Sponsored Stories? feature could cost Facebook $103.2 million, economist Fernando Torres? analysis of the revenue each ad brings to the site estimated. And, according to the lawsuit, Facebook?s Chief Operating Officer Sheryl Sandberg said the value of a ?Sponsored Story? advertisement is at least twice and up to three times the value of a standard Facebook ad that doesn?t include a friend endorsement.

But Facebook executives shouldn?t be too despondent, according to Larry Chiagouris, a marketing professor at Pace University's Lubin School of Business. He notes that, in general, academic studies show consumers are willing to reveal more about themselves than privacy advocates would have us believe.

When given a choice, people would rather give up a bit of privacy to get something for free than pay for a service and have their privacy protected, he said.

?Facebook is going to do just fine, because most of its users don?t care much about their privacy,? Chiagouris said. ?Privacy advocates tend to be people on the fringe -- who by the way in some cases have legitimate concerns; it?s just that those concerns are not necessarily shared by the masses.?

A recent examination of the accounts of 1 million Facebook users by Secure.me, a company that offers privacy services to social networks users, showed?nearly 9 out of 10 Americans share information about themselves that can be abused. Slightly fewer Europeans share such sensitive information, the company?s research found.

To continue to entice users to share their personal information on Facebook the website needs to be clear about what its users are giving up, Chiagouris added.

?They still have the largest community of people anywhere on the planet, and that?s worth a great deal,? he said. ?But they need to find a way to provide some sort of tiered service, and not through lots of privacy settings most people don?t make good use of. Facebook is constantly changing them, adding more confusion. They really have harmed themselves in that regard.?They just need to be more transparent and simple about it.?

Another upbeat sign for Facebook is its share price, which has rallied 27 percent since hitting a post-IPO low of $25.87 on June 5.

California Attorney General Kamala D. Harris said Friday that Facebook has become the seventh company to agree to give people advance warning if its mobile applications take personal information from their mobile phones and devices.

Reuters contributed to this report.

Facebook is launching the option of subscription payments of apps, with CNBC's Julia Boorstin.

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