Facebook faces a crackdown on selling users' secrets to advertisers

 

Facebook is facing a crackdown on how it exploits vast amounts of its users' most personal information to create bespoke advertising.

Facebook's Mark Zuckerberg must address privacy concerns or face fines under a new EC Directive

 

By Jason Lewis, Investigations Editor

The European Commission is planning to stop the way the website "eavesdrops" on its users to gather information about their political opinions, sexuality, religious beliefs – and even their whereabouts.

Using sophisticated software, the firm harvests information from people's activities on the social networking site – whatever their individual privacy settings – and make it available to advertisers.

However, following concerns over the privacy implications of the practice, a new EC Directive, to be introduced in January, will ban such targeted advertising unless users specifically allow it.

Even though most of the information it harvests is stored on computers in the USA, if Facebook fails to comply with the new legislation it could face legal action or a massive fine.

The move threatens to damage Facebook's plans to float on the Wall Street stock exchange next year, by undermining the way it makes money.

Viviane Reding, the vice president of European Commission, said the Directive would amend current European data protection laws in the light of technological advances and ensure consistency in how offending firms are dealt with across the EU.


"I call on service providers – especially social media sites – to be more transparent about how they operate. Users must know what data is collected and further processed (and) for what purposes.


"Consumers in Europe should see their data strongly protected, regardless of the EU country they live in and regardless of the country in which companies which process their personal data are established."


The move comes as a Sunday Telegraph investigation highlights the extent to which Facebook can help companies to focus adverts according to the profiles of users.


The information analysed and stored by the company is not limited to users' personal details, and "likes" and "dislikes" that they input on their "walls".


The firm also gathers details about their friends, family and educational background and detects subtle changes to their lifestyle, enabling it, for example, to target a bride-to-be with advertising for wedding photographers.


Other commercially valuable information, such as what music people are listening to via the site, is also available to advertisers.


Everything people share with their friends on Facebook is being tracked by the firm, retained, and can be used for commercial purposes.


It can even harvest information by performing keyword searches on behalf of advertisers. In this way, it can find out, for instance, details about people's political beliefs or their sexual preferences.
Facebook stores messages and "chats" sent via the site and keeps them on its database even after they are deleted by those involved in the private online conversations.


The company says it does not use this information for advertising.


The sheer volume of personal data accumulated by the company was hinted at earlier this year when a 24-year-old Austrian student, Max Schrems, asked it what information it held on him.
The request led to the site sending him a CD containing 1,222 pages of data. He complained to data watchdogs because the disclosures were incomplete and made clear the social networking site retained further information about him which it had not handed over.


Next week, the EU's data protection working party, which includes the UK Information Commissioner, will meet to discuss the "state of play" regarding Facebook.


They will discuss an audit of the company's working practices being conducted by the data protection watchdog in Ireland, where Facebook has its international headquarters.
The working group has warned internet firms over the use of behavioural advertising techniques which enable them "to track individuals ... to serve tailored advertising."


A report from the group says in most cases, "individuals are simply unaware that this is happening" and adds that the authors were "deeply concerned about the privacy and data protection implications of this increasingly widespread practice."


All Facebook's 800 million users, whether they realise it or not, agree to let the company use of their personal information.


When signing up, they approve a 4,000 word contract, which licenses Facebook to use their data as it sees fit. This contract can be viewed by clicking on a link in the small print at the foot of each page on the site.


Unlike other traditional media outlets, including newspapers, the website makes no distinction between information obtained for commercial purposes and details gathered in the course of its other activities, as people share content and talk online with their friends.


In the past, Facebook was largely funded through a banner advertising contract with Microsoft. But the gradual increase in advertising on the site, which started in 2009, is intended to make Facebook self-sufficient and ready for a stock market flotation.


In Britain, the gradual introduction of more targeted advertising has earned it £25 million in the last two years but this figure is expected to increase dramatically as it prepares to float its shares on Wall Street.


A spokesman for the UK Information Commissioner said: "Facebook should ensure that any data it collects should be used in the manner that its users expect.


"If personal data is being passed on to a third party or used for targeted advertising then this should be made clear to the user when they sign up to the site and reinforced when users are invited to use an application."


Facebook last night said advertisers only saw "anonymous and aggregate information" to allow them to target their campaigns and that this meant they were not able to target named individual users.


So while advertisers cannot say they want their adverts to go to specific individuals, they can spell out a very detailed description of the sort of person they want to reach – such as age, location, family background – which means the campaigns will only target a limited group of people.


They said that people's political views could only be passed on to advertisers if the user filled out a specific section on their profiles.


Advertising was also "age-gated", it said, so companies wanting to advertise alcohol would not be shown to people under the age of 18 in the UK.


A spokesman for the company said: "We understand that people share a lot of information on Facebook and we take this very seriously.


"We believe ads that are relevant, social and personalised based on your real interests are better.
"We can show relevant ads in a way that respects individual privacy because our system only provides advertisers with anonymous and aggregate information for the purpose of targeting ads.


"We do not share people's names with an advertiser without a person's explicit consent and we never sell personal information to third parties.


"There is no connection between the privacy settings people choose and our advertising. Whether you use your privacy settings to keep your profile very private, or very public, everyone sees the same amount of advertising down the right hand side of the page.


"Adverts are personalised to the individual user. We do not track peoples' behaviour to serve advertising."

Zuckerberg 'to float Facebook next year' says major investor

Mark Zuckerberg will choose to float Facebook next year, says Reid Hoffman, the co-founder of LinkedIn and a significant investor in the site, in what could be the biggest consumer technology public offering in history. 

Reid Hoffman, the co-founder of LinkedIn and serial technology investor with stakes in Facebook, Zynga and Groupon.

By Emma Barnett, Digital Media Editor

Talking to The Sunday Telegraph, Hoffman, who is one the most successful and high profile serial technology investors with stakes in several other major web companies, such as social games company Zynga, daily deals site Groupon and location service Gowalla - suggests the Facebook founder will opt to go public in the “first half of next year”.

“I suspect that Mark [Zuckerberg] will choose to go public because the company has to put in a lot of financial work in order to make the necessary filings and so he might as well make sure he benefits employees and ultimately the company from the level of work that’s already involved.

“Going public would benefit Facebook in lots of ways - namely having public currency to do acquisitions. So Mark [Zuckerberg] might as well get the benefit as well as the cost. Given that logic - I would suspect that some time in first half of next year, he will engage in the IPO process.”

Facebook is under pressure from the US regulator, the Securities and Exchange Commission (SEC), to disclose how many private shareholders it has on the secondary market. The limit for a private company is 500.

It has until the end of April next year to either make the necessary filings or IPO. Analysts have predicted that Facebook could set its valuation at $100bn when it floats and break new ground as the biggest consumer technology public offering ever.

Hoffman, who, as the co-founder and now executive chairman of LinkedIn, recently enjoyed a successful float of the business networking company he created in 2003, agreed that Facebook’s IPO could set new records.


“It could be the largest ever consumer technology IPO,” he said. “Facebook has deferred for a long time. The pattern 10 years ago was to go out [float] as soon as you could. The pattern now is to build a lot of inertia in your business and Facebook has done that. This will lead to a high tension IPO with a robust valuation.”


Facebook declined to comment.


Recent billion dollar valuations of several consumer web companies has led to claims that there is a new technology bubble just waiting to burst.


Floated on the New York Stock Exchange on May 19, LinkedIn epitomised the recent technology bubble, with its shares rising more than 109pc to close at $94.25 on the first day of trading, having gone up as much as 171pc at one point earlier in the day.


In less than 24 hours, a company with relatively small profits – it reported profit after tax of $6.59m (£4.04m) for the six months to June – went from being valued at $4.25bn to in excess of $9bn.

Hoffman, who is also now a partner at leading Silicon Valley venture capital firm Greylock Partners, refused to say whether he believed that the industry was back in a bubble. “I leave answering that specific question to other people. The precise point of a public market is that the market dictates the current answer to that question. Right now people who claim the technology market is back in a bubble are those who believe investors are underwriting the risk relative to growth.


“I invest in, and will continue to do so, in networks, platforms and marketplaces. The current ones will deepen and new ones will add value -so I am bullish about the growth opportunities in the market right now.”


He also said that the recent trend for secondary private markets to grow up around companies such as Facebook would have to “morph” and change in response to concerns from US regulators.


“The secondary market is a complicating factor in all of these businesses,” Hoffman said. “My guess is that how the secondary markets work today is not how they will work in a couple of years. How they will work is to be determined.


“The challenging thing about them is that private companies usually like to control their shareholders and as these markets have grown to be so big, almost seeming like a quasi real public market, it is more difficult to keep a handle on. Plus there are increasing regulatory issues.”


Hoffman has been in the UK for the last week as part of an initiative he set up several years ago with fellow investor, Sherry Coutu, called ‘Silicon Valley comes to the UK’.
The pair felt that young British people needed inspiration and the confidence to strike out on their own – hence the focus on panel discussions and events at 30 universities across the country during the last week, reaching around 12,000 students. And for the first time, there were entrepreneurial sessions going on at two Cambridge schools.


This year’s 30-strong troupe of Silicon Valley delegates include Andrew McLaughlin, the former chief technology officer for US President Barack Obama, and Megan Smith, the head of acquisitions at Google.


There was also a reception at Downing Street where the 32 student winners of an ‘Appathon’ [a competition last month during which 850 students had 48 hours to come up with the best mobile and web apps using Government data] were announced by David Cameron. These students will now tour Silicon Valley.


Hoffman says he has been impressed by the lack of barriers there are to creating a start up in the UK, but he feels the Government could do more to create programmes and events which encouraged valuable networking amongst technology entrepreneurs.
He thinks that fear of failure is the principal cultural challenge the UK needs to overcome if more people are to become entrepreneurs.


Interestingly, Hoffman also revealed that he is not sure if LinkedIn would have taken off in the same way it did had he founded it in the UK in 2003 instead of the US.


“For all social networks, part of getting them started is having enough people who are willing to experiment with another extension of their personal identity,” he explained.
“So in a LinkedIn sense it’s your professional identity; in a Facebook sense it’s your social identity and Twitter - your media identity.


“What I don’t know is would there have been a slower adoption within those new expressions of identity here had the likes of LinkedIn not been established elsewhere first, because of that classic British fear of embarrassment.”


Looking ahead, Hoffman believes the next wave of the internet, ‘Web 3.0’, moving on from the information and social web, will be one dominated by data.


“Data is the next powerful underlying theme of Web 3.0. This growing amount of data, which is all semantically indexed, will generate the next set of apps by which we will better navigate the world. Those apps will be the next big set of tech players.”

 

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