Facebook Under the Gun Over New Privacy Concerns

Investors and marketers are both putting Facebook (NASDAQ:FB) under the gun. The social network has to prove that advertisers can make money using the site, or it won’t attract their business. General Motors (NYSE:GM) famously pulled its $10 million ad budget right before the IPO based on these concerns. In order to match purchasing data from retailers with users so that advertisers can measure the success of their campaigns, Facebook is working with a controversial company called Datalogix.

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Datalogix claims to hold data on “almost every U.S. household and more than $1 trillion in consumer transactions.” The company uses identifying information such as email addresses collected from Facebook and matches them to information collected from retailers through devices like loyalty cards. This way, advertisers can determine if a person bought a product in the store after seeing a Facebook ad.

Brad Smallwood, Facebook’s head of measurement and insights, said that marketers see a $3 sales increase for every $1 they spend on Facebook ads, demonstrating exactly the kind of returns clients want. However, privacy advocacy groups are not so happy about the process.

“EPIC believes that the U.S. Federal Trade Commission should open an investigation to determine whether Facebook’s proposed arrangement with Datalogix complies with the terms of the recent settlement,” said Electronic Privacy Information Center president Marc Rotenberg in a statement. Facebook’s data use policy states that the company only provides data to advertisers after they have removed any personally identifying information.

Ford (NYSE:F), McDonald’s (NYSE:MCD), and Starbucks (NASDAQ:SBUX) are all major advertisers on Facebook. More and more retailers are using Facebook login on their websites instead of asking customers to re-enter data, raising more questions about how exactly identifying user information is managed. Concerns over Facebook’s privacy practices have grown as users report that private messages have been showing up on public feeds.

Privacy concerns related to advertising caused a backlash from users in the past. Advertisements aren’t effective when the users feel uncomfortably exposed to them. Facebook will need to only make sure that user information is protected, but that the users themselves feel protected, if they are to convince them to click on ads.

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