Will This New Policy Cause Instagram Users to Flee?

One clause in Facebook-owned (NASDAQ:FB) Instagram’s updated terms of service agreement, which indicates that the photo-sharing application has the right to use members’ photographs for advertisements, has sparked user outrage.

What is the problem with Instagram’s new policy?

Instagram’s new terms of use read:

“Some or all of the Service may be supported by advertising revenue. To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you.”

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In its analysis, The Wall Street Journal commented that the policy gave Instagram “the right to serve advertisements to you next to your photos.” But the text of the agreement also appears to give the application the ability to sell users’ photographs to sponsors without compensation.

While the announcement has prompted a flurry of angry responses on Twitter, the change should not really come as a surprise; Facebook has a similar provision in its service terms and Instagram recently launched its Web profiles, which provide space for advertisements and sponsored content alongside users’ uploads. According to theWSJ, these types of user agreements are meant to allow third-party applications that connect to Facebook’s network “to do the things they do.”

However, Facebook has made no attempt to put users’ photographs towards advertising purposes, although it does employ their content in advertisers’ Sponsored Stories.

The new terms, which were announced on December 17, will become effective in mid-January.

CHEAT SHEET Analysis: Will Instagram’s new terms be a negative catalyst for Facebook’s stock?

One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. In this case, the new policy has generated privacy concerns like all of Facebook’s updates have done. While the possibility exists that the terms will allow the application to lift photographs for partners’ advertisements, the actual ramifications of the update are unknown at this time. Instagram, which is independently managed, has the same problem as Facebook: monetizing its advertising space. However, selling photographs to advertisers could backfire if users leave the service en masse as a result.

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