NEW YORK (AP) — The U.S. government has finalized its settlement with Facebook to resolve charges that the social network exposed details about users' lives without getting the required legal consent.
Facebook Inc. didn't admit wrongdoing, but agreed to submit to government audits of its privacy practices every other year for the next two decades. The company committed to getting explicit approval from users — a process known as "opting in" — before changing the types of content it makes public.
The settlement, announced in November, is similar to agreements the Federal Trade Commission reached separately with Google Inc. and Myspace.
The FTC approved the settlement Friday after a public comment period. It comes a day after the FTC fined Google $22.5 million to resolve allegations that Google didn't comply with the earlier settlement.
Mark Zuckerberg Controlling Too Much
Perhaps the most eye-popping risk listed in the S-1 is the idea that Mark Zuckerberg's bad decision-making could lead to a decline in company value. Along with "users fleeing" and "decline in advertising revenue," the following was listed as a major risk factor: <strong> <em>Our CEO has control over key decision making as a result of his control of a majority of our voting stock. </em></strong> Zuckerberg owns 58 percent of Facebook stock, which means that he "has the ability to control the outcome of matters" that come before stockholders. Furthermore: <blockquote>As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of our stockholders generally.</blockquote> Should stockholders fear the man who controls the company they hold stock in?
Personal Information Being Leaked
Facebook knows that it holds a whole lot of its users' personal information and that if that information comes out -- either by hacking or by Facebook itself disclosing too much -- their brand could be harmed and users could flee. "Any incidents involving unauthorized access to or improper use of the information of our users or incidents involving violation of our terms of service or policies, including our Data Use Policy, could damage our reputation and our brand and diminish our competitive position," Facebook says. So even if Facebook doesn't see a moral or ethical reason not to leak your guarded secrets, at least it sees a financial one.
Users Fleeing The Site
According to the filing: <blockquote>If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed.</blockquote> Just ask Rupert Murdoch and MySpace<a href="http://mediadecoder.blogs.nytimes.com/2011/06/29/news-corp-sells-myspace-to-specific-media-for-35-million/" target="_hplink"> what happens to a site's value</a> when all of the users flock elsewhere. One thing that happens: Advertising revenue drops (<a href="http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm#toc287954_2" target="_hplink">as noted in the S-1</a>), and given that 85 percent of Facebook's revenue came from advertising in 2011, a loss of visitors would (obviously) doom Facebook.com. Zuck and co. better hope those rumors of a <a href="http://www.cbsnews.com/8301-505245_162-57367971/teens-migrating-to-twitter-sometimes-for-privacy/?tag=content;siu-container" target="_hplink">mass teenage exodus</a> from Facebook to Twitter are untrue.
The Media Saying Bad Things
From the S-1: <strong><em>Unfavorable media coverage could negatively affect our business.</em></strong> Facebook has seen its share of negative media coverage, especially due to privacy concerns and controversial design overhauls; if the media narrative becomes too overwhelmingly negative, Facebook fears that users may be turned off and may run away.
Patent Litigation Costing Too Much
Facebook is currently being sued over some intellectual property by Yahoo, and the social network says that the cost of going to trial, and potentially losing the case, could hurt them in the long run. "If an unfavorable outcome were to occur in this litigation," the S-1 concludes with some gloom, "the impact could be material to our business, financial condition, or results of operations."
Smartphone Owners Ditching Their Laptops
Facebook doesn't currently display ads on its mobile properties, which means that it is not making much revenue from its iPhone and Android apps. This also means that if there is a wireless revolution that sees members visiting Facebook via smartphone and tablet devices more often than desktop and laptop units, Facebook's ad revenue could decrease significantly. Since Facebook's annual ad revenue has never been lower than 85 percent, the company would find itself with a major cash-flow problem. Or, as Facebook puts it: <blockquote>[I]f users continue to increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, our revenue and financial results may be negatively affected. </blockquote>
Acquisitions Being Unsuccessful
Facebook intends to continue to make acquisitions -- such as that one billion dollar acquisition of Instagram from earlier in April -- and the company acknowledges that these acquisitions might not go as smoothly as it would like. "We plan to continue to make acquisitions, which could require significant management attention, disrupt our business, result in dilution to our stockholders, and adversely affect our financial results," the amended S-1 states. Why's that? <blockquote>Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired products, technology, or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges.</blockquote> Whether or not Instagram was "successfully evaluated," or Facebook is able to "utilitze" the currently revenue-less photo-sharing network to make money, will, to some extent, determine Facebook's future success.
Google+ Breathing Down Facebook's Neck
"Our business is highly competitive," reads the S-1. "Competition presents an ongoing threat to the success of our business." Having successfully toppled MySpace and Friendster, Facebook knows what kind of a threat upstarts represent. And Facebook goes so far as to list, by name, the social networks it's watching: <blockquote>We compete broadly with Google's social networking offerings, including Google+, and also with other, largely regional, social networks that have strong positions in particular countries, including Cyworld in Korea, Mixi in Japan, Orkut (owned by Google) in Brazil and India, and vKontakte in Russia.</blockquote> You might be snickering at the idea that Google+ is legitimate competition for Facebook, but Facebook doesn't seem to be laughing or <a href="http://www.slate.com/articles/technology/technology/2011/11/google_had_a_chance_to_compete_with_facebook_not_anymore_.html" target="_hplink">buying into the eulogies</a> for G+ that have already been written. Having <a href="https://plus.google.com/u/0/117388252776312694644/posts/9zr9iwmN4XL" target="_hplink">just passed 100 million users</a> (according to unofficial stats), perhaps Google+ really is a threat.
The Government Regulating Too Much
Perhaps written by Facebook's Tea Party contingent, Facebook sees government over-regulation as a threat to its growth and success. Facebook lists Iran, Syria and North Korea as examples of countries where government has already stifled its business: <blockquote>It is possible that governments of one or more countries may seek to censor content available on Facebook in their country, restrict access to Facebook from their country entirely, or impose other restrictions that may affect the accessibility of Facebook in their country for an extended period of time or indefinitely.</blockquote> Facebook also pointed out elsewhere that "complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters" cost money to adhere and adapt to.
Design Changing Too Much
Did you hate the new Facebook? How about the new new Facebook? The Ticker? The Newsfeed? The Timeline profile? Well, all of those changes over time -- and, yeah, they come often and they come in big ambitious chunks -- could also repel users, according to Facebook's filing: <blockquote>If new or enhanced products fail to engage users, developers, or advertisers, we may fail to attract or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments, and our business may be adversely affected.</blockquote> (Mark Zuckerberg is currently listening to "Everything's Gonna Be Alright" on Spotify.)
Getting New Financing Too Difficult
Facebook "cannot be certain that additional financing will be available on reasonable terms when required, or at all," which is obviously worrisome for a young company that often depends on outside financing. As long as Facebook is growing at such a robust rate, financing should be easy to come by; if it hits a rough patch, however, those investors and banks could disappear along with users.
Zynga Meaning Too Much
Facebook makes 85 percent of its revenue through advertising. 12 percent of this revenue comes through Zynga, makers of Farmville, Cityville, Castleville, and a number of other incredibly successful Facebook platform-based games that both do and do not end in "-ville." Should Zynga's popularity falter -- or should the relationship between Facebook and Zynga sour -- Facebook could take a huge financial hit. Facebook's full reckoning as to what Zynga means to their success: <blockquote> In 2011 and the first quarter of 2012, Zynga directly accounted for approximately 12% and 11%, respectively, of our revenue, which was comprised of revenue derived from Payments processing fees related to Zynga's sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga's apps generate pages on which we display ads from other advertisers; for 2011 and the first quarter of 2012, we estimate that an additional approximately 7% and 4%, respectively, of our revenue was generated from the display of these ads. Zynga has recently launched games on its own website and on non-Facebook platforms, and Zynga may choose to try to migrate users from existing Facebook-integrated games to other websites or platforms. We may fail to maintain good relations with Zynga or Zynga may decide to reduce or cease its investments in games on the Facebook Platform. If the use of Zynga games on our Platform declines for these or other reasons, our financial results may be adversely affected. </blockquote>
China Being Too Closed
China represents a gigantic user base that Facebook has yet to penetrate. It clearly views the huge Asian nation as the next frontier, though it remains unclear whether it'll be allowed to enter the market, and if it is, whether it will be able to unseat current Chinese social networking incumbents Renren, Sina and Tencent. From the S-1: <blockquote>We may enter new international markets where we have limited or no experience in marketing, selling, and deploying our products. For example, we continue to evaluate entering China. However, this market has substantial legal and regulatory complexities that have prevented our entry into China to date. If we fail to deploy or manage our operations in international markets successfully, our business may suffer.</blockquote> And later: <blockquote>China is a large potential market for Facebook, but users are generally restricted from accessing Facebook from China. We do not know if we will be able to find an approach to managing content and information that will be acceptable to us and to the Chinese government. </blockquote>