Facebook's Instagram Backpedals. Is the Damage Already Done?

It all started so innocently. Facebook's (NASDAQ: FB  ) new photo-sharing acquisition, Instagram, let its 100 million customers know it could, and probably would, begin using their posted photos in its ads beginning Jan. 16. And that wasn't all: Users' info might also be shared with its parent, Facebook, along with those infamous, and usually anonymous, "affiliates" we know so little about.

Instagram, and by extension Facebook, heard the grumbling of the people -- in this case, the photo-posting users of Instagram -- loud and clear: "Touch my photos, and I'm out of here!" Instagram founder Kevin Systrom started the PR mop-up process the following day and is still trying to appease the masses.

Oops, did I say that?
In addition to the sharing of information with parent Facebook and those mysterious affiliates, the new terms of Instagram's use included using your photos in ads. How exciting! Although, the terms of use continue, users won't necessarily be paid for sharing their personal photos and user names.

Users over 13 years old are fair game, according to Instagram's new rules -- at least they were before Systrom began backpedaling.

Naturally, a lot of users aren't comfortable having their personal photos and information plastered on an ad over the Internet. What to do? With Instagram, opting out isn't option; you quit the service, or agree to let it enjoy the fruits of your labor.

No, that's not what I meant
Systrom's first step in attempting to remedy the fiasco was a personally composed blog post to Instagram users. In a nutshell, Systrom acknowledged there was some "confusion" and that Instagram would address its terms of use, altering sections that aren't clear and answering users' questions.

Now, fast-forward a few hours, after Systrom's initial response in his Dec. 18 blog. According to a report on Reuters, Systrom reinforced the assertion that Instagram has "no plans" of incorporating its users' personal photos in ads. Per Systrom, the notion that Instagram would sell users' pictures, without compensation, is "not true and is our mistake that this language is confusing." Users' pictures and data are still fair game, however, much like Facebook's Sponsored Stories campaigns.

Fallout
National Geographic, one of many commercial users of Instagram, has announced its intention to immediately suspend posts on the site. And services that provide users with the tools needed to download and save photos from sites like Instagram have seen an astronomical increase in users the past 36 hours.

As coincidence would have it, one of Instagram's primary competitors, Yahoo!'s Flickr, announced an iOS app, along with a complete revamping of its site, just last week. Talk about good timing. Pinterest and Twitter may find themselves welcoming former Instagram users before long, too.

Going forward
As I've stated on more than one occasion, Facebook's willingness and ability to develop additional revenue streams from its billion users is the impetus for my bullish sentiments. Judging by yesterday's jump in Facebook's share price, shareholders aren't overly concerned with the miscues of its $700 million Instagram acquisition. Perhaps recognizing Facebook is doing what is should be doing -- finding ways to generate revenues from its "free" site.

At $60 billion in market cap, and in the midst of stellar run, it's easy to overlook Instagram's PR hiccup, particularly as it appears it will be remedied shortly. But it's worth keeping tabs on how Facebook manages its user interactions in the future. If Instagram is any indication, and let's hope it's not, Facebook had better ramp up its PR department -- it's going to need it.

After the disappointing IPO, Facebook is finally clawing its way back. Is it time to relook at the social-media king? There are things every investor needs to know about this company, before taking the plunge. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.


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