Privacy Concerns Don't Faze Facebook and Twitter Investors

Facebook and Twitter shares are shaking off recent news regarding privacy issues.

Jan 3, 2014 at 10:15AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Following losses on the first trading day of the year, stocks opened higher this morning, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) respectively up 0.24% and 0.32% at 10:15 a.m. EST.

When it comes to Web-enabled software and, particularly, social networking websites, privacy has always been a major concern for users. That sets up a delicate balancing act for companies such as Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR), which are effectively renting out a huge database of potential customers to advertisers. The more complete the profile of each user is in terms of likely consumer preferences and behaviors, the more valuable that database becomes. Users, on the other hand, would prefer that the personal information they provide to these networks is not distributed far and wide.

That issue has come to the fore at the beginning of this year for Facebook and Twitter. The former now faces a class action lawsuit that alleges the company lifts data from private messages sent between users. Specifically, the suit alleges that when a user includes a Web link in a private message, that information is stored as part of a profile of the user's online activity.

Facebook is not alone in facing this type of allegation in a court -- last September, U.S. District Judge Lucy Koh said plaintiffs could pursue a lawsuit under wiretapping statutes against Google (NASDAQ:GOOGL) for scanning the messages of Gmail users. Google contends that all scanning is automated, but the lawsuit alleges the company "does not disclose the extent of its processing."

While I think privacy is an important issue that will have ongoing implications for the way in which companies like Facebook, Twitter, and Google conduct themselves, I also think users are barking up the wrong tree with these suits. Google, Facebook, and Twitter are nominally free services, but the companies are in business to make a profit. Users ought to understand that corporations wish to monetize these services; provided the data is safe, I think reasonable use for commercial gain is acceptable (although there may be some room for debate regarding what is "reasonable"). Of greater concern is how well-protected the data is from malicious outside intruders.

Which brings us to a Wednesday incident in which the Syrian Electronic Army, a hacker group that supports embattled Syrian President Bashar al-Assad, hacked into Skype's Twitter account and posted the following tweet:

Don't use Microsoft emails (hotmail, outlook), They are monitoring your accounts and selling the data to the governments. More details soon. #SEA

The Syrian Electronic Army posted a similar message from Skype's official Facebook page and on a Skype blog. Skype confirmed yesterday that no user information had been compromised.

Twitter and Facebook are paying no mind to these developments this morning, with both stocks outperforming the broad market, but privacy concerns aren't going away -- that's a direct consequence of these companies' business model.

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