Today Facebook Updated Its Privacy Settings: Here’s Why It Does (and Doesn’t) Matter

Safer or Not?

Today, Facebook (NASDAQ: FB  ) updated its security settings to better protect users -- from themselves. The switch was quite simple: Instead of status updates defaulting to public – essentially able to be seen by the entire world – the default is now friends. While the change seems rather minor, here's why it does (and doesn't) matter to investors.

Perception is reality
Facebook's been hounded for years by privacy rights advocates for its encouragement of users to share more information. The company has responded, albeit slowly, to requests to curb the sharing of information. Even now, advocates argue the privacy settings are too complicated and you still can't see who's looked at your information, like LinkedIn (NYSE: LNKD  ) allows.

After nearly a decade of a push toward oversharing, Facebook now seems to understand there's money in anonymity. Its $19 billion purchase of WhatsApp is a step in the direction of person-to-person, private communication. In addition, it appears Facebook has decoupled its person-to-person function, Messenger, from its mobile app – a move designed to rebrand and elevate messenger as a viable communication platform.

Here's why it matters...
Social media companies operate on an advertising-based model. The model is simple: grow users, engage users, and deliver relevant and timely ads to them. It's hard to monetize users if they feel their privacy isn't protected. Privacy concerns are growing too. Prompted by recent NSA revelations, the number of Americans that are concerned about their privacy erosion has jumped. A recent GFK poll reveals nearly 90% of Americans are "a little" concerned about their privacy.

We've also seen the ugly side of breaches of privacy – theft. The recent Target (NYSE: TGT  ) hack cost financial institutions nearly $200 million in reissued card fees and fraudulent activity. Target blamed a fourth-quarter drop of 46% in part on fraud costs.

...and here's why it doesn't
Many investors misunderstand Facebook's business model and assume the customers are the users. That's incorrect. Facebook's users are not its customers; Facebook users are the product. The customers are companies paying Facebook to deliver those relevant and timely ads. And as far as I can tell, Facebook isn't changing those privacy settings. In fact, Facebook increased ad-based revenue an astonishing 63% year over year in its last 10-K, on the heels of an impressive 36% from the year prior.

This ad-based monetization model is nearly as impressive as its smaller social media brethren LinkedIn. LinkedIn has a three-headed monetization plan, so head-to-head comparisons aren't exceptionally accurate. However, LinkedIn's business unit, Marketing Solutions, is a great comparison.

Company 2013 Ad Growth 2012 Ad Growth CAGR
Facebook 63% 36% 49%
LinkedIn 40% 66% 52%

You can see that Facebook is growing along the lines of a smaller, and thus, a more nimble competitor. Simply put, growing is harder when you're a bigger company. Facebook's revenue was five times larger than LinkedIn's on its last 10-K.

Foolish final thoughts
Facebook is responding to its critics by working to adjust its privacy settings. In the short term, this is of little interest to investors. However, if Facebook continues to respect users' privacy, this could lead to a "stickier" experience -- one that advertisers will pay top dollar for. It seems that Zuckerberg and company are looking to monetize privacy.

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