Google (Nasdaq: GOOG) CEO Eric Schmidt doesn't look like a big believer in privacy when he says, "If you have something that you don't want anyone to know, maybe you shouldn't be doing it in the first place."

Just down the road from the Googleplex, Netflix (Nasdaq: NFLX) CEO Reed Hastings must feel much the same way right now. Privacy concerns have deep-sixed the Netflix Prize competition, which I have singled out as one of the best research tools available to Netflix.

The first Netflix Prize served to improve the company's movie recommendations by a significant margin, and seems well worth the $1 million cash prize to the best of a highly engaged worldwide research community. But you could also look at the study's supposedly anonymous sample data and figure out who rented what. 

This brought lawsuits from privacy hawks and concerned customers, as some feared that their movie tastes might reveal personal secrets. Legal documents discussing the "Brokeback Mountain Factor" tell some of that story, but religious beliefs, family planning activities, and more have also been fingered as sensitive areas. Google recently showed us how a few Web searches can tell a love story, and rental histories can do the same.

That first data batch contained nothing but anonymous movie ratings, and the second prize would have added information like the viewer's ZIP code, gender, and age in an effort to better understand how these nuances affect a Netflix customer's movie selections. But pre-emptive lawsuits hand in hand with a query from the Federal Trade Commission have motivated Netflix to withdraw the second prize contest. The company will look at other ways to involve independent research in its operations.

It's a shame because I really do believe that these contests gave Netflix a tangible business advantage. You could argue that those rental habits would be just as public when you browse the shelves at your local Blockbuster (NYSE: BBI) or Wal-Mart (NYSE: WMT), or peck at the Redbox rental machine from Coinstar (Nasdaq: CSTR) at the grocery store.

But I can also appreciate how Netflix wants to stay out of unnecessary trouble. The resources it would have spent on handling FTC investigations and multiple privacy lawsuits would add to the cost of just running the contest, and at some point it's just better to back off.

As a Netflix customer and investor, I'm sad to see the Netflix Prize go. If an opt-in program would keep the legal wolves at bay, I'd gladly sign up. In the coming years, analyzing customer data and then presenting the best movie-picking experience possible will become the bread and butter for Netflix, TiVo (Nasdaq: TIVO), and others. Netflix might be the best stock of the next generation, but only if the company is allowed to do its research.

Fool contributor Anders Bylund owns shares in Google and Netflix, but he holds no other position in any of the companies discussed here. What does that tell you about his views on privacy? Hmm. Wal-Mart Stores is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers choice. Netflix is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.