Facebook has hit a potential stumbling block in its efforts to make money from its more than 900 million active users.
The social network has agreed to pay $20 million to settle a lawsuit in California claiming it publicized that some of its users had “liked” certain advertisers but didn't pay the users, or give them a way to opt out.
The so-called “Sponsored Story” feature on Facebook is essentially an advertisement that appears on the site and includes a member’s Facebook page and generally consists of another friend’s name, profile picture and a statement that the person “likes” that advertiser.
The agreement in California could potentially complicate Facebook’s efforts to accelerate advertising revenue, experts say.
Ever since the company went public last month, critics of the website have said it faces challenges when it comes to drawing in revenue because its users are sensitive to Facebook using their personal information to generate money, and because the website’s advertising is not obtrusive enough to grab the attention of users.
“The fact is the advertisements are not irritating users,” said Rob Enderle, an analyst with Enderle Group. “Advertisers are not getting value because Facebook does not want to upset its users.”
Enderle notes that Facebook’s non-traditional forms of advertising -- using features such as “Sponsored Stories,” or allowing advertisers to establish product-focused pages -- are not having the same effect as more established forms of advertising, which by their nature are conspicuous and direct.
Indeed, a Reuters/Ipsos poll earlier this month showed four out of five Facebook users said they have never bought a product or service as a result of advertising or comments on the social network site. And in mid-May General Motors very publicly yanked $10 million in Facebook advertising, saying paid advertising on the site isn’t effective.
Changing the “Sponsored Stories” feature could cost Facebook $103.2 million, economist Fernando Torres’ analysis of the revenue each ad brings to the site estimated. And, according to the lawsuit, Facebook’s Chief Operating Officer Sheryl Sandberg said the value of a “Sponsored Story” advertisement is at least twice and up to three times the value of a standard Facebook ad that doesn’t include a friend endorsement...