Huge Problem For Monetization: Lawsuit Forces Facebook To Let You Opt Out Of Sponsored Story Ads

Facebook’s business model just hit a massive stumbling block, as the social network is being forced to let users opt out of having their likenesses repurposed as endorsements in Sponsored Stories ads. The requirement of opt out controls comes as part of a settlement of a class action lawsuit where five Californians said they did not consent to having their names, faces, and activity used to promote companies who paid Facebook. Fortunately for Facebook, it could have been even worse as it appears that these controls will work on an story-by-story basis, and won’t allow users to opt out of all future Sponsored Stories.

The news comes just days after TechCrunch published data showing Sponsored Stories could be the answer to the big question mark of how Facebook will monetize mobile. Sponsored Stories mix naturally into the mobile and web news feeds, but now Facebook will be vulnerable to privacy activist campaigns to get masses of users to opt out of being included in the ad unit.

For those less familiar with Sponsored Stories, when a Facebook user interacts with a business, such as by Liking a Page or Page’s post, using an application, or checking in to a physical business, that business can pay to have the news feed story that could normally appear be shown more prominently or frequently in the web and mobile news feed, or in the ads sidebar. Because they seem like organic content, and feature the faces and names of friends as an automatic trusted referral, they’re clicked more often and are more influential on viewers than traditional ads.

You can see the full court document, spotted earlier by Reuters, embedded below but here’s a summary of the case’s outcome.

Facebook will need to add a system to let users see past actions that could be used as Sponsored Stories, and let them opt of having them used as such. These controls must be in place for at least two years. Facebook will also need to clarify in its governing documents that user likenesses are employed in Sponsored Stories, and that those under the age of 18 who use Facebook have received parental or guardian consent for their likenesses to be turned into Sponsored Stories.

Facebook will pay $10 million in cy pres that will go to advocacy for people’s right over their use in publicity on the Internet. Facebook will also pay the plaintiffs’ attorneys’ fees and costs up to $10.3 million, plus $37,00 in compensation directly to the plaintiffs.

Though redacted in later court documents filed by plaintiffs in support of the settlement, an analyst quoted that the changes could cost Facebook $103.2 million in lost revenue. However, if the controls are prevalent and users frequently engage with them to opt out of Sponsored Stories, the cost could be larger.

An even worse scenario for Facebook would by if users are given the option to opt out of future Sponsored Stories, not just ones based on their past actions, the changes could significantly derail Facebook’s mobile business model that hinges on Sponsored Stories by denying or drastically reducing its ability to monetize whole portions of its user base. In this case, privacy activist groups like “Europe vs. Facebook” that have been a thorn in Mark Zuckerberg’s side could rally users to permanently opt of Sponsored Stories en masse.

Here is the exact wording from the settlement regarding the opt out controls Facebook will have to add. They appear to only concern past actions and not require an all-inclusive forward-reaching opt out that could be more detrimental to Facebook:

Facebook will create an easily accessible mechanism that enables users to view the subset of their interactions and other content that have been displayed in Sponsored Stories. Facebook will further engineer settings to enable users, upon viewing the interactions and other content that have been used in Sponsored Stories, to control which of these interactions and other content are edible to appear in additional Sponsored Stories.

And here is the full text of the six terms of the settlement:

a revision of the Facebook terms (Statement of Rights and Responsibilities, or “SRR”), section 10.1 that clarifies to users that they give Facebook permission to use their name and likeness in Sponsored Stories ads,
a mechanism that will allow users to see and control which actions they have taken that have led to their being featured in Sponsored Stories ads.
additional provisions requiring that Users under 18 years of age represent that they have received parental consent to be featured in Sponsored Stories ads.
additional provisions obtaining consent from parents or legal guardians of user under 18 years of age establishing their consent to have these minor Users featured in Sponsored Stories.
additions to Facebook’s “Family Safety Center” that explain Sponsored Stories ads and enable parents to prevent their children from being featured in Sponsored Stories ads
an opportunity for Plaintiffs’ counsel to review Facebook’s website materials regarding advertising and ensure that Sponsored Stories are clearly identified as ads, with the right to move the Court to call for an independent audit (for which Facebook will pay) if necessary.

And finally, here’s the full court document detailing the settlement:

View this document on Scribd

[Image Credit: 454 Creative, Inside Facebook]