Web companies discover the perils of putting privacy before profits.

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Feb. 26 2008 11:50 AM

Good Guys Don't Make Billions

Web companies discover the perils of putting privacy before profits.

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If Facebook were a nonprofit dedicated to bringing millions of people together in a dense cyberworld, it would be an extraordinary success. If it were an NSA-funded initiative to track evolving enthusiasms, it would be a stroke of diabolical genius. But Facebook is supposed to make its founders billions and billions of dollars. And they still haven't figured out a really good way to convert happy freeloading users into dollar signs.

Social networks are widely considered dreadful advertising platforms. People go to Facebook to socialize, not to buy stuff. A Google search for "leopard-print ballet flats" probably means you're in the market for "leopard-print ballet flats"; listing Megadeth as your favorite band doesn't necessarily mean you want to buy Pantene for your long, flowing man-locks. That's why advertisers love Google and why they are generally reluctant to pay top dollar for text ads on Facebook. Facebook's response was to launch a service called Beacon. Actions taken on partner Web sites, like renting from Blockbuster or buying movie tickets from Fandango, would loop back into your News Feed for all your friends to see.

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From Facebook's perspective, Beacon was a relatively unobtrusive way to integrate commerce and social networking. After all, Facebook is an advertiser-supported site, and this was just a fancy new way of selling ads. But the site's crazily devoted acolytes—who think of Facebook as their personal playground, thanks to years of immaculate rhetoric and behavior by Facebook's founders—revolted against the new ads and demanded new privacy protections. Sure enough, after days of devastating news coverage, the users won, and Facebook converted Beacon from an opt-out (if you can figure out how) to an opt-in feature. By cultivating an image as a free social utility you could trust with your friendships and your photos, Facebook had backed itself into a corner.

The same goes for scores of smoochable start-ups. The great thing about the Web 2.0 boomlet is that, unlike the original dot-com boom, it requires much smaller start-up costs and has generated many more real success stories, like Flickr and Del.icio.us and YouTube. But most of those success stories have involved an already profitable company—Yahoo in the case of Flickr and Del.icio.us, Google in the case of YouTube—scooping up the little guys at a healthy valuation. Great little companies start out with a terrific idea they have no way to make money from. While they're burning through other people's venture capital, they can afford to be as noble and un-evil as they want. The Googles and Microsofts of the world, alas, don't have that luxury. Perhaps immaculate capitalism is just a phase, like teething or dying your hair magenta. Talking the non-evil talk builds your user base and gets you noticed, then evil Uncle Moneybags swoops in to rescue you from your own rhetoric.

Chris Anderson, the editor of Wired and the author of The Long Tail, is more optimistic about the sustainability and breadth of immaculate capitalism. In the March issue of Wired, Anderson previewed his next book with an essay called "Free! Why $0.00 Is the Future of Business." He argues that the bounty of free stuff on the Web—Radiohead's music, ad-supported casual games, all of Google's services—signifies that "digital technologies … have become too cheap to meter." What's scarce these days, he writes, is the world's "limited supply of reputation and attention. … Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today."

As a confirmed cheapskate, I certainly hope he's right. But when we're thinking about the future of the Web economy, it's worth remembering that not every start-up with venture money has Google's inherent advantages. I, for one, am worried about the fate of my beloved financial site Wesabe. With a recession on the way and Yahoo about to go the way of the dodo, Uncle Moneybags looks set to retire, or at least go on a diet. With fewer gigantic Web corporations around to buy up the minnows of the Web 2.0 world, immaculate capitalism will have to put its money where its mouth is. Can Wesabe keep to its un-evil creed and still make enough money to survive and thrive? Will it compromise, by selling ads here and there? Or will the best personal finance start-up out there crash and burn? We're about to find out.

Reihan Salam is a columnist for Slate.

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