News : Facebook reverses course on privacy policy

By Alexei Oreskovic

SAN FRANCISCO (Reuters) - Facebook's efforts to build a business model around its online social network have hit another roadblock, as a backlash by its users forced the company to reverse a new policy.

The dispute involves changes that Facebook had made to its terms of service agreement. Some critics said the changes appeared to give the company a perpetual right to content that users post on the network.

People Against the new Terms of Service, a Facebook group created to oppose the changes, counted more than 88,000 users on Wednesday.

The about-face by Facebook underscores the sensitivity that many consumers have about their personal data, even on sites where they freely share information about their lives with online friends.

And it reflects the challenges facing Facebook as it seeks to squeeze money out of its network of 175 million users and to offset the costs of its rapid growth.

Facebook is quickly burning through its initial funding, said Sanford Bernstein analyst Jeffrey Lindsay. Among other things, the social network needs to pay for the computers and equipment that host its online service around the world.

"That's real money," said Lindsay. "They're realizing that they have to get a business model."

As a private company, Facebook does not disclose financial information. Lindsay said the site is rumored to generate $100 million to $300 million a year, most of it through an advertising arrangement with Microsoft Corp, which owns a 1.6 percent stake in Facebook.

Getting a better return from the business is proving tricky for Facebook.

It introduced a service called Beacon in 2007 that tracked individuals' online activity -- such as purchases made at participating e-commerce Web sites -- and reported the data to the individuals' Facebook friends. But the service raised privacy hackles, and Facebook made changes to make it easier for users to turn the service off.

In response to the latest dispute, Facebook CEO Mark Zuckerberg initially wrote in a blog post on Monday that users ultimately own and control their personal information.

On Tuesday evening, Zuckerberg said the company would revert to its original terms of service as it works on crafting a less objectionable service agreement.

Where that leaves Facebook's developing business model is unclear.

The company's gold mine is the rich trove of user information that people generate on its network, said IDC social media analyst Caroline Dangson, because the data could be used for targeted advertising or sold to research firms.

But the company needs to find the right balance between monetizing the data and respecting people's privacy.

"We're early in the process of trying to figure this out and understanding what consumers will tolerate," said Dangson.

And the evolving Facebook demographic, which increasingly includes older users and international users, means that privacy expectations are not uniform. According to Bernstein's Lindsay, Facebook needs to tread carefully.

"Our view is there are plenty of ways that Facebook should be able to make a lot of money, but they seem to be making one mistake after another," said Lindsay.

"If they're not careful," he said, "mistakes of that magnitude will cost them their user base."

(Reporting by Alexei Oreskovic; Editing by Gary Hill)