Facebook Scandal Version 2.0

The events surrounding Facebook this week are a troubling glimpse of life with the Web of the future.

In case you missed the coverage, here's a quick recap: At the beginning of the week, the blog The Consumerist noticed that Facebook had quietly changed its "terms of service" to its users. It apparently was the first to notice this change, despite the fact that it occurred two weeks before.

In full-blown legalese, Facebook basically told its users that when they posted personal information to their Facebook pages (including photos, the music they were listening to at that moment, or their favorite movies), Facebook owned that information forever and could use it in just about any manner the company wished.

Facebook's apparent secretiveness in making the switch suggested it anticipated a backlash if word got out.

This being the age of the blogosphere, in which a vast army of citizen journalists are continuously picking over every government and corporate document (would the traditional media have ever spotted this change, much less written about it?), Facebook should have known that its little maneuver would not go unnoticed for long. And indeed, once word got out, all hell broke out across the Internet.

Facebook quickly moved to put out the fire. By Monday afternoon, Facebook CEO Mark Zuckerberg had already responded on his blog, saying: "Our philosophy is that people own their information and control whom they share it with.

"When a person shares information on Facebook, they first need to grant Facebook a license to use that information so that we can show it to the other people they've asked us to share it with. Without this license, we couldn't help people share that information."

Needless to say, anybody who read this comment and then looked at the very precise terminology of the new terms of service found Zuckerberg's comments a bit ... disingenuous.

Outrage Flares Up in Internet Time

Keep in mind, that was just Monday. We're talking Internet time here, so things are speeded up about 10 times, and it's not unusual anymore to have a scandal erupt, spread around the planet, be commented on by hundreds of Web sites, mobilize political action groups in response, and die down soon thereafter.

And that's pretty much what happened here. By Tuesday, the entire Web world was talking about the Facebook problem.

That morning, the Internet user advocacy group, the Electronic Privacy Information Center (EPIC) quickly filed a 25-page formal complaint with the Federal Trade Commission, arguing that Facebook had violated the law by altering the licensing of its users. The complaint was supported by two dozen other Internet privacy and civil liberties groups.

Facebook Does About-Face

And that was only part of the story. Even as EPIC was filing, on Facebook, itself, a user named Julius Harper Jr. was forming a "People Against the New Terms of Service" user group.

It grew within hours to 90,000 members -- a phenomenal accomplishment in the real world, but a not-uncommon event in the 175-million-member Facebook universe. Working with his groupmates, Harper even composed a list of "Three Big Questions for Facebook" on the change and submitted it to the company's legal department.

By Tuesday, less than 48 hours after all of this erupted, Facebook caved.

The company called EPIC to say that it was thinking about returning to its original terms of service -- and EPIC agreed to drop the complaint if they did so.

Users awoke Wednesday morning to an announcement from Facebook that it was reverting to its original terms of service. Zuckerberg announced that the company would solicit suggestions from users on new terms that would be "written clearly in a language that everyone can understand."

This was followed by an unsigned statement from the company, saying: "We never intended to claim ownership over people's content, even though that's what it seems like to many people. ... This was a mistake and we apologize for the confusion."

End of story. Sorta.

Deja Vu? Facebook's No Stranger to Scandal

You can understand if Facebook users were a little less than trusting that the company had now put this little moneymaking scheme behind it. After all, it was just 15 months ago that Facebook found itself in another scandal involving its ownership of seemingly private user information.

That one was called "Beacon" and, ostensibly, it was a way to let your friends know what you had just purchased online. Beyond the obvious potential for disaster (wives learning about mistresses, hundreds of "friends" finding out about your hemorrhoids, etc.), it was obvious to almost everyone that Beacon was just a barely disguised, targeted advertising program -- whose perniciousness was underscored by the fact that Facebook users were automatically enrolled in it ("opt-out"), rather than being asked to join ("opt-in").

Facebook caved on Beacon, too, also in the face of resistance from both users and advocacy groups. But even then, the company promised it would continue to look for new revenue-generating models. ... And with the attempt to surreptitiously change its terms of service, we may have just seen the first of them.

As Membership Grows Older, Facebook Must Grow Up

For a major company to try this kind of thing once and fail is surprising, but hardly unusual. But to do so twice, in nearly the same way, as if it has learned nothing from the earlier experience, leads one to look for deeper explanations and motives.

It seems to me there are three possibilities: 1) Venality; 2) Incompetence; or 3) Desperation.

At the time of the Beacon fiasco, I suspected it might be the first -- and that, despite having surpassed MySpace for just that reason, the people at Facebook didn't really care how they exploited their users as long as it turned into big bucks. But cynical companies learn from their mistakes, if only to become even more evil.

So, that leaves the other two, and in this case, I think it's a bit of both. Incompetence, I think, has something to do with it: Facebook is still largely a company run by post-adolescents, beginning with the 23-year-old Zuckerberg -- and while that has some big advantages when it comes to technical innovation, it also is a serious handicap when it comes to the wisdom of understanding people, anticipating crises and reacting coolly.

Even as its user base grows older, Facebook needs to grow up as well.

But the biggest reason, I think, is sheer desperation. Companies don't pull this kind of thing, especially over and over, unless they are scared.

But Facebook is one of the biggest success stories of the decade. What does it have to be scared about? Its business model.

The genius of the Web 2.0 revolution was that it figured out the best way to build a giant enterprise was to first, give it away for free, and second, give the users the tool and let them create their own custom service.

It is a strategy that has worked brilliantly, not just for Facebook, but Google, Craigslist, Twitter, LinkedIn, the various photo sites, etc.

But just as crucial to this strategy is step two, or what has been called Web 3.0: monetizing all of those millions of users. And here, most of these companies have hit a wall. By inculcating in their users the belief that social networks should be free, these companies are having a hard time figuring out how to make them pay.

Having failed to tackle the problem head on, these companies are now trying to get in through the back door -- in particular, selling off to advertisers all those terabytes of information about searches, interests and purchases.

The problem is that this strategy not only raises serious questions about privacy (thus, not only the two Facebook cases, but comparable scandals involving Google, MySpace, Twitter and Yahoo), but about violations of the implied trust between these companies and their users.

Scandal Version 2.0 Only the Beginning?

Every time they do this, these companies risk losing millions of their users and committing corporate suicide.

And yet, as this new Facebook case shows, these companies simply can't stop themselves. If they don't figure out a way to monetize their users and grow their revenues commensurate to their size, someone else just might. And even if that smarter competitor doesn't come along, the stock markets will still punish their failure.

So, despite their apologies this week, you can be sure that Facebook will try this again. And again. And so will almost every other Web 2.0 company out there.

And the great civil liberties battle of our time is shaping up to be a desperate struggle by each of us to keep our personal information our own, and the equally desperate ploys by on-line social networks to steal it from us and sell it to the highest bidder -- and all of it occurring in Internet time.

This is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, The Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNews.com "Silicon Insider" columnist since 2000.