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Facebook's Ad Strategy Suffers Justifiable Blow

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On Facebook (FB), “Likes” aren’t even speech. They are pretty profitable though.

At this moment, down the right side of my home page are requests to “Like” two things: the Duracell Powermat (PG) and Fox’s (NWS) aging hit American Idol. I do not know what algorithm selected them or how it thought they applied to me.

A practice related to these requests was the subject of a just-resolved lawsuit involving the social media giant. From now on, the company will have to inform users that their profile pictures and some of their information might be used in one of the site’s “Sponsored Stories” advertisements if they like a page.

Recently, Facebook has been working hard to increase revenue. The site has suffered from diminishing returns per user, as well as difficulties monetizing user migration to mobile platforms on iPhones (AAPL), Androids (GOOG), and BlackBerrys (RIMM). As a result, they have experimented with new and better ways to make money off their nearly one billion customers.

According to the New York Times, Facebook’s “Sponsored Stories” section stands as one of its most reliable sources of ad revenue. Executives at Facebook believe that one of the main reasons for the ads’ effectiveness is that they don’t look like advertisements.

Also unlike traditional advertisements, users weren’t informed when their images were used in “Sponsored Stories.” It goes without saying that they weren’t compensated either. This led to a class action suit that the company settled Wednesday.

On their end, Facebook argued that users gave “implied consent” in “Liking” particular pages. They have otherwise declined to comment on the case.

The settlement states that, over the next six months, Facebook will amend its terms of service to warn users of how their images and information can be used. It will also give users control over how their information is used, and the parents of those under the age of eighteen the ability to opt their children out of appearing in the “Sponsored Stories.”

One economist involved in the case claimed that it could cost Zuckerberg’s company as much as $103 million in ad revenue. As part of the settlement, the company also agreed to pay $10 million in plaintiff’s lawyer fees, and to donate $10 million to non-profit organizations.

Then again, as we’ve seen, Facebook ads aren’t that effective anyways.

(See also: Facebook's Ad Strategy Finally Catches Up to Google's and Facebook Can’t Get Anyone to Buy Anything, Survey Shows)
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