Author: Mathew Ingram

Should Facebook and Google users in the U.S. thank the Canadian government for protecting their privacy? A pretty good case could be made that they should. Both Internet giants have had their hands slapped by the Canadian Privacy Commissioner, and have had to alter their policies as a result (although Facebook is still considering its full response to the CPC complaint), and those changes have had the net result of protecting the privacy of U.S. users as well.

In the case of Facebook, the Privacy Commissioner’s office filed notice last week that the social-network provider’s protection of personal data didn’t meet federal standards on a number of points — 22 of them, to be exact. The government department advised Facebook to alter its practices to bring them into compliance, or possibly face court proceedings that would compel the company to abide by the rules.

One of the aspects of Facebook’s privacy protections that caught the Commissioner’s eye was the amount of personal data that is transmitted to or shared with the creators of third-party applications that Facebook users often agree to add to their profiles. Under the company’s rules, these third-party apps don’t have to provide much detail about what they plan to do with your personal data, and they collect a lot of data that isn’t really necessary, according to Privacy Commissioner Jennifer Stoddart.

This is something that many users have noted (and programmers as well), but in Canada that kind of personal data collection and retention isn’t just an irritation or curiosity, it’s potentially a breach of Canadian law. The law in question is the federal Personal Information Protection and Electronic Documents Act (or PIPEDA), which sets strict limits on what information can be collected, the amount of disclosure required, the purposes to which it can be put, and how long it can legally be retained. It is different in many key respects from U.S. privacy laws.

The Facebook investigation raised what the Commissioner’s office called “significant concerns around the sharing of users’ personal information with third-party developers creating Facebook applications such as games and quizzes.” The agency said that the company “lacks adequate safeguards to effectively restrict these outside developers from accessing profile information.”

The Commissioner’s report recommended a number of changes, including “technological measures to ensure that developers can only access the user information actually required to run a specific application” as well as taking steps to “prevent the disclosure of personal information of any of the user’s friends who are not themselves signing up for an application.” The investigation also found that Facebook has a policy of indefinitely keeping the personal information of people who have deactivated their accounts.

This is the second time that Canada has stepped in to advise a major Internet player of their neglect of privacy rules. Last year, Google came under fire from the Commissioner’s office over its Streetview” service, which hasn’t even launched in Canada yet. After reports emerged that cars belonging to Google had been seen filming in Toronto and other major cities, the federal agency released a statement calling on the company to change its methods to better protect people’s privacy.

In particular, the Commissioner said that revealing the faces of specific individuals without their consent was a breach of Canadian privacy laws, and so was revealing personal information such as car license plates. In the U.S., taking a photograph of someone in a public place without their consent is legal, but in Canada such photos are considered an invasion of privacy, unless they are taken for artistic or journalistic purposes, such as reporting on a news event.

Google responded by using automated technology to blur the faces of people in its Street View photo montages – a feature it is also rolling out in the U.S. and other jurisdictions as well.

Just as banks and credit-card companies routinely file lawsuits and press criminal charges against those who counterfeit money or use unauthorized credit cards, Microsoft has filed a lawsuit against three Canadians it accuses of the 21st-century equivalent: namely. “click fraud.” In the same way that cash — followed by checks and credit cards — were the currency that made capitalism function, the currency that drives value for giant Web businesses like Microsoft and Google is clicks.

According to Microsoft, its first-ever click fraud lawsuit was filed against a family from Vancouver — Eric Lam and Gordon Lam (who are believed to be brothers) and Melanie Suen (believed to be their mother) — because they engaged in repeated click-fraud attacks against online ads related to auto insurance and the multiplayer online game World of Warcraft. The company is asking for an injunction forcing the three to stop the behaviour, and is also asking the court to award it more than $750,000 in damages.

The crime itself isn’t nearly as straightforward as counterfeiting money or stealing credit cards. Click fraud involves rigging online advertising through the use of software scripts or other nefarious schemes such as “click farms,” and in a case like the one against the Lams, it involves jacking up the number of clicks on a competitor’s ads so that they have to pay more — since keyword-related search advertising such as that offered by Google and Microsoft is priced through an auction process. The more clicks, the more you pay for your ads.

Microsoft says in its suit that it had to pay some of its advertisers $1.5 million in ad credits in order to compensate them for the actions of the trio. The company is asking for an injunction as well as more than $750,000 in compensatory damages. Ironically, before it identified the Lams as the source of the click fraud, Microsoft says that it actually gave the family an advertising credit to compensate them for the click-fraud that was occurring.

“By engaging in a widespread scheme that generated invalid clicks on links to online ads that were displayed in response to search requests on Microsoft’s network, defendants disrupted the advertising campaigns of their competitors, obtained increased user traffic for their own ads at a much lower cost than they could have otherwise, and caused substantial damage to Microsoft,” the lawsuit alleges.

The software giant describes how it spent more than a year tracking the clicks on certain types of search-related keywords in markets such as auto insurance, and noticed that there were “a large number of exact match-type keywords being searched, and within a short period of time, the top sponsored site results were being clicked, which indicated that automated or ‘click farm-generated’ click fraud was occurring on the Microsoft network.” One of the difficult things about such a case is proving that the clicks were actually fraudulent, rather than just a coincidence.

Both Microsoft and Google (which has a dominant share of the market for online keyword-related advertising) have been on the other side of a click-fraud legal case in the past. In 2006, Google had to pay $90-million to settle a class-action suit launched by advertisers who claimed that they paid too much for their online advertising, while Microsoft has been sued for something very similar.

Dozens of venture capital firms have come and gone since the great Internet bubble of the late 1990s, but one relatively little-known firm has stuck around and continued to invest heavily in some of the Web’s leading technologies. It’s probably a lot easier to do this if you only have one investor to answer to, and In-Q-Tel Technologies has that in spades: it’s sole controlling shareholder is the U.S. government, in the form of the Central Intelligence Agency.

Created in 1999, In-Q-Tel is the venture capital unit of the federal spy agency, and was set up as a way for the CIA to stay in touch with “cutting-edge technology” that might be useful to its purpose as the U.S. government’s intelligence arm. According to the CIA site, the idea for such a venture came from Dr. Ruth David, a former CIA Deputy Director for Science and Technology. The agency’s rationale was that “as an information-based agency, the CIA must be at the cutting edge of information technology in order to maintain its competitive edge and provide its customers with intelligence that is both timely and relevant.”

As the CIA site notes, the agency has been involved in many leading technologies over the past few decades, including the U-2 and SR71 reconnaissance airplanes and Corona surveillance satellites — and, of course, the Internet itself was a spinoff of a research project developed by the Defense Advanced Research Projects Agency or DARPA. But the agency apparently realized that the pace of technology development was accelerating beyond its ability to keep up, and that investing in startups might be a way of keeping track of those new technologies, and possibly benefit from them as well.

As the CIA says itself: “One of the great leaps of faith the Agency took in this venture was to recognize, early on, that private sector businessmen were better equipped than it was to design the Corporation and create its work program.”

One of In-Q-Tel’s investments from several years ago has paid off in both senses: the company invested in a small geo-targeting and satellite-mapping company called Keyhole, which was bought by Google in 2004 and renamed Google Earth. Although Google did not say how much it paid for the company, In-Q-Tel sold more than 5,000 shares of Google following the deal and pocketed about $2.2-million. As of 2006, it had reportedly invested more than $130-million in about 90 businesses, including these ones.

The company invests in several broad areas, including: application software and analytics; bio-, nano- and chemical technologies; communications and infrastructure; digital identity and security; and embedded systems and power. Its investments include companies such as Asankya — which is working on a way of speeding up Internet traffic using a proprietary technology — and Decru, which makes highly secure data-storage products. The company has also invested in Attensity, which does advanced text analysis on large quantities of data, something the CIA no doubt does a fair bit of, and a company called Stratify that specializes in analyzing “unstructured data.”

All four of those investments have potential implications for the future of the Web, since both Asankya and Decru’s technologies are used in “cloud computing” infrastructure, and Attensity and Stratify’s products are useful for taking the existing Web and adding layers of meaning or understanding on top of it — along the lines of what Web creator Tim Berners-Lee has called the “semantic Web.”

Although not every investment the company has made has paid off, even formerly skeptical Silicon Valley investment watchers have grudgingly admitted that In-Q-Tel has done pretty well for itself, while one of its founders told the Washington Post as far back as 2005 that while he still saw the venture firm as an “unproved experiment, it was already “far more successful than I ever dreamed it would be.”

As one of the top — if not *the* top — social-networking sites, Facebook tends to draw a disproportionate amount of criticism from those concerned about the effect the site has on young minds or the welfare of society as a whole. And no one is more concerned about those risks than the various religious groups who routinely try to ban, block or otherwise crack down on the scourge of modern social networking.

The latest to make this kind of move — or at least a threat in that direction — was a group of Islamic clerics who were meeting in Indonesia. They declared that they were contemplating a religious ruling that would issue a “fatwa” or declaration about Facebook, requiring observant Muslims to practice what amounts to “safe social networking” or suffer the wrath of their imam (priest).

In a nutshell, a spokesman for the group said that Facebook and similar sites could be used for appropriate purposes such as education about the faith or keeping in touch with one’s family and friends, but noted that they could also present a temptation.

“The clerics think it is necessary to set an edict on virtual networking, because this online relationship could lead to lust, which is forbidden in Islam,” said Nabil Haroen, a spokesman for the Lirboyo Islamic boarding school, which was hosting the event. The head of the council of imams said that the growing number of Facebook users in Indonesia was a controversial subject among Muslim leaders and that he favored a ban because of possible sexual content.

“People using Facebook can be driven to engage in distasteful, pornographic chatting,” said Amidan, who — like most Indonesians — uses only one name. Another spokesman for the clerics said that “spreading ill words about others, gossiping and other things that go against religious teaching on social networking sites in the virtual world are forbidden according to Islamic law.” Despite these protests, one Muslim group on Facebook has 48,000 members, while a Muslim fan page has 18,000 fans.

The Indonesian clerical group’s move would not be the first time the country has stepped in to block social-networking sites for religious reasons. Last year, the country ordered its largest ISPs to block YouTube and MySpace because they both carried an anti-Islam film called Fitna, created by Dutch filmmaker Geert Wilders, and the government said that seeing it might “disturb relations between faiths.”

And Muslims aren’t the only religious groups to be concerned about the Internet and the intrusion of social networking into the lives of the faithful. Although Pope Benedict and other senior members of the Catholic clergy have made positive statements about the benefits of the Internet — and even at one point created a Catholic version of Facebook called Xt3.com to appeal to young people — not everyone is quite so sanguine about these new services.

In a recent address to his flock, the Bishop of Paisley, Rt. Rev Philip Tartagliawarned the faithful that “In dialogue with others we need to be wary of the inane chatter that can go on in the digital world which does nothing to promote growth in understanding and tolerance.” He also raised concerns about who young people might contact through the networks, saying: “What parent has not wondered what their child is doing on the internet? What material are they accessing? Who are they talking to in social networking sites?”

Jewish groups have yet to raise any substantial concerns about social networking and its effects from a religious point of view — although there are Orthodox adherents that believe Facebook and similar sites can lure the faithful away from the path of righteousness — but they have become concerned about the use of Facebook as a tool to spread hatred about their faith, including a number of groups that deny the existence of the Holocaust. So far, Facebook has said that it believes the groups fall under the category of freedom of speech, and has resisted efforts to close them.

By now, everyone seems to have become pretty comfortable with the idea that Facebook is a revenue-generating enterprise. Although originally there was a lot of skepticism about whether the social network would be able to produce much revenue, advertising deals with companies like Microsoft (which invested $240-million for 1.6 per cent of the company in 2007) have established that Facebook is definitely producing plenty — as much as $500-million in revenue this year.

What’s even more fascinating, however, is the amount of money that is being generated by the Facebook “ecosystem” — that is, the considerable number of applications, tools and games that are built using Facebook’s F8 platform. According to some estimates (and they are just estimates), app developers as a whole could bring in almost as much or possibly even more revenue this year than Facebook itself.

As Eric Eldon points out, coming up with an overall estimate of what Facebook app developers are making is difficult — if not impossible. Many developers don’t want to say publicly what they bring in, for competitive reasons. But some of the estimates that have appeared, particularly about the largest app developers, are accepted by most observers as being fairly accurate. Zynga, for example, which makes the Texas Hold ‘Em app, is believed to have a “run rate” that would produce revenue this year of about $100-million.

That’s a single developer (although it has multiple apps in its stable). About half of its revenue is estimated to come from its Facebook apps, and the other half from its MySpace businesses. Playfish is expected to make about $30-million this year. In all, Eldon estimates that the top handful of developers make about $150-million, followed by several other tiers of smaller developers who collectively make another $150-million or so. By the end of this year, several sources said that could hit $500-million.

Online gaming industry players told Advertising Age magazine the same thing, with many of them estimating developer revenue could hit $500-million or more. “It wouldn’t surprise me if apps on Facebook generate more revenue this year than Facebook,” LivingSocial CEO Tim O’Shaughnessy told the magazine. LivingSocial currently has the number one most popular Facebook app, “Pick Your Five.” Mark Pincus of Zynga recently wrote up some of his tips on how to make money through Facebook apps for the Facebook developers blog.

One interesting thing to note is that Zynga and several other developers make money in a variety of ways — not just through banner advertising, as many online media outlets do, but also through CPA (cost per action) payments, as well as the sale of virtual goods. In Zynga’s case, the company makes about a third of its revenue from the sale of poker chips for its Texas Hold ‘Em games. The virtual goods market is one that is already well established in other countries: in China, for example, gaming company Tencent made $1-billion in revenue from the sale of goods and services in its virtual world, including clothing for avatars.

Is there a lesson here for other companies such as Twitter, which is searching for revenue-generating opportunities for its fast-growing service? Clearly, there is. If you can build a social network that attracts the kind of devoted users that Facebook has, and in large enough numbers, you can generate substantial amounts of revenue both for yourself and your partners. And if Facebook is developing an integrated payment system (as it is rumoured to be), the revenue potential could be set to explode.