Tech IPOs Grapple with Privacy

By Cecilia Kang| Washington Post: Post Tech | June 18, 2011 |

For social media start-ups, going public these days involves more than sprucing up business and financial models.

Also showing up in the blogs and securities filings of companies such as Groupon, LinkedIn, Pandora and Zynga is a new consideration: privacy.

These social networking firms after all are in the business of data — collecting, sharing and sometime selling user information for targeted ads. They want to signal to investors that they have a plan to make money from the trove of information they have on users.

So as federal lawmakers contemplate new online privacy laws and regulators take up investigations of consumer protection violations, this year’s flood of social networking IPOs are looking anew at how those activities in Washington, D.C., could affect their stock market prospects.

“Privacy is now finally and appropriately being seen as a compliance risk that is real and needs attention,” said Lisa Sotto, head of the privacy practice of law firm Hunton& Williams.

“These companies realize that they need to be really upfront with what they are doing with data.”

Daily deals site Groupon recently changed its privacy policies to collect more subscriber information and share that data with partners. Ahead of its stock listing, it told its 83 million users about the changes in a recent e-mail.

Gamemaker Zynga, creator of Farmville, recently made a game out of its privacy policy to lure users to understand how their data is being used. The company learned first-hand about the importance of privacy policy disclosures after it was sued for allegedly sharing information about Facebook users.

Right after it went public, professional social network LinkedIn announced in its blog that it would allow advertisers to publish when its users recommend products.

Nearly all the firms that have gone public so far or are gearing up for their IPOs have listed online privacy enforcement and laws as a potential risk to future business.

Online real estate service Zillow, which will list its shares on the Nasdaq this Wednesday, listed potential Internet privacy laws as a risk factor to its business.

Pandora said in its S1 IPO filing that about 84 percent of its revenue comes from advertising and that a push for federal laws — particularly a “do not track” mechanism — poses a risk to its future business. Two “do not track” bills are circulating in Congress that would block Web sites and marketers from tracking user activity online.

The efforts highlight a new focus on online privacy that didn’t exist when Google went public in 2004. Then, the strongest mention of privacy was a passing reference to “some people” expressing concern about Gmail and the company’s placement of ads against the content of e-mails.

They’ve also watched as regulators in the U.S. and Europe investigate changes in Facebook’s privacy policies late 2009 that led to consumer outrage that the site was making content more widely available to the public.

“Why was LinkedIn’s valuation so high? Because it has so much relevant data. But at the same time the new reality of today is that you can’t just do whatever you want to mon­etize that data,” said Ryan Calo, head of Stanford University’s Consumer Privacy Project.