I saw this one coming from the moment they announced Beacon (the ad sharing system). Everyone assumes that Gen Y-ers do not care about privacy. They may not draw the line in the same place some of the prior generations — but they do care.
The biggest issue for Facebook is the violation of trust. Users see Facebook as a place to hang out with their friends and they trusted Facebook not to sell the information (though they probably never read the fine print). Now they are going to be wary and uncomfortable if they perceive they are being monitored. I doubt there will be a major exodus, but if users started boycotting advertisers, it could affect Facebook’s business model — after all ads are its only source of revenue.
I predict that this is going to continue to be an ongoing problem for all public social network sites. Having a cool site does not pay the bills and the only way to monetize the site is through ads. The temptation to go for more ads, and more targeted ads would provide more revenue in the short term but fewer satisfied users and possibly lower growth in the long term. This means that there is a natural feedback loop that can act as governor on revenue, especially as subscriber growth slows.
