Last year, it was Facebook that came under fire for privacy issues. This year,
it is Sony Corp . (NASDAQ: SNE ) and Apple Inc. (NASDAQ: APPL ). In what
Bloomberg columnist Paul Kedrosky anointed the worst such debacle in modern
financial/technical history, an unauthorized person stole the names, addresses
and possibly credit card data of 77 million Sony PlayStation users. As a
consequence, the company had to shut down the PlayStation network losing
customers, revenues and the credibility of its security systems. Stock market
darling Apple also faced heat over privacy issues Monday, when two iPhone users
filed a class-action lawsuit alleging that the company is secretly recording
movements of iPhone and iPad users. In the Internet age, both cases illustrate
the problems around privacy concerns and their possible effects on a companys
top-line growth. In Sonys case, such concerns have a direct effect on its
top-line. This is because the issue raises uncomfortable questions about sharing
sensitive financial data with service providers. Apart from the legal and
financial issues involved, such data breaches can erode a companys brand appeal
and have an adverse effect on sales. In Apples case, although the company has
denied monitoring user location data, the larger question of privacy remains. In
a social networked world, websites are increasingly using sophisticated
algorithms to identify user preferences. To be sure, such information is already
disclosed by the user in some instances. For example, Foursquare, one of the
hottest start-ups currently, is premised on disclosing user locations.
Similarly, Facebook Places is built around the concept of disclosing your
current location with your network of friends on the site. In both cases,
however, users choose to disclose their locations. The question is whether it is
valid and ethical for companies to share such information (location, in this
case) with advertisers. Resolution of the privacy question will affect revenues
for companies such as Google (NASDAQ: GOOG ) that develop social products and
depend on advertising as a revenue source. While privacy concerns are a complex
issue, organizational response to crises is not. Sony exacerbated an already
sensitive situation by remaining silent about it for a week even as its network
was unavailable to users. No wonder the companys stock has lost more than 6%
since last week. This latest debacle coupled with the supply chain disruption
due to the recent tsunami in Japan should keep the stock in a downward spiral
for some time. On the other hand, after initially scrambling to respond, Apple
reacted swiftly to contain the damage. It released a statement regarding the
privacy issue and even got the normally reclusive Steve Jobs to talk to the New
York Times about the issue. The result was that the markets barely reacted to
the news. For both companies, however, the latest crises will sharpen focus on
their privacy policies and security systems.
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