Facebook could see ad revenue hit in 'Sponsored Stories' lawsuit

Facebook may have had to dish out $20 million to settle a privacy lawsuit involving "Sponsored Stories," but the cost could be even greater, denting the company's ad revenue stream.

If you thought Facebook's recent $20 million privacy settlement was lenient, don't feel so bad. The worst is yet to come.

The social networking giant could face a hit in the region of $103.2 million revenue per year thanks to the lawsuit that allowed users to opt-out of the site's "Sponsored Stories" advertisements, according to an economics analyst hired by the plaintiffs, reports Reuters.

Five Facebook members brought the case to a California court on behalf of 100 million potential class action members.

Facebook was ordered to give users an opt-out control allowing which content can be used for such advertisements, which Facebook agreed to do for at least two years.

ZDNet's Steven Shaw explains Facebook quietly settled for $10 million in the privacy suit, with the money thought to be going to charity. The company also agreed to pay $10 million for the plaintiff's legal fees.

"Sponsored Stories" are customised advertisements that appear on the users' news feed view and often include the name of a friend who has liked a product or service. It works on the premise that if a friend likes a page, a product or a service, the ripple effect will tip others into clicking on that advertisement.

Court documents show the value of a sponsored ad was at least twice, and up to three-times that of a standard ad, according to cited comments by Facebook chief operating officer Sheryl Sandberg.

Around 153 million U.S. users of Facebook are eligible to opt-out of having some of their actions featured in sponsored ads.

With the high tens of millions or low hundred million expected to opt-out of the ads, the effect could cause significant harm to Facebook's ad revenue.

The $103.2 million figure was redacted by court documents. What wasn't redacted was Facebook founder Mark Zuckerberg's comment that sponsored story ads were the "holy grail" of advertising.

According to forecasts, advertising revenue could skirt close to $5.8 billion in 2012, with the vast majority of its revenue coming from its ad business.

Facebook was unavailable for comment at the time of writing. Facebook declined to comment to Reuters.

Image credit: Facebook.