The self-inflicted wounds Facebook received from its new privacy setup are getting deeper as some users pull their information, and others quit the social network altogether.

While I think that a lot of the criticism being leveled at Facebook is
hyperbole, Facebook’s new privacy regime does represent an almost 180-degree turn for the
world’s largest social network.

When Facebook launched, it was a private network reserved exclusively for students and alumni at a handful of schools. But over time, as it has opened up to the world at large, it has also become more public. The motivation for this is simple: it will be impossible for Facebook to grow into the company it needs to be financially as a closed, private network. Right?

Maybe not. Much of Facebook’s popularity is derived from its private nature. Even as Facebook opened up its membership, it largely left in place controls making it possible for users to maintain their privacy. Those controls are now pretty much gone, replaced with a confusing array of options clearly designed to make it difficult for users to share less of themselves with the world.

But Barry Schnitt, Facebook’s Director of Corporate Communications and Public Policy, has a solution for that: lie. That’s right. He told the Wall Street Journal that users can falsify certain portions of their Facebook profiles.

TechCrunch’s Jason Kincaid noticed the conflict between his comment and Facebook’s terms of use, and reached out to Schnitt, who reiterated:

…you don’t have to indicate your current city or you can indicate that your current city is “Atlantis”, “Valhalla” or, again, anything you like. We hope people will use accurate information if they are comfortable doing so because that information helps them to be found by their friends, which is part of the point of joining the site.

This might seem like an innocuous comment but Facebook’s fortunes might hinge on whether or not Schnitt truly represents with his position.

Here’s why: Facebook is sitting on a gold mine. Although Facebook will reportedly pull in approximately $500mn in revenue this year, most of that from advertising, much of the Facebook gold mine hasn’t been tapped yet.

The gold in that gold mine, course, is user data of various kinds, from profile details to the social graph. It has immense value because it gives and will give Facebook the ability to develop innovative solutions that connect advertisers to members of Facebook’s massive audience. How’d Facebook acquire its gold mine? As my colleague Meghan Keane pointed out yesterday, users have felt comfortable sharing their personal information and content with Facebook. And for good reason: prior to Facebook’s about-face, much of it was hidden from public view by default. Something unique to Facebook in the realm of major social networks.

But Facebook’s new anti-privacy approach may very well kill the goose that laid the golden egg. If Facebook users think twice about sharing accurate information with Facebook, and go back and remove or falsify the information they’ve already shared, Facebook will suffer. But it’s advertisers who may suffer even more. That’s because the amount and quality of the data that Facebook can give them access to as they look to target Facebook users will decrease.

Sure, Facebook can still use basic geolocation tools to figure out that you don’t like in Atlantis, for instance. But what happens when users start removing other small but valuable pieces of personal information? In the aggregate, it could hamper Facebook’s quest to realize the social networking dream: the ability to build a complete portrait of each individual user which can be used by an advertiser to target him or her with pinpoint precision efficiently in a one-to-one fashion.

Facebook is still far from realizing that dream, but make no doubt about it: if any company has ever had the potential to pull it off, it’s Facebook. But thanks to short-sighted thinking and confusion over its identity, that dream may remain just a dream. Better luck next time, advertisers. Facebook would rather own a stream than a gold mine.

Photo credit: Andrew Feinberg via Flickr.