What Instagram's Blunder May Mean for Ad Future

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In the wake of the Instagram backlash—and now pending lawsuit— growing privacy concerns may spur social media companies to rethink advertising-based revenue models, said Rich Greenfield, an analyst at BTIG.

(Read More: Instagram Furor Triggers First Class Action Lawsuit )

"There's a huge issue around privacy in trying to turn what we've deemed kind of this issue that each of these companies has in terms of social responsibility and how to turn that into profit generation, it's just not an easy task," Greenfield said on CNBC's Squawk on the Street Friday. "It's one of the reasons we keep wondering—as social media plays out online—whether advertising is actually not the answer because it's too invasive privacy-wise and whether there needs to be new forms of monetization that takes center stage that doesn't exist today on any of these platforms."

Facebook-owned Instagram recently came under fire for making proposed policy changes to its terms of service which stated that businesses could pay the photo-sharing company to use users' data or images "in connection with paid or sponsored content or promotions." (Read More: Instagram Ditches Changes to Advertising Policy )

While Instagram quickly responded to the intense user backlash spurred by the proposed changes—reverting back to its original policy regarding advertising—the incident highlights how growing privacy concerns could shake up social media companies advertising-based revenue models.

(Read More: Randi Zuckerberg Also Confused About Facebook Privacy )

Facebook CEO Mark Zuckerberg, for example, now has "a billion dollar boondoggle in Instagram" because he has not figured out a way to profit from the photo-sharing platform, said Porter Bibb, of Media Tech Capital Partners, on CNBC's Power Lunch Friday.

"Clearly, stage one, or at least the way they (Instagram) were setting it up has already failed as consumers have reacted very negatively to just the hint of monetization," Greenfield said. (Read More: Facebook, Twitter Go to War With Instagram Push )

But as the Instagram backlash shows, privacy concerns will continue to affect just how social media companies can use content created by users for advertising purposes.

"There's a natural divide between users wanting privacy and brands wanting to leverage users' behavior and content," said Ranvir Gujral, co-founder of Chute, a media- sharing company. "I actually think who owns the content and what rights they have is going to continue to be an issue and really come in focus into 2013. I think we'll see more privacy lawsuits and claims."

Chute works with brands and publishers to help them integrate user-generated content onto their website or app. The company basically gives its clients a system that enables them to capture, manage and display users pictures on their site or for a campaign.

Some of its partners include Saks Fifth Avenue, Lucky and NBC News, a sister network of CNBC.

While Chute's business has grown over the last year, Gujral said that given the recent Instagram incident, there's concern that business could slow because brands may not want to get involved in using services related to user-generated content.

"We're an enablement platform and we view ourselves as being very in the middle of this," Gujral said. "Clearly, we would be concerned brands and publishers would say 'We just want to stay away from this, we won't use it."

However, with every threat, there is also opportunity, Guijral said.

Gujral said that in the wake of the Instagram debacle, clients may actually be drawn to Chute's services because they offer expertise and tools that help brands and publishers deal with rights management.

"While there are many instances in which a brand or publisher can safely leverage content published publicly to platforms like Twitter and Instagram, there are also instances where a greater deal of "rights clearance" should take place," he said.

Often times, Chute's clients will want to aggregate users' pictures to their website or Facebook for a photo contest, news coverage or campaign of some sort. To aggregate those images, brands will often create a very specific hashtag or ask users to reply to its brand's official Twitter account with an attached photo, Gujral said. In these cases, they can safely leverage the users' content.

"We believe that if a user takes a proactive action to "submit" content in such a manner then it is appropriate for that brand to aggregate that content in the announced manner," he said. "It is very important, however, to remember that the brand has no ownership or claim to that photo and can really only use it in a limited way like displaying it online as part of a larger photo stream ... Just because you use a hashtag doesn't mean a brand can just use your photos as they please in marketing materials or print ads, for example. "

Chute addresses the issue of rights clearance via its uploading tool called Media Chooser. Basically, every time a user uploads an image to one of Chute's clients' sites or apps, they are shown the specific terms of service, which are written by each client, and the user must agree to the terms of service before the image is submitted.

But while brands, publishers and marketers can take precautions to help ensure they respect users' privacy, its also important for users to remember one simple fact, Gujral said: "If you are using a service and you are not paying for it, you are the product."