Instagram just updated its privacy policy to fall in line with Facebook’s updated data use policy allowing the transfer of user information back and forth across both services (or affiliates, as they call each other). That move was expected after Facebook recently adopted their own proposed policy changes after the third and final Site Governance vote failed to produce a binding mandate.

Although the free flow of data across Facebook, Instagram, and its affiliates may be enough to cause concern, some added content to the latter company’s privacy policy has large-scale implications for not only user privacy on the site but also for how the service fundamentally operates.

The updated terms of service, which go into effect on January 16th, include a good amount of new content. Instagram has taken the time to expand upon the terms & conditions, as well as the sections on proprietary rights in content. They’ve also included new sections on arbitration and added a few new disclaimers and liability waivers. The changes range from new language about bullying and harassment of other users on the network to new language concerning arbitration and Instagram’s opt-out process for participating in class-action lawsuits.

Do you use Instagram? How do you feel about its new ability to share data with Facebook and vice versa? Will this new policy affect how you use the service? Will you stop altogether? Let us know in the comments.

You can check out the updated terms of service here.

But it’s one change in particular that hints at a new ad product that users could be really uncomfortable with – and it sounds a lot like one Facebook users should be all too familiar with – Sponsored Stories.

Facebook Sponsored Stories, as you’re probably aware, use your friends’ already-completed actions across the site in order to promote a product or service. Burger King, for instance, pays for Facebook to display user actions concerning Burger King in their friends’ news feeds. You’ll recognize this as the “John Smith, Dan Baker, and Julie Clark like Burger King” stories on your news feed. Sponsored Stories can also include posts from the page in question, or check-ins and more. The idea behind them is that they feel more organic than traditional side-bar ads – and they do. Sponsored Stories pop up inside users’ news feed and are sometimes indistinguishable from non-sponsored stories, except for the “sponsored” tag that is easily glossed over. If done right, a Sponsored Story doesn’t really even feel like an ad – except for the fact that it’s totally an ad. A social media-specific, clever ad, but an ad nevertheless.

On Facebook, Sponsored Stories are already prevalent on both mobile and desktop. That’s to say that they are hard to avoid. An average Facebook user that checks their news feed a couple of time a day will be hit with multiple Sponsored Stories ads. But starting soon, that same Sponsored ad saturation may affect everyone’s favorite hipsteriffic photo-filtering community, Instagram.

Call it the Facebook influence on a company they just purchased, but Instagram has modified their terms to explicitly allow for the use of users’ likeness in connection with sponsored content. Here’s the new addition to the policy:

Some or all of the Service may be supported by advertising revenue. To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you. If you are under the age of eighteen (18), or under any other applicable age of majority, you represent that at least one of your parents or legal guardians has also agreed to this provision (and the use of your name, likeness, username, and/or photos (along with any associated metadata)) on your behalf.

And here is the old version, which doesn’t mention using users’ likeness in promotion, only that promotional content will in fact exist on the site:

Some of the Instagram Services are supported by advertising revenue and may display advertisements and promotions, and you hereby agree that Instagram may place such advertising and promotions on the Instagram Services or on, about, or in conjunction with your Content. The manner, mode and extent of such advertising and promotions are subject to change without specific notice to you.

So starting January 16th, Instagram has to go-ahead to use your photos in ads. Simple as that.

Let’s take a look at what those ads could look like. Instagram gives itself the ability to let “a business or other entity pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take.” That could be something as simple as displaying the fact that Josh Wolford “liked” a photo by Starbucks on other users’ Instagram feed. That’s using my name, likeness, and actions to create an ad.

But when you really look at the language, you see the type of ads the company is really planning on cashing in on.

By giving Instagram the ability to use your photos with associated metadata in promotional content, you’re giving Instagram the ability to turn your pretty little lo-fi photos into incredibly organic-feeling advertisements. If you take a photo at a beautiful resort, that “associated metadata” knows where you took it. That means that your filtered photos of your toes in the ocean can be quickly turned into an ad for “Sunset Resort” in Key West.

This is the first real attempt to monetize Instagram.

Declan McCullagh over at CNET says that another tweak in the policy language could also mean that Instagram now has the authority to license your photos to anyone for use outside Instagram – think a giant stock photo database.

“One section deletes the current phrase ‘limited license’ and, by inserting the words ‘transferable” and ‘sub-licensable,’ allows Facebook to license users’ photos to any other organization,” he says.

Although that exact same language is repeated in Facebook’s ToS, nobody has complained that Facebook is creating a giant stock photo database of users’ personal photos.

For content that is covered by intellectual property rights, like photos and videos (IP content), you specifically give us the following permission, subject to your privacy and application settings: you grant us a non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any IP content that you post on or in connection with Facebook (IP License). This IP License ends when you delete your IP content or your account unless your content has been shared with others, and they have not deleted it.

To me, Instagram’s new policy language seems to suggest Sponsored Stories inside the service using user photos, not turning the service into a Getty images of sorts, full of user-generated content. Although the language does discuss “sub-licensing,” meaning that sort of thing is not entirely off the table.

We also have to consider what this means for the future, as Facebook and Instagram become closer. With Facebook and Instagram freely sharing information now, and with Instagram’s assurance that it “reserves the right, in our sole discretion, to change these Terms of Use from time to time,” who’s to say that an Instagram-Facebook ad product isn’t feasible? Your geo-tagged Instagram photos sure would look pretty nice as a Sponsored Story on a Facebook news feed, right? It sure feels like this is the logical conclusion of this whole thing.

It appears that someone at Instagram/Facebook did their homework (as we would hope they would). The language of the new policy seems almost tailored to address all of the concerns brought up in Facebook’s very public Sponsored Stories legal battle, which has just entered its penultimate hour. In that case, a handful of users sued Facebook for using their likenesses in Sponsored Stories without their expressed consent and without compensation.

With this privacy policy rewrite, Instagram is setting the stage to be able to make very pretty, very organic-feeling ads out of your content. Instagram has to start making money, and this is certainly a viable revenue source. Nobody should be surprised by this, considering the company was bought by Facebook for nearly a billion dollars.

And as users, to think that a free service as popular as Instagram wouldn’t have to eventually come with ads, is short-sided and entitled. I guess you could always pay a subscription fee instead…

But the bottom line is this: next time you snap a lo-fi filter on that burger photo, just know that you might be doing some unpaid photog work for whoever made it. You know what they say: if you’re not paying for a product, you are the product.

What do you think about Instagram deploying Facebook-like Sponsored Stories? Should users accept that a business has to monetize, and this is just part of it? Or is this the kind of thing that would force you to stop using Instagram? Let us know in the comments.