I have sources that say, unofficially that:
1) They were not blindsided at all. They worked hard to compete on major features before g+ ever came out.
2) "Groups" has more or less similar functionality, and the feature is known to have a poor UI right now. The point though is that FB thought about this and even though they aren't up to the same polish with that feature, the feature exists, no architectural changes necessary. Just UI polish.
The super embarrassing thing for Facebook is that Google already told them what they were going to do. Take a look at this slideshow by Google's UX team a whole year ago [1]. That's right it's Circles!
Google has really done their homework on what makes a social network work and Facebook has no excuse for executing their own version of Circles so poorly with Groups and Lists. They've wasted valuable time pandering to advertisers when it was blatantly obvious what was coming. Google's vision wasn't secret.
[1] http://www.slideshare.net/padday/the-real-life-social-networ...
I honestly think Zuck either figured that a) Google was incompetent/unwilling to challenge them or b) Google be damned, Facebook will make much more money with the public-by-default, privacy-optional approach to sharing.
Perhaps the blindsiding was the promotion of Page to CEO and subsequent mobilization of Google's developer army?
He's been at it a while. If he gets beaten I don't think it will be to do with youth and inexperience. Remember Google failed with their first offering in this space (Wave), was it youth and inexperience then?
I honestly think that Google+ is a direct result of Page's ascendancy, and this was unexpected to outsiders.
If Apple's success has taught us anything, it's that "UI polish" trumps pretty much everything else when it comes to making money from software, and it is hard to get right (or else everyone's UIs would be just as polished as Apple's).
So if Facebook is behind Google in "Just UI polish" they may have very much to fear, indeed.
It is true that Facebook may just copy the best innovations of Google+, but that puts them in a defensive position and obviously isn't what they want. We've seen what happens to giants who bank on leveraging their entrenchment in the current market.
Apple isn't afraid to have a bad idea and then toss it out because, after all, ideas are cheap. If you build a turd and you polish it, are you still going to release that polished turd? The Apple way is to design it the right way from the start, THEN you polish it.
Existing users already have old habits, and existing data that they don't want to retype. Users aren't code - you can't just refactor them into something new, clean, and shiny.
Google+ users will build their networks afresh, focusing on privacy and groups. They will just maintain two accounts, and use Google+ when they want some level of privacy, and Facebook when they need to announce their wedding to the late adopters.
They're uploaded as 'private' by default, and it's a configurable option, so you can turn the auto-upload feature off altogether. Actually, maybe I did, because I think it asked me the first time whether or not I want auto-upload on or off by default; but even with it on, I don't feel even remotely unsafe -- the photos are automatically backed up to 'the cloud' and aren't shared unless I go in and explicitly share them.
No matter what you personally may feel about it, I can guarantee we'll be seeing blog posts and news stories about "Google put my private pictures I took for my boyfriend on the internet."
Guaranteed.
Admittedly, that's quite probably most people, but, as I said, it does ask you by default, and it does upload those pictures as private until you explicitly go and share them otherwise.
I think Friend Lists is what you may be referring to.
They need to make the feature easier to use/find, and they need to make the News Feed more sensitive to these.
Given that, Friends Lists aren't especially hidden either. Account > Edit Friends > Add a list. But using them for privacy is hard: you need to select custom privacy, then say show to specific people, then type in the friend list name in a box that looks like it only expects a person's name. Kludgy. (The iPhone app is actually much better here: it just includes the friends lists in the privacy dropdown.)
"Tonight at a Facebook Developer’s Garage meeting at Facebook’s headquarters in Palo Alto, Zuckerberg fielded a question about the service’s privacy controls. He said that the ideal solution for sharing different things with different people is to make a friend list. “But guess what? Nobody wants to make lists,” Zuckerberg admitted."
I absolutely love Circles, and it's more or less what I always wanted Facebook lists to be.