Not quite so if the system works in a fashion similar to IM clients. Yes, other people you are connected to could keep the information, but as the idea is that it is only your friends that have that capacity, it is pretty far removed from uploading it to a server that is utterly controlled by a 3rd party (such as Facebook).
As far as issues regarding leaving the machine on 24/7 go, as I said, I'm still not sure exactly how they are hoping to achieve the system - and that may well be the case. But then I know loads of people that now have MSN on 24/7 through their phones (personally I use it less and less). And the idea that you can "switch access off" is not such a bad one imho.
As far as the security of data centers go - it's pretty much a non-issue. I have been to several data warehouses in Dublin (including Google's), and you are right, security is extra-ordinarily tight, including the likes of gel fingerprint readers, retina scanners etc. However peoples concerns don't lie with some spook infiltrating a secure data center and nicking their holiday photos, they are more to do with data profiling - something you effectively have to give permission for in order to use certain social networking sites - and the fact that the data gathered can be used for time eternal by whoever fancies access to it.
I am intrigued by a "midway" solution. Using something like Diaspora as a conduit for permissions / friends networks, and secure housing (with no rights regarding the data given) ala Livedrive, Dropbox etc.
I agree that it sounds counter-productive in an age when the cloud seems like the future. But to simply dismiss privacy issues as press scaremongering is I believe something of a lack of foresight - the area is being given scrutiny more and more in academic circles...with very good reason.
It will be very interesting to see how this pans out