Facebook Unfazed by $5B FTC Settlement

The Federal Trade Commission this week announced its approval of a US$5 billion settlement with Facebook, ending a long-running investigation into the company’s privacy practices. The commission’s 3-2 vote was along party lines.

The United States Department of Justice must finalize the settlement before the matter is closed. The DoJ’s action will end the investigation that began early last year when Facebook entered the spotlight for numerous privacy violations and possible violation of a 2011 consent agreement with the FTC.

Facebook on Notice

The 2011 settlement required Facebook to establish and maintain a more comprehensive privacy program and to obtain express consent from users before sharing their data with third parties.

However, it isn’t just the $5 billion fine that Facebook faces. The company also must document every decision it makes involving user data before it can introduce any new products.

It also will have to monitor any third-party apps on its platform and ensure they do not tap or otherwise obtain consumer data. The company executives are on warning that they must do a better job of protecting user privacy.

Facebook and the FTC have not commented publicly on the issue, and details and terms of the restrictions have not been disclosed.

Small Change for Facebook

The $5 billion fine — as well as the changes that Facebook will need to make to its policies — may seem harsh in comparison to past FTC judgments. The FTC in 2012 imposed a $22.5 million fine against Google for misrepresenting how Apple’s Safari Internet browser served targeted ads.

However, critics have argued that Facebook “got off light.” While $5 billion is the largest fine the federal government has ever imposed on a technology firm, it is still small change to Facebook. The company admitted in its April earnings report that it expected to pay as much as $5 billion to settle the investigation.

“The FTC just gave Facebook a Christmas present five months early,” said House Antitrust Subcommittee Chairman David N. Cicilline, D-R.I.

“It’s very disappointing that such an enormously powerful company that engaged in such serious misconduct is getting a slap on the wrist,” he added. “This fine is a fraction of Facebook’s annual revenue. It won’t make them think twice about their responsibility to protect user data.”

Critics argued that even a fine in the billions of dollars wasn’t a high enough price to pay for Facebook’s privacy violations, given that its first-quarter revenue for this year was $15 billion and that it reported having more than $40 billion in cash reserves.

“A $5 billion fine is pocket change for Facebook,” noted Roger Entner, principal analyst at Recon Analytics.

“One can clearly see that because Facebook preannounced the fine by setting aside $5 billion for the FTC investigation,” he told the E-Commerce Times.

“The fine emerges as an insignificant penalty for the company, much in the same way that antitrust fines in Europe had little impact on Google,” noted Greg Sterling, vice president of strategy and insights at Local Search Association.

“Unless fines are considerably higher, they lack the deterrent effect they are supposed to have,” he told the E-Commerce Times. “While there is a small but vocal segment of consumer advocates who are outraged by the privacy violations, judging from their behavior, consumers are still oblivious to the privacy violations or have resigned themselves to it.”

Market Reaction

Normally, receiving a fine even in the millions of dollars would be seen as bad news by investors, but following the announcement of the$5 billion fine, Facebook’s stock price actually went up.

“Facebook informed its shareholders several weeks ago that the fine was coming, and it was already factored into the share price when the FTC made its announcement last week,” explained Recon Analytics’Entner.

“Accordingly, the market didn’t react,” he added. “Generally speaking, financial penalties indicate the seriousness of the regulators, but they ultimately have a limited impact on these massive Internet companies.”