Facebook's $5 billion FTC fine is good news for the company

Updated Wed, Jul 24, 2019, 1:15 PM

Facebook Founder and CEO Mark Zuckerberg waves as he arrives on stage during the annual Facebook F8 developers conference in San Jose, California, U.S., April 18, 2017. REUTERS/Stephen Lam

Facebook (FB) on Wednesday agreed to extensive oversight from the Federal Trade Commission and to pay a $5 billion fine over privacy violations — but the massive-sounding penalty probably won’t cause Facebook very much pain.

"This was almost perfect," said Scott Galloway, marketing professor at NYU's Leonard N. Stern School of Business. "If they added a zero, it would have been perfect. If it was $50 billion, Facebook has $40 billion in cash, it wouldn't have put the company out of business.”

According to Galloway, the $5 billion fine, along with the fact that Facebook doesn't have to admit to wrongdoing, makes the FTC "an unwitting co-conspirator in Facebook's continued violation of the law."

The FTC settlement also means that the 2018 Cambridge Analytica scandal, which saw a political consulting firm abuse Facebook user data in an attempt to aid in the election of Donald Trump, is no longer hanging over the company — at least as far as the FTC is concerned.

"This is high fives up and down the hallways at Facebook," Galloway said.

Still, the company isn't out of the woods when it comes to potential government regulations and penalties, especially on the international stage.

The FTC's fine and orders

While Facebook's $5 billion fine is enormous, there are those that feel the FTC didn't go far enough in forcing Facebook to atone for its behavior.

To be sure, the $5 billion fine is larger than the original $3 billion Facebook set aside in Q1 2019, Justin Post and Joanna Zhao of Bank of America Merrill Lynch point out in a new note. Still, the additional $2 billion will likely result in a hit of just $0.70 per share in Q2, Post and Zhao wrote in their analysis. Facebook shares were trading at $203.90 on Wednesday afternoon.

Visitors take photos in front of the Facebook logo at the company's headquarters Wednesday, March 28, 2018, in Menlo Park , Calif. (AP Photo/Marcio Jose Sanchez)

The FTC's settlement with Facebook calls for the company to not only fork over $5 billion, but also impose a new organizational structure. Specifically, the settlement will establish a 20-year order that establishes an independent privacy committee of the company’s board of directors. Facebook will also have to designate compliance officers who will be responsible for the privacy program and, alongside CEO Mark Zukerberg, must submit quarterly privacy compliance reports.

Facebook will also be forced to run any new products for the main Facebook service, as well as Instagram and WhatsApp, through a privacy review.

All of this stems from a 2012 settlement order that Facebook entered into with the FTC that prohibited the company from misrepresenting its privacy policies to consumers. The government alleges that Facebook did exactly that in a number of instances, which resulted in the $5 billion fine and new privacy committee.

Facebook was originally in for even greater trouble though. According to The New York Times, some of the FTC members were hoping to hold Zuckerberg personally responsible for the myriad privacy and data issues the settlement wraps up.

The FTC's fine, though, allows Facebook to continue collecting consumer data, as long as it is truthful about how it will be used. In fact, it's not likely the average Facebook user will see any change in how they interact with the social media giant.

A call for greater accountability

In a press briefing following the settlement announcement, FTC Chairman Joe Simmons said that while the FTC could have pushed for a larger fine or some kind of criminal charges, doing so would have been a drawn-out process with no guarantee of a victory on the government's part.

But the FTC's fine can also be viewed as a step forward in further regulating the tech industry.

"I think it's worth keeping in mind that this is the biggest fine ever that's been imposed, and it's part and parcel of a set of ongoing investigations and inquiries in both the U.S. and the E.U. about policies and practices of Facebook and other big tech companies with respect to privacy and potential anti-competitive behavior as well," said Jennifer Daskal, associate professor at American University's Washington College of Law.

The E.U.'s investigation into whether Facebook's privacy practices violated the General Data Privacy Regulation is expected to wrap up later this year, according to Politico. And while the potential fine isn't expected to match the FTC's, it could reach more than $2 billion.

The company, along with other tech companies, is staring down the potential for new privacy regulations in the U.S., which could put pressure on the way tech companies are able to capture and use consumer data.

For now, though, Facebook will have to move forward with $5 billion missing from its coffers and a new privacy committee.

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