Facebook’s stock price jumped after it said it expects to incur a fine of up to $5 billion from the Federal Trade Commission. And that’s all you really need to know about whether the historically large penalty matters to the company.
The Menlo Park, California-based social media giant reported its first-quarter earnings on Wednesday and revealed it had set aside $3 billion during the period related to the FTC’s investigation into its handling of user data and potential privacy violations. Facebook expects the matter could wind up costing it between $3 billion and $5 billion.
The possibility of a fine wasn’t a surprise — the Washington Post reported in February that the FTC and Facebook were negotiating a multibillion-dollar fine. But Facebook’s earnings confirmed it.
The question now becomes whether the fine, if and when it hits, is just a slap on the wrist. The amount is orders of magnitude larger than the FTC’s previous largest fine to date — $22.5 million against Google in 2012. But for Facebook, while it may be a knock to the bottom line, it’s far from the end of the world — even with the $3 billion it set aside in the first quarter, the company still made a profit of $2.4 billion.
“Is this going to get their attention? It will get their attention to the extent that they’re going to try to be more careful in the future,” said Peter Henning, a law professor at Wayne State University and a former federal prosecutor. “But does it really deter violations? I think the answer to that question is no. For some companies, it’s viewed as the cost of doing business.”
To be sure, the FTC could impose other penalties on Facebook beyond a fine, such as requiring it to change its data sharing and privacy practices. But at least for right now, the threat of what would be a blockbuster fine for the FTC doesn’t really seem to be that much of a negative for the company. In fact, investors seem to have taken it as a positive: Facebook’s stock price climbed after its announcement on Wednesday, adding about $40 billion to its market capitalization.
What this FTC-Facebook probe is about in the first place, briefly explained
A quick reminder of how we got here: This all goes back to the Cambridge Analytica scandal and whether Facebook’s action violated a consent decree it reached with the FTC in 2011.
In March 2018, reports revealed that Cambridge Analytica, a data analytics firm that had worked with Donald Trump’s presidential campaign, among others, had accessed the personal information of millions of Americans through Facebook. In 2014, the company shared the personal information of tens of millions of people with an outside app developer. That developer then sold that information to Cambridge Analytica.
The FTC subsequently announced that it would launch an investigation into Facebook’s privacy practices. Specifically, it is looking into whether Facebook violated a 2011 agreement, or consent decree, it reached with the FTC over charges that it had deceived consumers about their privacy.
Beyond the consent decree, Kurt Wagner recently noted at Recode that the FTC could be probing other Facebook-related matters as well:
Cambridge Analytica is what set off this investigation in March, but the company has had a number of privacy slip-ups since then that the FTC could be looking into. A number of software bugs created privacy concerns for Facebook this summer: One changed the privacy settings for as many as 14 million people without their knowledge; another “unblocked” people that hundreds of thousands of users had blocked, putting users’ safety at risk; yet another “vulnerability” exposed to hackers the personal Facebook data of almost 30 million people. When Facebook announced that breach, a company spokesperson said Facebook was “closely coordinating” with the FTC to let them know what happened, so the two sides have been in touch about more than just Cambridge Analytica.
In the grand scheme of things, this fine isn’t that big of a deal for Facebook
“What a start to 2019,” Morgan Stanley analyst Brian Nowak said in a note to clients about what he called “another storybook quarter” for Facebook.
While $3 billion is a lot of money, including for the FTC, in the grand scheme of things for Facebook, it’s not that big a deal. It’s money the company will likely make up in a matter of months. Foreshadowing the potential fine is a bit of an unusual move, but it’s also a way for Facebook to get out in front of the potential news, set investors’ minds at ease, and reclaim some of the narrative around the story.
“Wall Street hates uncertainty,” Henning said. “Once you give them a dollar figure, they’re going to look at it and go, ‘Okay.’”
This could also be a negotiating tactic on the part of Facebook, noted Ashkan Soltani, a former chief technologist at the FTC. Facebook might be attempting to leverage anchoring bias, the tendency in negotiations to give outsize weight to the first number put forward and set it as the starting point.
To be sure, not everyone was happy with the amount Facebook foreshadowed would be coming down.
Sen. Elizabeth Warren (D-MA), a 2020 presidential contender who has called for the breakup of big tech, including Facebook, tweeted that the potential fine was a “slap on the wrist.”
This is a slap on the wrist—a fraction of the profits Facebook makes in a year. Facebook is a repeat offender & fines like this won’t stop them from breaking the law & violating our privacy again. It's going to take big, structural change. #BreakUpBigTech https://t.co/yXjj6F8RWR— Elizabeth Warren (@ewarren) April 25, 2019
Rep. David Cicilline (D-RI), chair of the House’s antitrust subcommittee, echoed Warren’s assertion and called on Congress to act.
Last month, I said that a fine in the low billions of dollars would amount to a slap on the wrist for Facebook.— David Cicilline (@davidcicilline) April 24, 2019
Tonight, we learned that’s how Wall Street sees it too - as a slap on the wrist.
If the FTC won’t act, Congress has to. https://t.co/rkrS4XfaGY
Freedom From Facebook, an offshoot of the Open Markets Institute anti-monopoly think tank, slammed the FTC in a statement. “Their continuous passivity is now positively affecting Facebook’s bottom line,” the group’s co-chair, Sarah Miller, said in a statement. “Congress must consider moving resources from the FTC to state Attorneys General, who are demonstrating a willingness to act and serve the public interest.”
Matthew Stoller, a fellow at the Open Markets Institute and a vocal part of the left, said he thinks the potential fine is, in essence, a joke. “It’s like saying to a bank robber, ‘We’re going to penalize you by forcing you to give back 15 percent of the money that you stole,’” he said.
Fines are often seen as the cost of doing business
Blockbuster fines for companies that behave badly isn’t new in corporate America — nor is companies shrugging, paying the fine, and moving on.
Look no further than the banking industry, which has shelled out billions of dollars over its misdeeds: Bank of America agreed to pay $16.7 billion in a 2014 settlement with the Justice Department related to its activities leading up to the financial crisis. In 2013, JPMorgan agreed to a $13 billion settlement with the Justice Department tied to its sales of securities containing “toxic mortgages.” Both of those banks today are doing just fine.
As the Information notes, the European Union has also hit tech companies Apple and Google with bigger fines than is expected from the FTC.
Soltani told me he doesn’t believe a $3 billion to $5 billion fine will do much to influence Facebook’s behavior, but other remedies from the FTC could. For example, if the commission puts restrictions on how Facebook collects data and who it shares it with. “The more significant impact for individuals or for Facebook users and the public will be around injunctions and the limits on certain behaviors, not necessarily the fine,” he said.
In February, the German government ordered Facebook to change its data collection practices, including blocking the site from combining user data it collects through apps such as WhatsApp and Instagram and restricting it from collecting data on third-party websites in order to target users with advertising. The order would imply some big technical changes for Facebook, which has vowed to fight it.
It’s unclear whether the FTC would ever go that far, but requiring behavioral remedies would likely be more meaningful than asking for a check — however big it might seem.
This article originally appeared on Recode.net.