uploads/2019/07/AdobeStock_275495594.jpeg

FTC Antitrust Probe: More Pain for Facebook?

By

Updated

The FTC (Federal Trade Commission) isn’t finished with Facebook (FB) yet. The federal regulator launched another probe. The FTC is examining the company’s antitrust conduct. The FTC hasn’t publicly spoken about the antitrust investigation. On Wednesday, Facebook informed investors about the FTC antitrust probe, which started last month.

FTC antitrust probe  

The FTC antitrust probe comes after the agency hit Facebook with a privacy fine. The FTC probed Facebook for several months. The agency concluded that the company violated privacy rules. As a result, the FTC imposed a $5.0 billion fine on Facebook. The company chose to settle the FTC privacy probe instead of extending the dispute in court. In addition to the fine, Facebook has to implement a number of changes.

While Facebook will comply with the terms of the settlement, it’s a huge burden. David Wehner, Facebook’s CFO warned that the company’s costs will rise due to the FTC settlement. First, he said that complying with the FTC settlement terms will require significant investments in technology and staff. Second, he said that the conditions could impact the company’s advertising business and growth.

Due to the privacy fine and one-time tax hit, Facebook’s profit for the second quarter fell to $2.6 billion. The profit was $5.1 billion in the second quarter of 2018. Without the fine and the special tax item, Facebook would have posted a profit of $5.7 billion for the second quarter.

Is the FTC antitrust probe the tip of the iceberg?

The nature and scope of the ongoing FTC antitrust probe is still a secret. However, Bloomberg reported that the probe focuses on Facebook’s main social media business. The report stated the FTC would only open a probe if there are credible antitrust concerns. The agency might have received credible complaints about Facebook stifling innovation or raising prices, which would harm the competition.

If the FTC determines that Facebook harmed the competition, it could hit the company with heavy fines and restrictions. Critics blasted the FTC for what they viewed as a small fine against Facebook in the privacy probe. Lawmakers and some FTC commissioners think that the agency didn’t punish Facebook enough with its $5 billion fine.

Dissenting Democrat FTC commissioners criticized their Republican peers for being too lenient on Facebook. Also, some Congress members didn’t like the soft punch on Facebook for privacy violations. In light of the criticism, the FTC might be harder on Facebook in the antitrust probe. The agency could hit Facebook with a more significant antitrust fine and restrictions than it did in the privacy probe.

However, a heavier FTC antitrust fine would erode Facebook’s financial strength and potentially limit its growth investments. Facebook finished the second quarter with $48.6 billion in cash reserve. Google parent Alphabet (GOOGL) has a $113.5 billion war chest.

Facebook needs more cash to fund development projects

Facebook is trying to build a larger war chest as it undertakes expensive development projects. The company invests in technology research to support its advertising business and content moderation efforts. For example, the company leverages AI technologies to catch and remove harmful content from its platforms. Also, Facebook funds programs to make Internet access available to more people around the world. The company thinks that bringing more people online will help its advertising business.

The FTC antitrust probe adds to Facebook’s antitrust scrutiny. A day before Facebook disclosed the FTC antitrust investigation, the Department of Justice announced a broad antitrust review of tech giants. The Department of Justice didn’t identify specific targets. However, Facebook probably made the cut. The Department of Justice said that its review would include companies that dominate the social media space.

However, a financial fine isn’t the only risk that Facebook faces. If the antitrust probe results in more restrictions on Facebook’s business model, it could erode the company’s competitiveness. Facebook might be more vulnerable to rising tech competition. Eventually, Facebook’s innovation could take a blow, which could lead to lost market share, revenues, and profits.

Facebook warned that breaking the company up to reduce its influence in the social media space could backfire. Facebook executives argued that such a move would only give Chinese companies room to dominate the tech space.

Why is Facebook a target?

Facebook boasts over 6.0 billion monthly users and 2.1 billion daily users across its family of social apps. No competitors even come close. Snap’s (SNAP) Snapchat has 203 million daily users. Twitter (TWTR) has less than 150 million daily users. Pinterest (PINS) has around 200 million monthly users. As a result, Facebook dominates the social media market. The company controlled a 74% share of the global social media market in June.

Facebook’s social media dominance led to suspicions that the company might not be competing fairly. Based on the Department of Justice’s antitrust review and the FTC’s antitrust probe, regulators are working to resolve any potential issues.

More From Market Realist