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The Impact of Facebook’s $5.0 Billion Fine

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Facebook recently agreed to pay $5.0 billion to settle privacy violation charges by the FTC (Federal Trade Commission). The FTC examined the company’s privacy protection practices for months, concluding that the company had failed to secure users’ privacy. Besides slapping Facebook with a record privacy fine, the FTC has also ordered a raft of operational changes at the company.

The FTC probe stemmed from allegations of Facebook mishandling people’s data. For example, data on millions of users improperly found its way into the hands of Cambridge Analytica, a British political consultancy. A report by The New York Times also accused Facebook of inappropriately sharing data with dozens of device makers.

The FTC privacy fine is equivalent to around 10% of Facebook’s total advertising revenue in 2018. The company generated advertising revenue of $55 billion last year, whereas Google generated $116.3 billion. This year, eMarketer predicts Facebook’s advertising revenue will rise to $67.4 billion.

FTC settlement takes away some of Mark Zuckerberg’s power

The FTC settlement comes with a set of conditions that Facebook must satisfy or risk serious consequences. The FTC said some of these mandate changes will greatly reduce Mark Zuckerberg’s executive powers. The FTC requires Facebook to set up an independent panel that will oversee its privacy practices. According to the FTC, the creation of the panel will reduce Zuckerberg’s control of privacy decisions at the company.

This move would satisfy Facebook shareholders seeking to strip Zuckerberg of some power. The founder of Facebook doubles as the company’s CEO and chairman. A proposal to take away Zuckerberg’s chairman role flopped at the company’s shareholder meeting last May. The proposal may have passed if Zuckerberg hadn’t vetoed it.

Losing some oversight power is just one blow dealt to Zuckerberg through the FTC settlement. The settlement also exposes Zuckerberg to personal liabilities if Facebook fails to comply with the terms of the settlement. Every quarter, Zuckerberg and his executive team will have to sign documents confirming that Facebook is protecting users’ privacy. If the regulator discovers that Facebook executives made false claims about privacy protection, they could face criminal penalties.

Facebook risks losing competitive edge

The FTC has also barred Facebook from using people’s phone numbers obtained through security checks for advertising purposes. In the digital world, data is like oil—it powers innovation and growth. Consumer data is particularly crucial for delivering the right advertising messages to the right audiences. Ad targeting is a lucrative business for ad-funded companies. Therefore, restrictions on how Facebook can apply its users’ data for advertising could be a major blow to its ad-targeting business. As a matter of fact, CFO Dave Wehner has warned of headwinds to the company’s advertising business.

Advertising is Facebook’s main source of income, contributing nearly all of its revenue. In the second quarter, its revenue rose 28% YoY (year-over-year) to $16.9 billion, slowing from the 42% revenue growth the company recorded in the same period last year. Facebook’s revenue growth has been slowing as the company’s core advertising business battles strong competition.

Pinterest (PINS), Twitter (TWTR), and Snap (SNAP) continue to give Facebook and Google (GOOGL) tough competition in advertising. As these rivals expand their audience bases, they are able to draw more advertisers to their platforms. Snap’s Snapchat added a record 13 million new daily users in the second quarter.

Online product search trends

Additionally, online shopping search trends have shifted, presenting challenges for the likes of Facebook and Google. Consumers are choosing to begin their online product searches on marketplaces rather than general-purpose search engines.

As a result, marketplace operators such as Amazon (AMZN) are pulling in more shopping traffic, and therefore more advertising dollars. Amazon captured 6.8% of the US digital advertising market last year, and eMarketer predicts it to capture 8.8% this year. However, Facebook’s market share is predicted to jump YoY to just 22.1% from 21.8%, and Google’s is expected to shrink YoY to 37.2% from 38.2%. Facebook could have difficulty growing its advertising sales as it faces ad targeting restrictions.

Huge cost burden for Facebook

In addition to cutting its ad-targeting advantages, the FTC settlement could drive up Facebook’s costs. The company has said that complying with the settlement terms will make its product development process more difficult and costly. Its costs rose 66% YoY to $12.3 billion in the second quarter.

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