Thursday 19 September 2019

Monday Insight: Record $5bn fine is proving good value as Facebook gets stronger under FTC scrutiny

 

Beneficial: The fine print of the Federal penalty will likely help Facebook cement its dominant position in social media advertising. Photo: Dominic Lipinski/PA Wire
Beneficial: The fine print of the Federal penalty will likely help Facebook cement its dominant position in social media advertising. Photo: Dominic Lipinski/PA Wire

Sarah Frier

When Facebook agreed to settle a privacy complaint with the US Federal Trade Commission (FTC) for $5bn (€4.5bn) last month, both parties acted like the news was a big deal.

The FTC noted it was a record federal penalty, while the company released a video of CEO Mark Zuckerberg solemnly telling employees a new era of regulatory compliance was at hand.

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Leaving aside that the fine was hardly a serious blow - last year alone, Facebook's profit topped $22bn (€19.8bn) - the settlement is great news for Mr Zuckerberg in another way.

The fine print will likely help Facebook cement its dominant position in social media advertising, just as the FTC begins an antitrust investigation of the company.

Facebook's most valuable resource is its data. Every click, comment, and even scroll from its 2.5 billion users is incorporated into its ideas about what people like and want.

The company combines that knowledge with information from outside sources, tracking people as they browse the open web and offline through their credit card purchases and phone GPS signals, then uses that data to precisely target ads for Facebook and its other apps: Instagram, Messenger, and WhatsApp.

CEO Mark Zuckerberg wants to protect privacy. Photo: REUTERS/Charles Platiau/File Photo
CEO Mark Zuckerberg wants to protect privacy. Photo: REUTERS/Charles Platiau/File Photo

This unimaginable mountain of information is the bedrock of Facebook's $70bn-a-year ad business.

The FTC settlement put no restrictions on how much data Facebook can collect or analyse, as long as users consent.

Anytime the personal information of more than 500 users is shared with a third party without those users explicitly choosing to move it, Facebook and Mr Zuckerberg can be held liable for the violation.

The company is likely to interpret that law in the most beneficial way possible, arguing that it's legally required to keep its valuable data to itself.

"I can't believe Facebook didn't pay more for this," Alex Stamos, a former Facebook executive, said on Twitter after the settlement was announced.

He imagined the FTC demanding that Amazon.com always offer Amazon-branded products at lower prices than other merchants on its marketplace: CEO Jeff Bezos "would leap across the table with a $10bn check and a massive grin," he wrote.

Facebook declined to comment for this story. FTC chairman Joseph Simons says he doesn't believe Facebook will put undue requirements on developers that also compete with it, but that if it does, "a huge red flag would go up and potentially start another antitrust investigation."

Facebook used to want to share its data. A few years ago the company relied on outside developers to build apps (FarmVille, Spotify) that would weave into its service and give users more reasons to log in.

Those developers, meanwhile, could use the social network's data fire hose to learn and grow faster.

Facebook mostly shut down those partnerships in 2015, but it has little control over the vast troves of user information it had handed over. That came back to bite it with last year's Cambridge Analytica scandal, which prompted the FTC investigation.

A developer of a Facebook personality quiz sold the data he collected to Cambridge, a political consultant working to help right-wing politicians analyse and sway voters.

Facebook has since moved on to new growth strategies that rely more on its own network than third parties. It's erased the once-vaunted independence of its other properties and chased off those companies' founders.

Now it plans on linking its core app and other services so that, say, Instagram users can message WhatsApp users in a new mega-network.

As the FTC punishes Facebook for doing things it no longer does, the agency is also helping ensure no other company can get as big. Facebook's data collection creates a "barrier to entry for other businesses," said Margrethe Vestager, European Commissioner for Competition, in a 'Privacy Advisor' interview.

The FTC's antitrust investigation, which it notified the company about in June, is focusing so far on whether Facebook acquired competitors like Instagram and WhatsApp just to remove them from the market.

Several presidential candidates and other US politicians have called for the company to be broken up into smaller pieces.

While the US government weighs its options, Facebook is steadily making a potential breakup much tougher. For example, Mr Zuckerberg has decided to combine all the messaging networks so people can communicate securely among them. He's said the move is going to help it provide users with encryption - particularly with the impregnable WhatsApp system - that not even it can crack.

He also wants to change the branding of WhatsApp and Instagram to "WhatsApp from Facebook" and "Instagram from Facebook", supposedly to boost transparency, according to his PR team. Mr Zuckerberg has said these moves must be made to protect privacy.

Within the company, however, that isn't the main reason he's giving for the changes, say people familiar with the matter. He's combining the messaging apps in the hopes the move will improve people's view of Facebook more than it taints the other brands by association.

Integrating the products may prove a disincentive for strong FTC action on antitrust.

At the very least, it will make it tougher, perhaps impossible, to track other dark uses of Facebook. "For any anti-competitive behaviour they want to get away with, they're going to say, 'The FTC made us,' " says Matt Stoller, of the Open Markets Institute. "That's what they bought for $5bn."

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