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Technology

Facebook says settling FTC investigation could cost up to $5 billion

Facebook results, Kaarst, Germany - 08 Nov 2017
There’s no guarantee Facebook will reach a settlement agreement with the FTC: The agency could instead pursue a federal court case.
(Sascha Steinbach / EPA/Shutterstock)
Bloomberg

Facebook Inc. estimated that it will cost as much as $5 billion to resolve a U.S. investigation into its privacy practices, as the social-media giant moves to put the fallout from the Cambridge Analytica scandal behind it.

Facebook said Wednesday that it took a $3-billion charge related to the Federal Trade Commission investigation into whether the company violated a 2011 privacy settlement with the agency.

“We estimate that the range of loss in this matter is $3 billion to $5 billion,” Facebook said. “The matter remains unresolved, and there can be no assurance as to the timing or the terms of any final outcome.”

Settling with the FTC would resolve one of the biggest liabilities hanging over the company in the wake of news that data on tens of millions of users were obtained by now-defunct consulting firm Cambridge Analytica. An agreement with the agency could also impose changes to the company’s business practices.

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Earnings beat expectations

The news of the $3-billion charge came as Facebook reported its first-quarter financial results.

Its revenue rose 26% to $15.1 billion, beating the $14.97-billion average prediction of analysts surveyed by Bloomberg and underscoring the strength of the company’s advertising business.

Excluding the $3 billion it set aside related to the FTC investigation, profit was $1.89 a share, topping the average analyst estimate of $1.62.

That pleased investors. Facebook shares, which had edged down 0.6% in regular trading, jumped as much as 5.7% in after-hours trading after the earnings report.

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Net income, including the legal costs related to the FTC inquiry, fell to $2.43 billion, or 85 cents a share, Facebook said. In last year’s first quarter, the company posted earnings of $4.99 billion, or $1.69 a share, on $11.97 billion in sales.

Facebook said its namesake social network now reaches 1.56 billion users every day, matching Wall Street estimates, and 2.38 billion a month on average, slightly better than expectations.

Facebook is reaching saturation in its most lucrative advertising markets, the United States and Europe, while faster growth is coming from developing countries that aren’t as profitable. The company’s sales gains are increasingly being driven by photo-sharing app Instagram and advertising in its Stories feature, a Snapchat copycat. Facebook also recently started testing an e-commerce product called Checkout, allowing people to buy products within Instagram, another potential source of revenue via the fast-growing app.

“Advertisers love Stories ads, because they are engaging and fun, and because they can cost less than in-feed advertising,” EMarketer analyst Debra Aho Williamson wrote in a note before earnings. “Advertisers say they are concerned about Facebook’s many problems, but that concern hasn’t led to a drop in ad spending.”

More investigations

Separate from the FTC matter, Facebook is in advanced talks with a group of states to resolve investigations into whether the Cambridge Analytica incident violated local consumer-protection laws, according to three people familiar with the situation.

State attorneys general have been negotiating an agreement with Facebook that would require the company to pay an unspecified fine and implement changes to its business practices aimed at improving user privacy, one of the people said. A final agreement could be weeks away, two of the people said. The amount Facebook set aside doesn’t cover a settlement with the states.

The charge related to the FTC case doesn’t guarantee the company will reach a final agreement with the agency. The FTC has the option of pursuing a federal court case to enforce the 2011 consent order if it can’t reach an acceptable agreement. The FTC declined to comment on Facebook’s disclosure. A $3-billion settlement would be a record for the agency in a privacy case.

Under the terms of the 2011 settlement with the FTC, Facebook agreed to get user consent for certain changes to privacy settings. The agreement stemmed from claims that it deceived consumers and forced them to share more personal information than they intended. That complaint arose after the company changed some user settings without notifying its customers.

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In the Cambridge Analytica scandal, the British political consultancy that had ties to Donald Trump’s presidential campaign obtained the data of millions of Facebook users without their consent.

The states that have been investigating Facebook include Pennsylvania, Illinois, Connecticut, New York, New Jersey and Massachusetts, Bloomberg has reported. Representatives of the states either declined to comment or didn’t immediately respond to requests for comment.

Although the amount of money at issue in the talks with the states couldn’t be learned, states have a track record of extracting significant penalties from companies for wrongdoing, most notably a sweeping $246-billion settlement with the tobacco industry in the 1990s. In September, Uber paid $148 million to 50 states and the District of Columbia to settle claims related to a large-scale data breach in 2016 that exposed the personal information of more than 25 million of its U.S. users.

Facebook is also grappling with a criminal investigation by federal prosecutors in New York; a consumer protection lawsuit filed by Karl Racine, the attorney general for Washington, D.C.; and a privacy suit by the Cook County, Ill., state attorney, Kimberly Foxx.

Foxx is trying to obtain Facebook documents that could show the company knew about the Cambridge Analytica scandal earlier than previously thought, according to a person familiar with her case.

“Facebook must fully disclose to the public what happened and take concrete steps to ensure it will never happen again,” Foxx said in an email.

Racine has also been embroiled in a battle to obtain email communications between Facebook employees in Washington and California, who discussed problems about Cambridge Analytica. Facebook attorneys are seeking to keep the document under seal, but Racine is looking to make the email communications public. A spokesman for Racine’s office declined to comment.


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