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Facebook sets aside $3 billion ahead of record FTC fine over privacy violations

Facebook sets aside $3 billion ahead of record FTC fine over privacy violations


Facebook is gearing up for a massive financial penalty over its repeated privacy violations

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Photo by Amelia Holowaty Krales / The Verge

Facebook’s financial success continues unabated in the face of countless security and privacy scandals, including a potential record-setting Federal Trade Commission fine. The fine, the potential amount of which was first reported by The Washington Post in February, is related mostly to the Cambridge Analytica scandal that was revealed in March of last year, as well as the seemingly never-ending series of subsequent breaches and leaks that have dogged Facebook in the months since.

The company posted first quarter earnings today for 2019, highlighting its continued monthly and daily active user increases and a 26 percent increase in year-over-year sales, up to $15.1 billion and ahead of Wall Street expectations. But Facebook also says it is setting aside $3 billion, or roughly 6 percent of its cash and marketable securities on hand, for the FTC fine that is coming down the pipeline at some point, likely later this year.

Facebook says it’s preparing to pay as much $5 billion in FTC fine

“In the first quarter of 2019, we reasonably estimated a probable loss and recorded an accrual of $3.0 billion in connection with the inquiry of the FTC into our platform and user data practices, which accrual is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet,” the company writes in its earnings statement. “We estimate that the range of loss in this matter is $3 billion to $5 billion. The matter remains unresolved, and there can be no assurance as to the timing or the terms of any final outcome.” The fine has impacted Facebook’s recorded profit for the quarter, forcing it far below the first quarter of last year and negatively affecting the company’s earnings per share.

Regardless, Facebook continues to grow, and by all indications, it would have bested all analyst expectations had it not set aside cash for the fine. The company says the number of people who check Facebook daily has increased by 8 percent from this time a year ago, to 1.56 billion. The number of people who check Facebook monthly has also grown 8 percent, to 2.38 billion. The company says that even more of its business now relies on mobile, with 93 percent of all advertising revenues coming from its collection of mobile apps. Facebook now also breaks out the number of people who use at least one app in its broader ecosystem. “Around 2.7B people use Facebook, WhatsApp, Instagram, or Messenger each month,” the company says. “On average, more than 2.1B people use one of our services every day.”

Hampering the company’s finances is a staggering increase in headcount, represented mostly by the influx of new contractors Facebook is bringing on to try and curb abuse on the platform and sift through the deluge of content that gets uploaded every day. Facebook says it’s increased year-over-year employee count by 36 percent, to nearly 37,800 total employees. The amount of money it spends on such “general and administrative costs” has multiplied nearly six times over, to more than $4 billion from a little under $800 million this time a year ago.

Facebook’s stock is up nearly 5 percent in after-hours trading, indicating that Wall Street largely doesn’t seem to care about the avalanche of bad press the social network has generated in the past couple of years, as long as its financials continue to improve. The looming FTC fine also doesn’t appear to be having any negative impact. Still, Facebook is facing an increasingly more adversarial atmosphere both from users, who are flocking more to Instagram and private messaging products, and Washington.

Part of the presidential campaign of Sen. Elizabeth Warren (D-MA) hinges on her pledge to break up companies like Facebook by targeting its acquisition strategy that has helped it create such a massive, sprawling global user base across multiple products. Her fellow Democratic candidate Pete Buttigieg has publicly said he wants the FTC to be more aggressive in combating tech monopolies.

But even a record-setting FTC fine doesn’t appear like it will have a meaningful impact on Facebook’s business. The company still earned $2.4 billion in profit for the quarter, and with the cash now set aside for the fine, CEO Mark Zuckerberg can resume business as usual. More important down the line will be Zuckerberg’s plan, announced in March, to transition the company away from public sharing and the News Feed and toward ephemeral, private messaging, a shift that has yet had any effect on Facebook’s business and likely won’t for quite some time.