The FTC And Facebook: Why The $5 Billion Fine Is Both Too Little And Too Much

By now, you've certainly heard the news that was very likely leaked by Facebook late on Friday that the FTC, by a narrow 3 to 2 party line vote, had approved a $5 billion fine for Facebook for violating its earlier consent decree in the way it allowed an app to suck up lots of data that eventually ended up in Cambridge Analytica's hands. Most of the reaction to this fine (by far, the largest in the FTC's history) is anger.

Many people focused on one key point to argue that the fine wasn't enough: Facebook's stock jumped upwards after the news broke, to the point that Facebook's valuation probably went up more than the amount of the fine itself (never mind the difference between the value of equity and actual cashflow...). However, I wouldn't read too much into the stock jump. After all, Facebook had already said back in April that it was expecting a $5 billion fine, meaning that Wall Street had already priced in exactly that. If the $5 billion fine had come out of the blue it might have been a different story. The bump, then, could be explained by investors reacting to the end of any uncertainty and the fear that the fine might have been larger.

That said, there are good arguments for why this is a really significant fine. And for that, I'll turn to the former acting-CTO of the FTC, Neil Chilson, who knows a thing or two about how the FTC works, and points out that this sort of thing is extremely aggressive (and this part is important): given the FTC's mandates and powers. As he notes:

The FTC is using an extremely general law intended to stop or redress practices that harm consumers. It is reportedly getting a settlement that is 225x larger than the prev. record. And it got this for practices where AFAIK no consumer lost a penny. Laws have meaning. There is only so far an agency can push the commands of Congress before a court will slap them back (as has happened to the FTC a few times recently.) This settlement is, I think, probably at the bleeding edge of the FTC's litigation risk. If you're angry about this settlement, calling the FTC a "co-conspirator" is ridiculous. The FTC has been an aggressive privacy enforcer using a statute that isn't specifically intended to protect privacy. That's on Congress. If you don't like it, talk to your lawmaker.

In short, given the FTC's powers and the details of what happened with Cambridge Analytica, where the "harms" are not directly quantifiable (you can argue harms against democracy, but that would require a bit more actual evidence and is not the FTC's mandate...), a $5 billion fine is quite a lot. So, frankly, attacking it as "an embarrassing joke" or "a tap on the wrist" or even "a victory for Facebook" seems to be missing the point.

That said, what I think all this anger is getting at -- and which I mostly agree on -- is that we still have not figured out a way to adequately deal with privacy in a digital age. And people are (partly reasonably, partly irrationally) very mad at Facebook for that. Part of the problem here, however, is expecting that a single FTC action is somehow magically going to fix all of that. It can't. No amount would have done that, and it's quite unlikely that any restrictions the FTC puts forth as part of this agreement are going to fix that either. So, I can totally understand the anger and annoyance at this particular settlement -- but it's not as if anything the FTC would have done here would have satisfied most people.

And, of course, this one FTC action is hardly the end of the line. The EU and other countries are still likely to come down hard on Facebook, and the company is still facing antitrust questions as well. And, then there's Congress. At some point, Congress will put forth various privacy bills (and various states may follow California's dubious lead in doing so as well).

In short: this is a significant fine, given the FTC's mandate and the issue at hand. And if you think it's "not enough" because it won't hobble Facebook, well, then you're correct. But the FTC's mandate isn't to randomly hobble companies because people are angry at them.

Facebook is going to be facing a long line of angry regulator and legislators, and that seems unlikely to change as a result of this fine (indeed, it appears to have inspired many to increase their efforts to "do something").