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Facebook's Regulatory Woes Aren't Over

By Evan Niu, CFA - Jul 25, 2019 at 2:32PM

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Out with the old investigation, in with the new investigation.

Yesterday, Facebook ( FB -1.14% ) reported second-quarter earnings results, which included a $2 billion accrual to help cover the $5 billion penalty that the U.S. Federal Trade Commission officially announced ahead of the release. That settlement had been widely expected following media reports, and Facebook had already eaten a $3 billion charge in the first quarter, leaving $2 billion it still owed.

Put another way, the $5 billion fine (recorded in the general and administrative line item on the income statement) represents 16% of the revenue that Facebook generated in the first half of 2019 and about half of net profits during that time frame. One investigation may now be in the rearview mirror, but Facebook still has more to contend with.

Illustration of chat bubbles with a padlock in the middle

Image source: Facebook.

There's more where that came from

The FTC is now opening a separate investigation into Facebook, this time focusing on antitrust concerns instead of privacy issues. Additionally, the U.S. Department of Justice this week said it was also reviewing the business practices of "market-leading online platforms," although the DOJ did not identify the specific companies that it was scrutinizing.

"In June 2019, we were informed by the FTC that it had opened an antitrust investigation of our company," Facebook said. "In addition, in July 2019, the Department of Justice announced that it will begin an antitrust review of market-leading online platforms." In its 10-Q, the company adds that the FTC is specifically looking at the markets for social networking and social media, digital advertising, and mobile apps.

"Without the discipline of meaningful market-based competition, digital platforms may act in ways that are not responsive to consumer demands," DOJ antitrust chief Makan Delrahim said in a statement. "The Department's antitrust review will explore these important issues." New York Attorney General Letitia James opened an investigation into Facebook in April, alleging unauthorized collection of email addresses.

Outside of the U.S., Ireland's Data Protection Commission (DPC) has 10 ongoing inquiries into Facebook and its family of platforms and services regarding compliance with Europe's General Data Protection Regulation (GDPR) that took effect last year. Data Protection Commissioner Helen Dixon is skeptical about CEO Mark Zuckerberg's commitment to privacy. "There will certainly be some of the investigations into Facebook that will reach a conclusion in the coming months," Dixon told CNBC last month.

Facebook allegedly misled investors

Intense regulatory scrutiny is always inevitable when a company obtains the kind of market power that Facebook has, and it has not been forthright with investors regarding the associated risks. The social networking giant also settled an SEC complaint this week for $100 million, with the securities regulator alleging that Facebook misled investors. Facebook continued to frame its risks as hypothetical when it knew that data misuses was actually occurring, according to the complaint.

Hopefully, Facebook will now be more transparent with disclosing privacy risks to investors, although the company doesn't have a particularly good reputation for doing so at this point.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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