Facebook (FB) is staring down the barrel of a potential $3 billion to $5 billion fine by the Federal Trade Commission for its user privacy and data practices. The company announced the expected fine, of which it has already written down $3 billion, in its Q1 2019 earnings report.
The charge looks like it will be incredibly costly for Facebook. The $3 billion charge cut into the company's margins which were hovering between 40% and 50% down to 22% for Q1.
Facebook issued a statement in its earnings release saying, "In the first quarter of 2019, we reasonably estimated a probable loss and recorded an accrual of $3 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 added that the charge could top out at $5 billion, but that the matter remains unresolved and there's no timing as to when it will come to a conclusion.
During its Q1 earnings call, Facebook’s representatives said they were unable to comment further on the potential fine, as it is part of an ongoing matter.
The fine, which is still not official, would result from the violation of a consent decree agreement between Facebook and the FTC in which Facebook was required to notify users when their data is used in a way that differs from previous privacy agreements. Facebook was also required to notify the FTC if user data was misused in anyway.
The FTC previously charged Google for violating a consent decree on privacy, but the fine, $22.5 million, was a fraction of what Facebook is facing.
The ghosts of Cambridge Analytica
The potential FTC fine is linked to the Cambridge Analytica scandal that rocked the social network in 2018. The issue saw a political consultancy firm use Facebook user data in an attempt to help Donald Trump with the 2016 election.
The matter was a reckoning for Facebook and saw CEO Mark Zuckerberg dragged before Congress and the European Union Parliament.
Despite the scandal, Facebook's stock has rebounded. And while more scandals, including foreign election interference campaigns; bugs that exposed users' photos; and, more recently, the realization that some users' passwords were saved in plain text on Facebook's servers have been revealed, investors are no longer reacting as negatively as they did when the news of Cambridge Analytica broke.
If the final figure of the FTC fine lands in the billions of dollars, it would be a clear signal to Facebook and other tech giants that user privacy can't be treated as an afterthought, no matter how little it impacts the number of ads purchased on their platforms.
Either way, Facebook is ready for a serious hit.
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