Company sets aside $3 billion for possible settlement over
privacy in its latest quarter
By Jeff Horwitz
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 25, 2019).
Facebook Inc. set aside $3 billion for an expected fine from the
Federal Trade Commission over privacy violations, cutting into the
social-media giant's profit even as its underlying business
remained strong.
Facebook posted $15.08 billion in revenue, up 26% from $11.97
billion in the year-earlier period. Its profit dropped by more than
half, to $2.43 billion in the first quarter, as the one-time
reserve wiped out most of its income.
A multibillion-dollar penalty would likely be the largest ever
against a major U.S. tech company by a U.S. regulator, and lands
amid sharp debate on Capitol Hill about how best to hold Silicon
Valley accountable for its abuses. It would also be the largest
privacy-related fine in FTC history.
Facebook agreed in 2012 not to collect personal data and share
it without user consent, as part of a settlement with the FTC. The
agency began probing last year whether Facebook had violated the
terms of that earlier settlement when data of tens of millions of
its users were transferred to Cambridge Analytica, a data firm that
did work for the 2016 campaign of President Trump. The Wall Street
Journal reported in February that FTC staff had discussed a fine of
up to $5 billion.
The FTC investigation has run for more than a year, prompting
complaints from some lawmakers. Facebook's statements on Wednesday
suggest the case could be winding up, though the FTC has not given
any deadline. While Facebook estimated a settlement would range
between $3 billion and $5 billion, it cautioned "there can be no
assurance as to the timing or the terms of any final outcome."
Jessica Rich, a former head of the FTC's consumer protection
bureau, said that the legal reserve wasn't necessarily proof that a
settlement was forthcoming. But she credited "enormous consumer
outrage" for the size of the fine Facebook anticipates paying,
noting the largest privacy settlement the agency has ever reached
was $100 million. "The pressure is on the FTC to show that they can
take serious action when warranted," she said.
The possible fine would be eminently manageable for Facebook.
The company reported holding more than $42 billion in cash and
marketable securities.
For Facebook, a settlement would bring a degree of resolution to
an episode that kicked off an intense period of scrutiny around its
data-sharing and privacy practices. Those issues in part drove
Facebook Chief Executive Officer Mark Zuckerberg last month to
unveil a major shift to private and ephemeral messaging.
Despite the turmoil, Wednesday's results show a business that
continues to hum.
Following the company's first-quarter earnings report, Facebook
stock rose about 8% in after-hours trading. Before the close of
trading on Wednesday, the company's stock had risen about 35%
year-to-date.
Facebook's results follow similarly strong quarterly numbers for
social-media peers Twitter Inc. and Snap Inc., and bode well for
fellow online-ad giant Alphabet Inc., the parent company of Google.
Alphabet reports earnings on Monday.
Excluding the reserve for the FTC settlement, Facebook's
operating margin fell to 42% -- a stellar number for virtually any
business but nonetheless a step down from the 46% it reported a
year earlier, as costs rose to $8.76 billion from $6.52 billion.
Facebook has been warning that its margins will decline as a result
of its increased investment in moderating user-generated
content.
Mr. Zuckerberg said on an earnings call that the company was
rolling out encrypted messaging more slowly than it would have a
few years ago, as "part of our new approach of trying to be more
proactive about social issues." He said he would reveal more
details about Facebook's business strategy around encrypted
messaging in the coming weeks, but "I don't think in the next
couple of years this is going to be a major driver."
Despite independent research suggesting that Facebook users are
spending less time on the company's main app, the company reported
1.56 billion daily active users globally, up 8% from 1.45 billion a
year ago and continuing the company's expansion streak. Average
revenue per user also rose, to $6.42, up from $5.53 a year ago.
The company said around 2.7 billion people use Facebook,
WhatsApp, Instagram, or Messenger each month.
Facebook reported nearly no user growth in the U.S., Canada and
Europe, markets that produce about 70% of the company's revenue but
are approaching saturation. Its fastest-growing market was Asia,
where users grew by nearly 4% over the first quarter.
The photo-sharing app Instagram stood out as a star of
Facebook's current results and the most likely candidate for strong
growth in the near future. Instagram played a big role in rising
revenue per user in the U.S. and Canada, with its Stories feature
being the biggest driver of impression growth, according to Chief
Financial Officer Dave Wehner. But ads within Stories ads remain
significantly cheaper than Facebook's other offerings, a gap that
Mr. Wehner predicted would eventually narrow.
"We do have opportunities to increase the effective ad load on
Stories," Mr. Wehner said, in contrast to "the much more limited"
potential in users' Facebook and Instagram feeds.
An FTC settlement wouldn't be the end of Facebook's regulatory
issues.
In the U.S., the company faces a lawsuit by the Department of
Housing and Urban Development over alleged housing discrimination
on its platform, which attacked basic features of the targeted
digital advertising industry in the process.
In Europe, Facebook faces 10 different inquiries from its
primary regulator, the Irish Data Protection Commission. And it
faces growing international political pressure to take
responsibility for content on its platform, with regulators in
Australia and New Zealand going as far as proposing to threaten
Facebook executives with personal fines of jail time if the company
fails to adequately block illegal content.
Those efforts stemmed from the March 15 attack in which a white
supremacist broadcast the murder of 50 people at two mosques in New
Zealand on Facebook Live.
In response to a question from an analyst, Mr. Zuckerberg said
he hoped to see regulators pursue a global framework around content
moderation. But with few exceptions, "regulation isn't global. It's
national," he said, saying talks with regulators make him believe
"we'll see different countries make progress on different time
frames."
Facebook is also girding for another presidential campaign
during which it will likely have to protect its own platform from
foreign interference and protect its own reputation from the
candidates. More than a year and a half before the next federal
election, Sen. Elizabeth Warren (D., Mass.) has proposed breaking
up many of tech's biggest players, pledging to use antitrust laws
to carve out Instagram and WhatsApp as separate entities from
Facebook, a step she said would "improve the user experience and
protect our privacy."
--Brent Kendall and John McKinnon contributed to this
article.
Write to Jeff Horwitz at Jeff.Horwitz@wsj.com
(END) Dow Jones Newswires
April 25, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Meta Platforms (NASDAQ:META)
Historical Stock Chart
From Apr 2024 to May 2024
Meta Platforms (NASDAQ:META)
Historical Stock Chart
From May 2023 to May 2024