News broke late last week that Facebook (NASDAQ: FB) and the U.S. Federal Trade Commission have reached a tentative deal regarding its string of privacy scandals that have resulted in user data misuse, affecting tens of millions of users in the process. The settlement was a long time coming and reportedly includes a massive fine of $5 billion, which would be a new record for the agency.
The current record is a $22.5 million slap on the wrist imposed on Alphabet subsidiary Google back in 2012 for misrepresenting how it tracked users on mobile browsers. Facebook's penalty will be over 222 times as much, yet shares jumped on the news.
The fine is less than a single quarter's profit
In fairness, Facebook had been bracing for the record fine, and investors already expressed that they weren't too concerned about the impact. The social networking giant set aside a $3 billion accrual in the first quarter for the fine, but also added that it estimated "that the range of loss in this matter is $3.0 billion to $5.0 billion."
Even after eating the $3 billion, the company still recorded a healthy profit of $2.4 billion that quarter. This just means that Facebook will have to record another $2 billion. In other words, Facebook fully covered the record fee with a single quarter's profits. The company finished the first quarter with $45.2 billion in cash on hand, so it will have little trouble cutting the FTC a $5 billion check.
There are two main reasons why investors rejoiced following the news. First, the reported settlement removes uncertainty. The market hates uncertainty and shareholders now consider the episode a done deal, even though it hasn't been officially approved and announced. Perhaps more importantly, none of Facebook's controversies have even remotely dented engagement.
Facebook CEO Mark Zuckerberg. Image source: Facebook.
Literally every single one of Facebook's user metrics is higher today than it was two years ago. While some privacy-minded users have undoubtedly quit the service, they appear to be a tiny, albeit at times vocal, minority. Users have simply accepted that the cost of using the free social networking service is privacy. It's also not like many people would be willing to pay for an ad-free version, which doesn't exist and would not stop the company's data collection engine anyway.
Save for a yearlong dip in Facebook's stock price and a mildly bruised reputation, the company has faced no meaningful consequences for egregiously mishandling user data since its inception. While the settlement is expected to include other requirements like reforming some of its internal data practices, there should be little hope that $5 billion will be enough to actually make Facebook better.
CEO Mark Zuckerberg says Facebook's future is private, but if the company overcompensates and makes its platform too private, the irony is that many of the other problems it has been grappling with -- such as facilitating the spread of misinformation and hate speech -- become far more difficult to cope with when communications are encrypted and groups are private.
The only thing that's clear is that something has to change at Facebook, but it won't be Zuckerberg.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends GOOG, GOOGL, and Facebook. The Motley Fool has a disclosure policy.