Facebook vows to change its ways — but won't stray from payments plans
Gone are the Wild West days of Facebook, when the company could do whatever it wanted with little worry of regulatory or earnings repercussions. And as the social network embarks on its Libra currency project, its toughest days loom ahead.
In opening the analyst call to discuss its latest quarterly earnings, Facebook announced that it had entered into a settlement with the Federal Trade Commission that will have a major impact on how it does business to better protect consumer privacy. There are three significant elements as part of the FTC settlement: a $5 billion fine, a new privacy structure at Facebook and new tools for the FTC to monitor Facebook’s adherence to specific privacy requirements. Facebook also announced that the FTC has opened an antitrust investigation on the company. Additionally, Facebook announced that the Department of Justice will begin an antitrust review of market-leading online platforms, of which Facebook is clearly be a target.
“We’ve agreed to pay a $5 billion fine. We’ll have to certify quarterly that we are adhering to our new privacy requirements,” stated Mark Zuckerberg, Facebook's CEO. “It’s critical that we get this right.”
Zuckerberg added that Facebook will be expanding its privacy program to include substantial management and board of directors oversight, adding new operational requirements and reporting obligations as well as a process to regularly certify its compliance with the privacy program to the FTC.
The heavy regulatory pressure has changed how Facebook is approaching new product development, especially on sensitive issues such as its proposed cryptocurrency initiative.
“On Libra and, similar to other social issues such as encryption and privacy, we get that these are important and sensitive issues. Facebook a few years ago would have just shown up with the product,” Zuckerberg said. “We worked with the other 27 members of the association to put out the white paper [to explain Facebook’s position]. We are trying to provide a safe, stable and regulated product.”
Sheryl Sandberg, Facebook's chief operating officer, spoke about the significant efforts Facebook is undertaking to safeguard the platform from undue influence during global elections. Sandberg mentioned that the recent European elections in May were an important test for the company’s new policies and threat deterrent programs. Facebook went so far as to create a European elections monitoring base in Dublin to make sure that it was on top of things.
“We are doing everything we can to stop the bad actors,” Sandberg said, a clear reference to ferreting out any influence by social hate groups or foreign countries impacting an election outcome.
“The privacy efforts do require significant investments obviously in compliance processes, people and technical infrastructure,” said David Wehner, Facebook's chief financial officer. In other words, the $5 billion fine by the FTC is just one cost factor as Facebook will need to invest heavily to improve its consumer privacy protections.
Investments in weeding out foreign nationals from impacting elections, to blocking terrorist and hate group postings and videos, in addition to supporting the growth of the company overall led to a significant increase in Facebook’s payroll. Headcount was 39,651 people as of June 30, 2019, a 31% year-over-year increase.
Consequently, Facebook is focused on building out its payment business revenue stream.
“Payments may be the most important for the long term. We are testing payments on WhatsApp in India,” Zuckerberg said.
However, the biggest uncertainty is the future of its cryptocurrency program, through which Facebook wants to bring digital payments to the 2.5 billion unbanked consumers around the globe. The company clearly understands that it will need regulatory approval and oversight if it has a chance to launch and succeed.
Facebook revenues grew in its second quarter of 2019 to $16.9 billion, up 28% from the same quarter of 2018, which stood at $13.2 billion. Total costs and expenses grew 66% in the second quarter over the same quarter a year prior, of which $2 billion was accrued for a pending fine from privacy. Income from operations was $4.6 billion in the second quarter of 2019, down 21% from the second quarter of 2018.
Facebook also announced a one-time $1.1 billion income tax expense due to a reversal decision by the Ninth Circuit Court regarding the treatment of share-based compensation expenses.