We advise entrepreneurs and investors in capital raising transactions using a tool box of new legal strategies, technology and business practices.
Most of our clients have some connection to the Internet and the creation, collection, exploitation and exchange of data.
So, we follow industry tends closely.
This raises the question: What does a data mining company do, when the world turns against data mining?
We’ll soon find out with Facebook.
Facebook, the company that made “likes” and “friending” a thing, now finds that nobody “likes” Facebook and former “friends” are now in attack mode:
- The Federal Trade Commission just levied a $5 Billion fine
- Facebook’s settlement with the FTC includes new privacy policies
- The European Union wants more privacy and more taxes
- American “liberals” are mad because the Russians used Facebook to circulate propaganda
- American “conservatives” are mad because Facebook is censoring political speech
- Many people (like us) just find Facebook too boring to waste time on. We would rather interact “IRL” (that’s millennial code for “in real life”) than with the unreal world people create on Facebook.
Federal Trade Commission and Privacy Issues
The FTC’s $5 Billion fine broke new ground. The FTC’s previous highest fine was a little over $20 million. So, the FTC was sending Facebook a message that it is serious about Facebook’s past behavior. The FTC also required Facebook to impose complex procedures to ensure future compliance with Facebook’s agreements with the FTC.
That seems like a lot of money and a good way to ensure future better behavior by Facebook, but privacy advocates say it’s just a slap on the wrist. As soon as the settlement was announced, the Electronic Privacy Information Center (EPIC) sued the FTC for being too lenient.
Of course, the FTC is limited in what it can do about privacy issues, because the FTC isn’t a privacy protection agency. Its basic mission is to prevent market behavior that constitutes “unfair or deceptive” practices. The FTC’s jurisdiction over Facebook on privacy issues is primarily based on Facebook misleading users into thinking Facebook protects their privacy.
That limitation exists because there is no Federal right to privacy. The Constitution protects certain violations of privacy by the government, but it does not protect against privacy violations by businesses or individuals. Congress could pass a privacy law that applies to businesses and individuals, but it hasn’t.
So, the FTC can only indirectly regulate Facebook on privacy issues by requiring that Facebook clearly explain what data it collects and what Facebook will do with that data. Leading people to believe you are protecting their privacy when you aren’t is an “unfair and deceptive” market practice that gives the FTC the power to regulate.
It did so in 2011 when Facebook entered into a settlement agreement with the FTC in which Facebook agreed that users had to affirmatively give permission for Facebook to use or share data with others. The settlement last week involved Facebook failing to comply with its the practices it agreed to in 2011.
Of course, if Facebook didn’t comply with the 2011 settlement agreement with the FTC, skeptics wonder whether Facebook will comply with this new agreement.
As soon as the settlement was announced, the Electronic Privacy Information Center (EPIC) sued the FTC for being too lenient. Among the criticisms by EPIC are:
- Facebook is so big (over $500 Billion market cap) that $5 billion fine is not a credible deterrent for future violations.
- The FTC’s settlement prohibits individuals from suing for past violations.
- The FTC settlement doesn’t actually limit the data that Facebook can harvest or sell. It only establishes rules for how it does that, requires senior Facebook management to be accountable for compliance and creates reporting mechanisms that make it easier for the FTC to determine if violations have occurred.
The concept that the FTC is working from is that data harvesting is legal as long as you clearly tell people what you are doing and establish reasonable procedures for people to decide to give you permission. Privacy advocates (like EPIC) want actual limitations on data harvesting and commercialization.
Changing Attitudes and Laws Will Affect Behavior
What about concerns that Facebook won’t comply with the new rules it just agreed to. After all, the FTC received over 30 thousand complaints that Facebook violated the 2011 settlement agreement. Why will this time be different?
First, for many years only cranks complained about privacy violations. Most Americans lived by the credo that they didn’t post information they think is important to remain private.
My own advice to my clients is that if they want to keep a secret – don’t tell people your secrets. People are blabber mouths. But Facebook created the illusion that you could tell something to hundreds of people (“friends”), but the information would still be “private.”
This new expectation is the primary reason privacy complaints have been increasing.
Laws are also changing. The European Union has enacted very strict privacy laws and states like California are adopting similar legal restrictions. So, Facebook and other platforms now have to build privacy protection into their software systems and business methods to avoid legal violations. Complying with the new FTC rules will become just a small part of the new regulatory compliance expense that will become a normal part of Facebook’s business.
More government regulation has a big benefit for Facebook. It will help prevent startups that might someday compete with Facebook by increasing their regulatory cost. Facebook can afford to pay tens of millions for regulatory compliance, but start-ups can’t. So, with a slap on the wrist, the Government is effectively protecting Facebook’s near monopoly.
Facebook’s New Revenue Streams
So, where does that leave the monopoly Facebook and its Billion+ users?
- Facebook provides a free service to its users.
- Facebook has the right to charge for use of its services.
- Facebook’s primary revenue streams require it to harvest data and sell other businesses the right to use that data, including for advertising.
- Facebook is looking for other revenue streams.
What other Facebook revenue streams should we expect to see if government regulation and consumer refusals to let Facebook exploit data limit Facebook’s revenues?
In theory, Facebook could begin charging fees to users who refuse to give Facebook the required permissions. The cost of your privacy could be no more free access to photos, events and opinions of your friends.
That would be a radical step for Facebook, but it makes economic sense. The Facebook world would divide into two camps:
- Some users would not allow Facebook to use and share their data, but they would pay a monthly fee for service.
- Other users would get free service in exchange for providing permission to use and share their data.
This scenario probably won’t happen in the near future, because its valuable for Facebook to have as many active users as possible. Some people will just drop out of Facebook if they have to pay a fee to protect their privacy. Large numbers of dropouts would undermine Facebook’s business, because user loyalty to Facebook is based on users knowing that almost everyone they know has a Facebook account. This huge installed user base limits the ability of new competitors to compete.
So, what other revenue do we know Facebook is aiming for?
Facebook has announced its intention to create its own digital currency (called Libra) that Facebook users can use to buy goods and services from other Facebook users. That would put Facebook in competition with Amazon – another tech giant that is facing the likelihood of more government regulation. If Facebook can create its own currency, others will follow.
So, Facebook, the company that practically invented social media, now aims to be the company that legitimizes cryptocurrency.
In the end, helping to destroy the Government’s near monopoly on money may be Mark Zuckerberg’s ultimate revenge on the Government for privacy regulation. Some people will “like” Mark for that. Others will “unfriend” him.
That’s our current take on Facebook’s adventures with the FTC.
As you can see, building and maintaining a great business requires both strategy and execution. Both have to be flexible enough to adapt to changing circumstances. That’s where Innovate Capital likes to be – in the middle of advising clients about how to plan and adapt.
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|Jim Verdonik||Benji Jones|
© 2019 Innovate Capital Law (Verdonik & Jones, PLLC) For further information regarding the issues described above, please contact us.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.