Facebook under investigation

The Federal Trade Commission has confirmed that Facebook is under investigation for violation of consumer privacy. The social media giant was caught in a scandal earlier this month, when it was revealed that political consulting firm Cambridge Analytica had accessed the personal information of over 50 million users.

Background

Facebook is one of the largest social media sites in the world. It was launched by Mark Zuckerberg in 2004. As of June 2017, Facebook had two billion monthly users.

Facebook and other social media have come under fire a number of times in the past year, for hate and terrorist propaganda, the presence of bots, and the proliferation of “fake news” ahead of elections. In 2017, it was reported that Facebook was a key influencer in the outcome of the 2016 US Presidential election and the Brexit vote. Last September, Facebook admitted to finding approximately $100,000 worth of ads connected to Russia. Russia allegedly played a role in flooding social media platforms like Facebook and Twitter with fake news stories depicting Hillary Clinton negatively.

Cambridge Analytica

Cambridge Analytica is a private political consulting company founded in 2013. It uses data mining and data analysis “to change audience behaviour”. The company uses personal data acquired from a number of sources, including Facebook, to create micro-targeting advertisements designed to influence opinions. In an exposé by UK’s Channel News 4, CEO Alexander Nix was caught on tape claiming that the company does “a lot more” than just investigation, alluding to entrapment and bribery. The company has been involved in a number of political campaigns across the world.

Earlier this month, the company was accused of a Facebook data breach. Cambridge University professor Aleksandr Kogan reportedly sold the company personal user information of 50 million Facebook users, which may have been used in political influence campaigns. One of the executives of the company told undercover reporters that the organization had been responsible for popularizing the “Crooked Hillary” phrase.

Analysis

According to media reports, Facebook has known about Aleksandr Kogan’s data breach since 2015. However, it failed to take action against Kogan and Cambridge Analytica, and to inform users of a breach. The FTC has now confirmed that it is undertaking a probe to find out whether the corporation failed to protect customer privacy.

"The FTC is firmly and fully committed to using all of its tools to protect the privacy of consumers. Foremost among these tools is enforcement action against companies that fail to honour their privacy promises," the agency said in a statement, confirming an open non-public investigation into Facebook.

In 2011, Facebook signed an agreement with the FTC on data protection. The company updated its privacy guidelines to include a consent decree that stated that user permission had to be obtained before sharing data. Former director of the FTC Bureau of Consumer Protection David Vladeck, told the Washington Post that for each confirmed violation of the agreement, the company would be fined $40,000. Facebook has reportedly failed to protect the data of 50 million users.

"We remain strongly committed to protecting people's information. We appreciate the opportunity to answer questions the FTC may have," Facebook deputy chief privacy officer Rob Sherman told CNBC.

Attorneys General of 37 US States have written to Facebook demanding that the company provide Facebook users with an explanation for the breach. "As the chief law enforcement officers of our respective states, we place a priority on protecting user privacy, which has been repeatedly placed at risk because of businesses' failure to properly ensure those protections,” the letter read. Republican Senator Chuck Grassley has called on the CEOs of Facebook, Google, and Twitter for a congressional data privacy hearing.  

After the announcement of the FTC probe, Facebook shares immediately dropped by up to 6%. Shares have dropped by a total of 13.5% since the scandal broke on March 16th. Companies including Mozilla, Space X and Tesla, have paused advertisement campaigns on Facebook.

While the media has questioned whether this will be a death knell for the social media giant, some analysts have stated their belief that this incident is merely a bump in the road. “The FTC case we ultimately believe given previous cases will end with a fine in the tens of millions and is more noise than an impact to the company’s operations over the coming years,” Daniel Ivers of GBH Insights told Financial Times.

Assessment

Our assessment is that holding Facebook accountable for privacy violations will send a strong message to competitors. We have previously stated our belief that it is becoming increasingly essential for governments to implement data protection legislation. CEO Zuckerberg has admitted that it may be necessary to regulate social media. However, Facebook’s future remains uncertain. Polls have shown that customer trust in Facebook is at an all-time low; in order to earn back this trust, the company must increase transparency.