FTC settlement gives Facebook leverage over competitors

January 30, 2012

Before its initial public offering, Facebook needed to clear a major hurdle: an investigation by federal regulators over its privacy practices.

It did so by agreeing to a settlement with the Federal Trade Commission that experts say came with a double bonus: spooking potential rivals.

Now, as Facebook is preparing to file papers for a massive stock offering this week, its recent agreement with the FTC may help protect its dominance by discouraging competitors from launching social networks of their own, analysts say.

Anyone starting such a site, be it a big Silicon Valley firm or a college student in a dorm, will now have to wrestle with federal enforcement officials who are more carefully watching how personal information is shared on social networks, these experts say.

Online privacy issues came to light after Facebook users and lawmakers complained about how the company was making personal data public without their permission.

Before its settlement with the FTC in November, Facebook had long been able to take advantage of lax enforcement on the matter, building its membership and its revenue to extraordinary heights, experts say. Now, it’ll be very tough for a rival to follow that same path.

“It’ll be hard for any rival to out-Facebook Facebook at this point,” said Chris Calabrese, legislative counsel at the ACLU. “Facebook had much more latitude.”

In the settlement, Facebook agreed to follow privacy laws, allow independent audits of its practices and pay fines for future violations. It did not have to pay anything for past wrongdoing.

Immediately after the FTC’s announcement in November, privacy lawyers blasted e-mails to Web clients, advising them to comply with the settlement. They instructed firms to audit their privacy practices and make sure they get permission from users for any changes.

The FTC also warned in a blog entry titled “Lessons from the Facebook settlement (even if you’re not Facebook)” that “companies that want to stay off the law enforcement radar don’t need a weatherman to know which way the wind blows.”

Even though these privacy laws had long been in place, regulators only stepped up their enforcement as they grappled with Facebook and other Web giants such as Google and Twitter over the past few years.

And for the first time, the FTC published its explicit expectations from online firms — guidelines that weren’t as clear as Facebook ballooned into the world’s biggest social network of 800 million over eight years.

Facebook’s dominance was established just as consumers began to express their frustrations over privacy. More than 200 class-action lawsuits have been filed in the past year compared to a smattering of complaints over the previous seven years.

“The FTC has moved privacy and tracking issues to a priority, and with multiple class-action suits, companies need to take all of this very seriously and make sure they are following best practices,” said Dominique Shelton, a privacy expert and partner at the Los Angeles office of the Edwards Wildman Palmer law firm.

The new emphasis on privacy by regulators may hurt entrepreneurs the most, the expert say. Big firms can afford to hire expensive attorneys. But the cost of complying with laws, let alone understanding them, often escape the college student creating a Web site in a dorm room — the very environment that gave birth to Facebook.

“It’s really hard to get start-ups to think of anything other than raising revenue,” said Lisa Sotto, head of privacy at the law firm Hutton & Williams.

Facebook declined to comment for this article.

The FTC said its settlement does not hurt competition among social-network providers. Its agreements with Facebook and other tech giants were intended to be “wake-up calls” to the industry, said Maneesha Mithal, the associate director of the FTC’s division of privacy and identity protection.

“Facebook’s order requires that it doesn’t deceive customers. That’s something the law already requires,” she said.

Yet a look at Facebook’s history highlights how it grew despite breaking privacy rules.

Chief executive Mark Zuckerberg apologized several times, dating back to 2006, for practices such as making an individual’s news feed public, sharing information about what users were buying online and changing privacy policies that make it easier to expose personal data publicly.

“I’m the first to admit that we’ve made a bunch of mistakes,” Zuckerberg said after reaching the FTC settlement.

Cecilia Kang is a national technology reporter, writing about tech and Internet policies at the Federal Communications Commission and Federal Trade Commission and how regulations affect businesses and consumers.
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