Facebook's Model Attacked by German Antitrust Regulator

(Bloomberg) -- Facebook Inc.’s advertising model came under attack in a landmark ruling from German antitrust regulators who ordered the social network to overhaul how it tracks its users’ internet browsing and smartphone apps.

Germany’s Federal Cartel Office gave the company 12 months to stop “unrestrictedly collecting and using” data and combining it with users’ Facebook accounts without their consent. Facebook said it was being unfairly singled out by the regulator, which has broken new ground by using antitrust law to tackle data privacy.

"People always ask to break up huge internet companies,” Andreas Mundt, head of the FCO told journalists in Bonn Thursday. “Well, what we do here today is really something like internally breaking them up.”

Europe’s biggest economy has been difficult terrain for social networks after Chancellor Angela Merkel’s government last year started enforcing the continent’s toughest law aimed at reducing hate speech and fake news -- threatening to fine the likes of Facebook, Twitter Inc., and Google’s YouTube as much as 50 million euros ($57 million) if they failed to delete illegal posts.

“It’s a landmark decision,” said Thomas Vinje, a lawyer at Clifford Chance LLP who isn’t involved in the case. “‘It is the first big case decided by any competition authority in the world squarely focused on issues around the collection and combination of data.”

Facebook, however, will appeal the decision, saying that the regulator “misapplies German competition law to set different rules that apply to only one company.”

“While we’ve cooperated with the Bundeskartellamt for nearly three years and will continue our discussions, we disagree with their conclusions and intend to appeal so that people in Germany continue to benefit fully from all our services,” Menlo Park, California-based Facebook said in a statement.

Under the order, Facebook can’t tie membership on the platform to people agreeing to unlimited data tracking. Instead, it must provide a technical solution to allow users to opt out of the data tracking outside of the Facebook account. The solution will likely have to go beyond the simple buttons and boxes that have become so familiar to most web surfers.

"In view of Facebook’s superior market power, an obligatory tick on the box to agree to the company’s terms of use is not an adequate basis for such intensive data processing," Mundt said. "In such a coercive situation, the user’s choice cannot be called voluntary consent.”

Facebook tracks whenever a subscriber visits a website or app with interfaces such as the “Like” or “Share” feature. Millions of German websites and apps are affected, according to the FCO.

The company generates revenue from selling advertising that’s valuable because it can tell businesses who will see the ads. It gets insights into what users watch and buy by tracking their internet use and are able to link that to key information on their age, income and location.

The decision is the result of a three-year probe into whether Facebook improperly leverages its market power to make users agree to give up their information.

Facebook must signal within four months how it intends to comply with the order. While no initial fine was levied, the company risks a penalty of as much as 10 million euros ($11.3 million) if it fails to comply. Once it’s implemented, potential penalties for violations are far tougher -- as high as 10 percent of global revenue.

Facebook said the decision “misapplies German competition law to set different rules that apply to only one company.” The company also accused the watchdog of undermining European Union data protection rules and underestimating “the fierce competition we face in Germany.”

Facebook has about 30 million users in Germany, where it has hired hundreds of people to remove fake news, illegal postings such as Holocaust denials, and fake accounts from the site.

The German probe is one of many the company is facing in Europe and the U.S. over handling personal data. The case goes to the core of how Facebook increases its advertising revenue. The regulator is targeting the network’s habit of collecting data about what websites users are visiting and merging the information with their Facebook profiles. That trove of information allows ads to be tailored to individual users -- creating a cash cow for Facebook.

Mundt said Thursday that he had never met Facebook founder Mark Zuckerberg but has an account with the social network.

He said the way his agency had combined data privacy with antitrust faced no resistance from data protection authorities, such as the Irish agency which takes the lead on overseeing the company’s adherence to tough new EU rules.

The German agency is relying on a rule developed by the nation’s top court that said a dominant company can be judged as misusing its position if it forces customers to accept unfair terms.

“I am pretty sure we did the privacy part very right,” he said.