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Facebook's rising costs, expenses after data scandal

Facebook Inc.'s $5 billion U.S. regulatory settlement has had a strong impact on its expenses already, but other expense categories have also ballooned in the year and a half since the company disclosed a massive data breach.

Spending on research and development and marketing and sales, for instance, have increased significantly since the news broke in March 2018 that the now-defunct data analytics firm Cambridge Analytica LLC improperly accessed millions of Facebook users' personal information.

Whether there is a connection between these rising expenses and the privacy scandal is not precisely clear, though Facebook CEO Mark Zuckerberg did acknowledge that the company would "invest heavily" to secure the platform in April 2018.

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According to Facebook's most recent quarterly financial filing, it has drastically upped its spending in a category known as "cost of revenue," which pertains to the delivery and distribution of its products. Specifically, the company has increased its spending in this area by 49% compared to the second quarter of 2018, just after the Cambridge Analytica breach was revealed. Facebook said this uptick was "mostly due to increases in operational expenses related to our data centers and technical infrastructure, as well as higher traffic acquisition costs."

Addressing the scandal after it first broke, Zuckerberg said it was clear that the company did not do enough to prevent certain tools from being used for harm.

On Facebook's first-quarter earnings call in 2018, Zuckerberg also said Facebook would be expanding personnel in some areas to help combat abuse on its social networks. For instance, he said the company would double the staff of its security and content team over the course of the year.

The company's spending on research and development rose from $1.95 billion in the fourth quarter of 2017 — before the widespread privacy scrutiny began — to $3.32 billion in the recently reported second quarter of 2019. In the company's most recent quarterly financial filing, it noted that its quarterly increases in this area were due to 32% year-over-year employee headcount growth for engineering and technical functions.

Facebook also noted in its recent filing that its 30% increase year over year in marketing and sales expenses is attributable primarily to 28% year-over-year employee headcount growth for marketing and sales functions.

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The persistent legal and regulatory scrutiny has taken a toll on the company, which saw net income fall 49% year over year in the second quarter of 2019 due to the fine levied by the U.S. Federal Trade Commission.

The company warned in its most recent quarterly financial filing that dedicating resources to comply with its new regulatory settlement will "adversely" impact the company's ability to develop and launch new features, products and services in a timely manner.

Facebook agreed to a 20-year settlement order that stipulates a series of new business requirements designed to improve the company's consumer data protection and privacy practices. The new requirements include a mandate for Facebook to establish "a comprehensive data security program" and exercise more oversight over third-party apps and developers.

Additionally, Facebook disclosed on July 24 it is facing a separate FTC investigation regarding antitrust concerns, which the agency opened in June, and it is also subject to a U.S. Department of Justice antitrust review of leading online platforms, which was announced in July.

But Facebook's regulatory woes may not even end there. In its most recent quarterly filing, the company warned investors that it expects to be the subject of additional regulatory investigations in the future, which could impact the company in a "materially adverse" way.