Brief:

• Twitter revealed it could face a fine of up to $250 million from the Federal Trade Commission in a financial filing released Monday. The company estimates the range of probable losses to be from $150 million to $250 million, according to the document.
• At issue is the app's use of personal information for advertising purposes. Between 2013-2019, Twitter asked users to share their phone number and email addresses for security and privacy reasons, but applied the data for ad targeting.
• Twitter received a draft complaint from the FTC late last month that alleged its actions violated a 2011 consent decree with the agency around data privacy. The agreement demands that Twitter establishes and maintains an information security program that will safeguard private consumer information.

Insight:

Twitter faces a potentially steep penalty from the FTC for its alleged misuse of personal data in advertising. A financial blow of that scale could hit the company hard, as it is already under pressure stemming from the coronavirus pandemic. Ad revenue was down 23% year-over-year in Q2 earnings results released in July, CNBC reported.

Twitter first brought the issue under investigation by the FTC to light last fall, when it admitted that phone numbers and email addresses shared as part of its two-factor authentication process were used for ad targeting. Twitter said it resolved the product issues internally in September, but the consequences are stretching on for nearly a year.

Beyond impacting Twitter's bottom line, the mishap could degrade user trust at a time when criticism of data privacy practices is high and maintaining audience growth is crucial for social media apps. Facebook underwent a similar investigation from the FTC over the Cambridge Analytica scandal in 2018, which also ran afoul of a 2011 consent decree with the watchdog. The FTC reached a $5 billion settlement with Facebook last July, the largest fine doled out in the federal agency's history.

Twitter's problems on the data privacy and security front have mounted in recent weeks following the worst hack to ever hit the platform. In mid-July, official accounts ranging from Bill Gates to Joe Biden were overtaken as part of a massive bitcoin scam that was able to spread due to what Twitter has described as a "social engineering issue," essentially meaning its employees were tricked by bad actors, per The Wall Street Journal.

While the hacking controversy is separate from the unresolved FTC investigation, taken together, the developments could heighten scrutiny of Twitter and even ward off brands. Several high-profile advertisers are continuing to pause their paid social media spending as they look to amplify pressure on platforms like Twitter and Facebook to be more proactive in curbing hate speech and the spread of misinformation.

Unilever, one of the largest packaged goods companies in the world, has pledged to freeze spending on Twitter and Facebook in the U.S. until at least the end of 2020. Other companies, including Starbucks and Coca-Cola, also paused spending across social media platforms earlier in the summer. The pullbacks have not made a meaningful dent on Facebook to date, but Twitter is a far smaller company and could bear the brunt of their financial impact more harshly.