Fines have been in the news. Facebook recently signed off on a consent decree with the Federal Trade Commission that included a $5 billion fine for not complying with a previous decree. It may face another $100 million one from the Securities and Exchange Commission over the Cambridge Analytica data breach.

Or, if you want to talk fines, there's the $70 million one California has imposed on various drug companies for slowing the use of generic drugs that were less expensive than the manufacturers' original brand names.

If you're cynical and think none of this matters-;and if you're an entrepreneur or manager of a small to mid-sized business-;better reconsider. It matters a lot, only not in the way you'd like. These fines help cement big companies in place while icing out growing competitors.

Fines don't restrict giants

The numbers being tossed around in these fines sound enormous until you remember the scale of operations the companies undertake. Facebook, for example, makes about $5 billion in net income-;profit-;per quarter. A fine of that size hurts, but so does the stinger of a wasp. So long as you aren't allergic, you may find the experience irritating, but it won't change your life.

Similarly, Facebook can write off a single quarter of profit and know that it has plenty in the bank and will return next quarter to make another bundle. Or the $70 million spread across multiple drug companies? The industry is one of the wealthiest. The last time I checked back in February, big drug companies made about 23% after-tax profits as a percentage of initial revenue. Take a million here, a few million there, and pretty sure you still have something shy of a rounding error.

Big companies don't feel a thing because the fines dropped on them aren't anywhere in keeping with their scale.

Fines help giants

This may seem more outlandish a statement. After all, if the existing fines, even if not dangerous, are irritating, how can they be good? In the same way the jab of a hypodermic needle carrying a vaccine can.

The fine is the punishment for perhaps years and years of what a court or regulatory body decides are bad actions. Generally, there is a negotiated agreement between the company and the official body, along with a recognized refusal to admit guilt. The fine allows the company in question to move forward, free of the entanglements of what it has done.

But over years, if the actions were key to operational success, either general or in a specific area, there is likely a large store of collected profits as well as market power. The fee staves off more significant actions and the company can proceed as it wishes-;perhaps with a somewhat cumbersome set of oversight requirements, but those can be delegated to staff. The growth in success doesn't get unwound.

And even consent decrees may not be all they seem. The $5 billion fine and new consent decree for Facebook was because it hasn't continued with the requirements of the 2012 decree. It took seven years for something significant to happen. In the meantime, Facebook collected massive new amounts of data and lots of money.

Small companies get hurt

This may seem oddest of all. The fines don't have anything to do with small companies that may compete with some aspect of the larger one or may be developing new areas of business. How does that interfere?

The fines enable the big companies to continue on their merry way, probably continuing to use the objectionable tactics that got them into hot water. Such freedom makes it hard for small companies to grow and thrive, as the big ones may decide to eliminate them if perceived as a threat.

Until governments make it truly difficult for large firms to effectively do as they wish, things will go as they have.

Published on: Jul 31, 2019
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