Meta, formerly Facebook, made headlines last week for “threatening” to pull its services out of Europe.
The threat, slotted into the company’s annual 10-K filing to the US Securities and Exchange Commission, said it “would likely” pull Facebook and Instagram from the region if a new EU-US transatlantic data transfer framework could not be formed.
The threat was made in response to the US-EU Safe Harbour and Privacy Shield agreements being struck down by the European Court of Justice in recent years. The court struck down those agreements as it found US laws did not offer enough data protection safeguards to meet European standards, making it illegal for companies to gather data about European citizens and transfer it to US shores for analysis and sale to advertisers.
This isn’t the first time Meta has made threats to leave a particular market. Last year, Meta temporarily blocked people and publishers in Australia from sharing news as part of a scare tactic to make the Australian government amend its media bargaining code. Among Meta’s fellow big tech brethren, Google similarly threatened to pull Search from Australia under similar motives, while Apple said last year it could leave the UK due to patent concerns.
What’s different this time, however, has been Meta backpedalling from its comments. In a blog post, Meta said it is “absolutely not threatening to leave Europe”.
“Meta is not wanting or ‘threatening’ to leave Europe and any reporting that implies we do is simply not true. Much like 70 other EU and US companies, we are identifying a business risk resulting from uncertainty around international data transfers,” said Markus Reinisch, Meta Europe public policy VP.
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So what’s changed? Capital strikes aren’t anything new; whether it’s oil companies or chemical companies threatening to leave a market, big foreign direct investors have long lobbied against tighter regulations that restrict their market power.
But over the last couple of years, many governments, particularly through their competition regulators, are sharing information with each other on how to handle big tech issues. What’s ensued has been a stream of regulatory headwinds against Meta, ranging from the aforementioned ban of trans-Atlantic data flows to stronger privacy laws to expanded requirements for monitoring abhorrent material.
It’s no longer a race to the bottom among governments, like when a sea of tech giants over a decade ago made Ireland their European headquarters for lower taxes.
Digital platform companies, like Meta, are also unique in that they are heavily dependent on network effects, said Rob Nicholls, University of New South Wales associate professor and competition policy expert.
“Google, Apple, Facebook, Amazon, Microsoft, they all rely on network effects and taking out parts of the network in order to make a regulatory point is likely to be more harmful than it would be if you were just a manufacturer where you shift manufacturing to a lower cost, lower regulatory burden cost country. It’s different,” Nicholls explained.
“The actual nature of [Meta’s] business means that the threat is a little bit more hollow than it would be for a manufacturing business. And the coordination between governments means making those threats and following through with them are much, much harder.”
For example, if Meta’s platforms were to be pulled from Europe, people who live in Australia that communicate with family and friends in Europe using Instagram or WhatsApp might move to another platform to keep those communications despite still having access to Instagram or WhatsApp. If Meta were to cut off a substantial portion of its network, the move would not just adversely affect its revenue, but also the stability of its network too.
With governments becoming more confident in not caving to big tech demands, Meta is in a bind, especially with 98% of its revenues still coming from digital advertising.
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It’s a growing concern for Meta, which revealed during its Q4 conference call earlier this month that its number of daily active users fell by 500,000. If the dip is the beginning of a pattern, it’s significant.
Facebook seems to be aware of the problem, having rebranded to Meta last year to try and diversify towards web3 technology. But its bid to pivot has been lacklustre thus far. Meta’s cryptocurrency play, Diem, was shut down a fortnight ago after it “became clear” regulators would never let the project move ahead.
Meta’s also seeing more competition in grabbing people’s attention, particularly from TikTok. During the Q4 earnings call, Meta founder and CEO Mark Zuckerberg said people have more choices for how they spend their time online than before.
“Apps like TikTok are growing very quickly,” Zuckerberg said.
“The thing that is somewhat unique here is that TikTok is so big as a competitor already and also continues to grow at quite a fast rate off of a very large base.”
Historically, Meta’s platforms have excelled more than its competitors in placing ads about products or apps that users did not know existed. While TikTok is not a social network, the short-form video platform has done well to compete against Meta’s platforms in this area.
“That discovery mechanism, though, doesn’t just depend on data; it also depends on attention. This is where the TikTok challenge looms large … TikTok and the loss of attention are [an] existential risk,” tech analyst Ben Thompson said.
Coming back to Meta’s threat to leave Europe last week, if the EU and US are unable to arrive at a mutually acceptable solution for a data transfer framework, Facebook realistically has two options — both of which are stark.
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The first is pulling some of its services from the EU. That’s not an attractive option given that the EU has a population comparable to the US, even if it has a lower GDP per capita than the US. In the most recent quarter, almost 25% of the company’s advertising revenue came from Europe.
The other alternative would be for Meta to change its business processes to comply with the relevant orders from the European Court and the General Data Protection Regulation of not sharing EU citizen data with a US entity. This option would be costly, however, as it would entail Meta effectively needing to have large and separate data centres somewhere in Europe.
How Meta will move forward is unclear, but what seems clear is regardless of whether Meta’s threat holds any water, governments no longer feel the pressure of Meta like they used to.
Last Wednesday, French Finance Minister Bruno Le Maire reportedly said he would be fine if Meta pulled its platforms out of Europe.
“I can confirm that life is very good without Facebook and that we would live very well without Facebook,” he said.
