The company's strong Q1 revenue growth washed away anxiety about the Cambridge Analytica scandal's impact to its advertising-based business. And executives deftly dispelled fears about the other big cloud looming on the horizon: GDPR. On May 25, the ...and more »
Facebook execs said all the right things during the earnings call on Wednesday.
The company's strong Q1 revenue growth washed away anxiety about the Cambridge Analytica scandal's impact to its advertising-based business. And executives deftly dispelled fears about the other big cloud looming on the horizon: GDPR.
On May 25, the European Union's new data privacy law will go into effect, with strict rules regulating how Facebook obtains and uses the user data that underpins its business.
Facebook executives played down the potential impact of GDPR, both on its revenue and on its userbase. Investors breathed a big sigh of relief, and shares of Facebook got a nice boost, trading up 7% in after hours trading.
But the celebration may be premature.
Even if one assumes Facebook's benign view of GDPR's direct impact to its business proves correct, there's plenty of other ways the new rules could bite it. And for a business with Facebook's scale and reach, an unprecedented regulation is sure to bring a number of unknowns.
Facebook doesn't see a significant impact
"While we don't expect these changes will significantly impact advertising revenue, there's certainly the potential for some impact ... we'll just have to watch how that plays out over time," CFO Dave Wehner said.
The extra hurdles the law creates in obtaining user consent means that Facebook user growth in Europe may flatline, or even decline, he added.
COO Sheryl Sandberg acknowledged that there are currently unknowns, but stressed that this isn't a Facebook-specific issue — any negative effects will impact the entire advertising industry. "The amount of uncertainty there is for us and all the other companies in the digital advertising industry is reasonably higher than it's been right now ... we're going all going to know a lot more after we roll [GDPR] out."
She added: "As long as things happen across the industry, which is what's happening, I think we remain in a very strong position."
'A step in the right direction'
Some analysts are bullish on Facebook's prospects in Europe.
"Bottom line we expect minimal impact from the implementation of GDPR. We expect more 'bark than bite' …headline risks are greater than fundamental risks. Our proprietary due diligence with industry leaders suggests this will require an initial upfront investment for everyone in the industry, but won't materially impact the core business operations," Brent Thill, an analyst at Jefferies, wrote in an email.
"Given FB's resources, we expect they will relatively outperform everyone else." (Some analysts have argued GDPR may even strengthen Facebook, as smaller companies struggle to meet its requirements.)
Daniel Ives, chief strategy officer at GBH Insights, wrote in an email: "We view this as a step in the right direction and further clarity for the Street as this was a major worry for investors with GDPR coming down the pike. Still some more wood to chop but this transparency will be embraced."
But issues around compliance — and lawsuits from aggrieved Europeans — could still throw a spanner in the works.
Facebook is certain to face legal challenges
EU Competition Commissioner Vestager
Max Schrems is an Austrian lawyer who has filed legal complaints against Facebook in the European Union over privacy and data transfers — ultimately changing the law. He represents a significant threat to the social networking giant as it attempts to navigate the post-GDPR EU: Pro-privacy campaigners with a bone to pick with Facebook.
Schrems already has a "pile of cases on his desk" he plans to file when GDPR comes into effect, Bloomberg reported in March, and it's not outrageous to imagine that Facebook may be one of his targets. TechCrunch recently reported that European data experts are expecting lawsuits to be filed against Facebook over the changes it is making in response to GDPR. A tech law researcher told Business Insider she believes Facebook's requests for user data are not legally compliant.
The stakes are substantial: A company found to be in breach of GDPR can be fined up to 4% of their annual global revenue or €20 million ($24.5 million), whichever is higher. Facebook's global revenue for 2017 was $39 billion, meaning that 4% would amoun to $1.6 billion.
Europe doesn't shy away from going after the American tech giants, either: The European Commission, under the leadership of competition commissioner Margrethe Vestager, has forced Apple to pay €13 billion in back taxes after its arrangements in Ireland fell fall of EU rules.
Facebook has said it is working to ensure it is fully compliant with the law — but people are sure to test that. And as the Schrems case proves, Facebook doesn't always win.
Pivotal Research Group's Brian Wieser, one of the few analysts to maintain a sell rating on Facebook's stock, predicted shifts in how advertisers spend on digital media post-GDPR — and highlighted the regulatory risks.
"It remains to be seen whether or not the way in which attempts by Facebook (and everyone who sells digital advertising) to adhere to GDPR will withstand regulatory scrutiny and avoid significant related fines in Europe after May 25 of this year," he wrote.
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