Meta Platforms, the US company that operates the social networks Facebook and Instagram, is facing an advertising ban in the EU. This is due to its specific form, so-called targeted advertising. The ban on targeted advertising, which targets users by collecting their personal data, is more than a complication for Meta. The US company has long resisted efforts to restrict the practice, mainly because advertising on its social networks is its main source of revenue.
Meta's business model under threat
Meta's core business model is to offer free social networking services and sell advertising to companies and individuals who want to reach users of those social networks.
Over the past year, Meta generated $113 billion in advertising revenue globally. That's a jump from 2020, when Meta's ad revenue "only" reached $85 billion. In 2021, ad revenue was the highest ever, at $115 billion.1
The European market is the second most lucrative region for Meta, after North America. According to Meta Platforms' CFO, Susan Li, advertising revenue in the European Union accounts for roughly ten percent of the company's total business.2
The EU is on Meta's back
The European Data Protection Board (EDPB) has agreed to extend a ban previously imposed by non-EU Norway to all 30 countries in the European Union and European Economic Area.
The EDPB's decision directs the Irish Data Protection Authority, where Meta is based, to impose a permanent ban on the firm within two weeks for using this so-called behavioural advertising. Meta has said it is cooperating with European authorities on the matter, and a spokesman for the company said
"this development unjustifiably ignores a careful and thorough regulatory process".
With its plan, Meta is attempting to circumvent EU regulations that go towards limiting its ability to tailor ads to users without their consent, thus damaging its main source of revenue.
Meta Platforms' response
Meta has responded to the European authority's regulation by referring to its earlier announcement that it will give users in the EU and EEA the ability to consent to targeted advertising and will offer an ad-free subscription model in November to comply with regulatory requirements.
Offering a choice between a free service with ads and a paid option could lead to users opting for the former. This would help Meta comply with EU regulations without affecting its advertising activities.
Meta has told regulators that in addition to the ten euros per month for a desktop account, users can pay six euros for each linked account. On mobile devices, the price would climb to roughly 13 euros per month, due to taking into account commissions charged by the App Store and Google Play.
Meta Platforms' share price evolution over the last 5 years. (Source: Tradingview.com) *
It's undeniable that Meta, the operator of one of the most popular social networks, has a lot going for it. But not everything. The European regulator wants to restrict its main revenue stream. However, the fact that the company generates most of its advertising revenue outside EU jurisdiction, and its European revenue is only 10% of the total, will not put the company at risk. Additionally, Meta has introduced paid packages for users to "avoid" EU regulators. Depending on the popularity of this paid alternative with European users, Meta may even be able to make up some of the shortfall in advertising revenue within the EU single market.
Adam Austera, principal analyst at Ozios
* Past performance is no guarantee of future results.