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Tuesday, May 29, 2018

Europe's GDPR: Facebook Versus Google

GPDR Facebook Versus Google
GDPR went into effect May 25th and has already drastically changed the online ad industry in Europe. Smaller players are going to get hit the worst. Google's now going to be in everybody's cross-hairs and Facebook has the best chance to win market share.

We keep our Buy on Facebook but move to Neutral on Google.

We'll try to keep this simple

GDPR: General Data Protection Regulation

GDPR has threatened heavy fines for companies that allow leaks of private data or use of personal data without permission.  The crux of the issue is much of online advertising has used cookies and pixels to track users around the web to target their buying habits. Without explicit consent though, following a user on their internet journey will now be illegal.

Who Wins Who Loses With Google

The programmatic ad market in Europe has been reported to be down 25-40% since GDPR went live. If you remember Google cited programmatic as a main driver to their revenue growth the last two quarters. Smaller competitors have an even bigger issue with compliance and so will most likely lose customers to Google. But initially both will likely lose.

Google is also dependent on a diverse list of publishers that show Google's ads. Those publishers also don't want to face the heavy fines and many publishers have reduced their desire to advertise at all.

Google had about 33% of their 2017 revenues from their Europe, Middle East and Asia region. It's meaningful.

This is an important short term impact for Google and the stock, so far, is hardly down after reports of the 25-40% drop in programmatic.

Medium term though Google is about to win a ton of share. Smaller competitors are likely to lose customer confidence that they can meet compliance hurdles.  Google's helped spur that message by promising a white-list of compliant partners which implies a black-list of the rest.

Mark Zuckerberg agreed in Congressional hearings that legislation usually benefits the large players because they can afford to comply more easily.

We Think Facebook Wins

Facebook's situation is much easier. 25% of their business comes from Europe but they control their own inventory. Their "walled garden" business model keeps them more protected than Google. They are not at the mercy of outside publishers to show their ads. If publishers decide to reduce risk and not advertise that likely hits Facebook less.

And as far as the use of data, Facebook has a much easier solution. Facebook makes a clear opt-in for users that either they agree or don't use Facebook. Facebook has a much more manageable position.

Conclusion

Much the same way Facebook faced some rough sledding earlier in the year with Cambridge Analytica, Google's now in the cross-hairs.  Google more directly competes with more players in Europe and benefits from their demise. The ad market has issues for everybody but we think Facebook will have a smaller revenue impact. We keep our Buy on Facebook but move to Neutral on Google to avoid the near-term concerns. In six months though Google will probably be even more powerful thanks to the GDPR legislation as their smaller competitors fall.



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