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Should You Worry About Facebook Inc's Global Headaches?

By Leo Sun – Mar 9, 2016 at 10:00AM

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The social network faces new growing pains in Germany and Brazil.

For a business built on connecting family and friends, Facebook (META 7.30%) hasn't been making a lot of friends overseas lately. German regulators recently started probing Facebook over antitrust issues and potential breaches of data protection laws. Brazilian officials briefly arrested a Facebook executive after WhatsApp refused to turn over data related to a drug investigation.

Federal Chancellery, Berlin. Source: Pixabay.

Both cases represent extensions of other major challenges for Facebook. The German probe stems from the privacy concerns which were raised in France, Belgium, Spain, Germany, and other EU countries last year. The clash in Brazil, which caused a half-day shutdown of WhatsApp in Brazil, closely resembles the stateside battle between Apple and the FBI. Should Facebook investors be worried about these battles? Or are they typical growing pains for multinational tech giants?

Assessing the damage in Germany
Facebook doesn't report its revenue by individual country. But during the fourth quarter of 2015, Facebook's daily active users (DAUs) in Europe rose nearly 11% annually to 240 million, accounting for 23% of Facebook's total DAUs. Its average revenue per user (ARPU) in Europe rose 30% to $4.50, making it Facebook's second most profitable market after the U.S. and Canada. Germany, the EU's top economy and most populous nation, likely accounts for a large percentage of those totals.

In Germany, where data protection is strictly regulated, Facebook has been criticized for the way it mines user data and its slow response to anti-immigrant postings. Speaking to Reuters, German Federal Cartel Office President Andreas Mundt claim that it was "essential" to check the company for potential abuses of market power and that customers were "sufficiently informed about the type and extent of data collected." The cartel office noted that it was coordinating its probe with the European Commission, competition authorities in other EU states, German data protection authorities, and consumer rights groups.

If Facebook is found guilty of abusing a dominant market position in Germany, it could theoretically be fined up to 10% of its annual revenue. However, the cartel office has never imposed the maximum penalty. The longer-term threat is that regulators might force Facebook to gather less data from its European users. Since Facebook's business model is built on mining user data to craft targeted ads, its ARPU growth could slow down in Europe. Negative PR from the probe could also impact its DAU growth.

Facebook doesn't report revenues from Latin America. Instead, they're included in its "Rest of World" segment, which accounted for 11% of its sales last quarter. ARPU for that group is significantly lower at $1.22, since it primarily consists of lower income and less mature markets.

Brasilia, Brazil. Source: Pixabay.

Facebook's WhatsApp topped 1 billion active users in February, making it the most popular messaging app in the world. About 100 million of those users are in Brazil. But since Facebook still hasn't decided how to monetize WhatsApp yet, a temporary (or even permanent) shutdown of WhatsApp in Brazil wouldn't hurt Facebook financially.

Instead, a shutdown could hurt Facebook's reputation in a more important market, China. China banned Facebook in 2009, claiming that it was used as a tool in inciting the deadly riots in Xinjiang. However, WhatsApp wasn't banned, and still serves as an alternative way for Facebook to retain a foothold in the Chinese market. But if Brazilian regulators start portraying WhatsApp as a communication tool for criminals, Chinese regulators could also start scrutinizing the app.

More growing pains ahead ...
Facebook and Alphabet's (GOOG 5.74%) (GOOGL 5.59%) Google both face similar challenges in privacy-focused markets like Europe. Last year, Google was hit by antitrust probes in the EU claiming that its search engine promotes its own comparison shopping services over third-party sites, and that the bundling of first-party apps in Android devices is anti-competitive.

Both Facebook and Google make money by gathering user data for ads, both are the dominant companies in their respective markets, and both were implicated for having NSA backdoors in the Snowden leaks. Therefore, the bigger Facebook and Google grow, the more scrutiny they will likely face overseas. That scrutiny, which many critics claim is a protectionist strategy, could disrupt both companies' ecosystem expansion strategies and throttle their overseas sales growth.

 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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