How Will EU Regulations Impact These Social Media Stocks?

The fact that social media sites collect users’ personal information is nothing new, but Threads has yet to launch in the EU due to regulators’ data privacy concerns. Even if Meta finds a workaround, its platform could face long-term competition from Elon Musk’s X and the Jack Dorsey-backed BlueSky.

• Meta has yet to launch Threads in the EU because the sign-up process could violate the Digital Markets Act.
• After 40 million users joined on its launch day, Threads’ daily active users fell 75% within a few weeks.
• The Global X Social Media ETF is up 9.6% in the past six months.

All tech firms operating in the EU must now comply with the bloc’s Digital Services Act (DSA).

The law, which came into force on 25 August, holds companies legally accountable for fake news spread on their platforms, and prohibits children from being targeted with adverts.

“Online services are also being misused by manipulative algorithmic systems to amplify the spread of disinformation and for other harmful purposes. These challenges and the way platforms address them have a significant impact on fundamental rights online,” stated the European Commission (EC).

The strictest level of regulation will be enforced on platforms with at least 45 million users across the bloc. Known collectively as ‘very large online platforms’, these include Meta’s [META] Facebook and Instagram, Snapchat [SNAP] and ByteDance’s TikTok. If they fail to comply with the DSA, they could be hit with a fine equivalent to 6% of their global turnover.

Another piece of legislation affecting social media in the EU is the Digital Markets Act (DMA). According to the EC, it is designed to address issues “arising from certain behaviours by platforms acting as digital ‘gatekeepers’ to the single market”.

As of July, Meta and ByteDance were two of seven big tech firms to have notified the EC that the DMA applies to them. These so-called gatekeepers will be subject to tight requirements on how they operate, starting from March 2024. Those who fail to comply could be fined up to 10% of their global turnover.

Threads’ Data Privacy Concerns

The EU’s move to clamp down on big tech firms “behaving like they are too big to care”, as the commissioner for the internal market Thierry Breton put it back in April, has led Meta to postpone the rollout of Threads in Europe, excluding the UK.

The problem with the platform is that it requires users to sign up using their Instagram account. This means there is an element of data sharing involved that could be seen as a gatekeeper violating the DMA. Companies are prevented from reusing a user’s personal data, including name and location, across products for targeted advertising without consent.

A solution to this problem is not expected any time soon. “[I]t just turns out that in order to make sure that we can verify all the things we need to do to be compliant, it’s just going to take many months, unfortunately,” said Instagram chief Adam Mosseri in a video posted on his Instagram feed.

The question is — will people still be using Threads by the time the app has been rolled out in Europe?

Threads Faces User Retention Challenge

Threads started off strong, with 40 million users signing up when it launched on 6 July, benefiting from a rush of people leaving X, formerly known as Twitter. By the end of the month, however, daily active users and the time spent on Threads had tumbled 75%, according to Sensor Tower data.

The market research firm attributed this to a lack of unique features and content. Although the app had a chronological feed, it did not offer direct messaging and a proper ‘explore’ page. The lack of these engagement-focused elements could have affected user adoption and retention.

However, the app has shown signs of stabilisation since July. It “shows potential for recovery, but the road ahead will require careful consideration of user needs and preferences”, Sensor Tower added.

Key to Threads’ long-term growth and user retention “will be finding a monetisation strategy that is not just ad-focused given the tidal wave of data privacy regulations”, argued Amelia Connor-Afflick, Senior Thematic Intelligence Analyst at GlobalData, following the release of Meta’s second quarter 2023 earnings.

X Might Trump Threads in the Long Run

There is also the question of whether Threads can become a genuine alternative to Elon Musk’s X.

Wedbush Analyst Dan Ives is not convinced — yet. Back in July, he rated his experience on the app three out of 10 and said it had made him appreciate Twitter even more. “The news feed I find messy and cannot control who or what I am seeing in any order… so Instagramish,” tweeted Ives.

As for X, the rebranding is seen as part of Musk’s long-term vision to turn the platform into an ‘everything app’, akin to China’s WeChat. “That said, losing the iconic world-renowned bird logo is a risky move from a branding perspective,” argued Ives.

Jack Dorsey’s Alternative

Even if Threads, which has recently launched a desktop version, can overtake X, it could face increased competition from other new entrants.

Perhaps the most interesting of these is BlueSky, backed by Twitter co-founder and Block [SQ] CEO Jack Dorsey. Unlike Facebook, Instagram and Threads, BlueSky prides itself on being decentralised, which means that there is no one individual in control.

While BlueSky is currently in invite-only mode, it is attracting interest among those who have become disengaged from the type of content being promoted and shared on Elon Musk’s X.

How to Invest in Social Media

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Funds in Focus: Global X Social Media ETF

The Global X Social Media ETF [SOCL] currently has Meta as its top holding. The portfolio is weighted overwhelmingly in favour of the communication services sector (97%), while information technology (IT) has a 2.3% allocation. Consumer discretionary and financials both have weightings of less than a single percentage. The fund was up 8.3% in the past year through 28 August and up 9.6% in the past six months.

The VanEck Social Sentiment ETF [BUZZ] has Meta in its top-10 holdings. As of 31 July, the portfolio had allocated 27.54% to IT and 23.67% to consumer discretionary. Financials and communication services had weightings of 17.38% and 15.28%, respectively, while industrials accounted for 6.46%. The fund was up 1.9% in the past year and 11.24% in the past six months.

The Roundhill Big Tech ETF [BIGT] offers exposure to the FAAMG stocks — Facebook, Apple [AAPL], Amazon [AMZN], Microsoft [MSFT] and Google/Alphabet [GOOG] — and is a pure-play on the tech industry. The fund has gained 23.5% since its launch on 11 April.