The European Union passed some controversial legislation yesterday, which could negatively affect the advertising models for both Facebook (FB) and Alphabet (GOOG), the two largest digital advertising companies in the world. Though, the intention from the “copyright overhaul” is intended to promote the protection of copyright holders and to ensure fair compensation for their work. This has resulted in two measures passing through the EU Parliament, Article 11 and Article 13, which has been given heightened scrutiny among the journalistic and political community.
This raises some controversy, because the main content aggregation platforms will need to take added measures to ensure they’re not infringing upon copyrights, and that they have a license to distribute the content.
So, what’s Article 11? It basically prevents the redistribution of content that’s longer than a short excerpt from a news publishing organization or media organization. This basically means that, if you were to reproduce the same content, and hyperlink to a news article that you can only use a very brief excerpt unless you have a direct licensing agreement with the news organization or have written permission or approval.
Article 13 pertains to online content sharing service providers, i.e. Google and Facebook, but really any media aggregation portal. Content aggregators will be required to negotiate licenses or obtain permissions from these news organizations. If copyright claims are made then the companies will be required to remove the content and make a best effort to not allow continued redistribution of the copyrighted content on the platform assuming they never negotiated a licensing agreement or never got approval for redistribution.
This is where things get very murky for online aggregators of information, because in most cases it’s not clear what “short excerpt” means in a definitive legal case. In a lot of cases, Twitter, Facebook, and Google provide short descriptions of the content, photos, and the headline. So, the “short excerpt” means that the small snippets typical in newsfeeds of social media websites might be too lengthy and could be subject to copyright infringement. Also, the search results include small snippets of the news content, so users can preview the materials. However, the question then becomes how much redistribution of information becomes too much?
What does this mean for Alphabet and Facebook shareholders?
Well, the legislation gives an open-ended excuse for various media publishers to litigate anyone due to the redistribution of published content. Take for instance, I could technically argue copyright infringement in more cases than what was permissible prior to the passage of the EU Copyright Directive.
This means that, Alphabet with it’s Google News feature when litigated (which could happen) could be forced to takedown news articles from various publishers on its platform. Facebook could be limited in their ability to aggregate content on its platform and could face even more takedown requests driving up the cost for moderating content.
It’s not the end of the world, however for Facebook and Alphabet, because it will take two-years for EU member states to implement the new standards. Second, it’s not likely that media publishers would attempt self-sabotage in the form of limiting their exposure on social networking sites or search. This is because, Facebook and Alphabet are valuable traffic sources for news articles (such as this one). Hence, it opens up social networking sites and search aggregators to litigation from various media companies looking to enforce copyright under the new Copyright Directive, but it’s also going to come at the detriment of these media companies, because it would restrict their ability to gain traffic from these websites thus diminishing their ability to earn revenue from these traffic sources.
The intention behind the EU Copyright Reform was to “redistribute revenues” from Facebook and Alphabet. However, media companies tend to prioritize traffic from these sources and probably wouldn’t undergo the risk or uncertainty of having their content removed from these platforms, because it would heavily diminish the traffic they could generate from the platforms as a consequence.
The EU has taken regulatory campaigns that specifically target large technology companies like Facebook or Alphabet. It has successfully fined both companies for anti-competitive reasons, and so forth. Mainly, the EU wasn’t much of a beneficiary from the technology boom from the early 2000s, as the major tech giants that dominate the web are mostly situated in the United States, which aren’t major economic contributors in the Eurozone, so as a consequence there’s been a lot of legal attempts to take money from tech giant A and give to European company B.
Problem is, the tollbooth model for both Search and Social Media work on the basis of traffic aggregation, and to get access to that massive audience the media companies often have to provide an upfront preview to their content to gain any interest from the users of these platforms. Without an upfront preview the amount of engagement on these posts would drop, and so as a consequence media companies would get less traffic thus generating less revenue.
This gives an open-ended reason for media companies to demand revenue from licenses, but what would most likely occur is a take-down of any content directed to a media site that would demand licensing revenue from these traffic aggregators, and so as a consequence these media sites would get less traffic thus less advertising revenue for their content as well.
This doesn’t resolve anything for media publishers struggling in an online environment, because it doesn’t take away the fundamental advantage of these content aggregators, which is their disproportionate share of online traffic. Demanding money from the companies won’t result in Alphabet or Facebook mailing out checks to every news agency on earth, but rather a removal of content from these platforms, and so as consequence these news sites would get less traffic as a consequence.
At best, shareholders of Facebook, Alphabet, Twitter, and so forth can anticipate some more takedown requests, but it wouldn’t alter the number of users on these platforms. It’s safe to assume that this a non-event, because anyone who would demand licensing revenue from these platforms won’t appear in search or social feeds, and as a consequence won’t gain any traffic from these websites.
Copyright holders want traffic more so than an outright prohibition of these massive tech companies, so the copyright reform doesn’t move the needle or offer the incentives that would actually lead to licensing revenues for these various media entities, and instead it would probably suffocate traffic to these publishing properties if they were to demand licensing revenue. In other words, despite the passage of Copyright Reform in the EU, it’s not going to affect shareholders of these big companies at all.
Those who own internet traffic rule the world regardless of what laws are written.
Disclosure: Alex Cho doesn’t own a position in Facebook or Alphabet at the time of publication.
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