Forget Apple and Google. Meta Has Another Existential Threat on the Horizon.

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Meta Platforms

‘ shareholders have had a lot to worry about recently.

The social media giant and parent company to Facebook, Instagram, and WhatsApp has been in focus this month after it reported weak earnings and an anemic outlook for revenue growth. In the spotlight are fears that users are fleeing its platforms, and that its core advertising business faces intense headwinds amid new online privacy rules.

Meta (ticker: FB) witnessed the largest one-day loss in market capitalization in U.S. history after its quarterly results on Feb. 2, with hundreds of billions of dollars in value being wiped away as the shares plunged 26%. The stock has fallen a further 12% since then, though it was 0.5% higher in premarket trading Friday amid a wider rise in stocks.

The central threat to Meta’s business model is rooted in changes by

Apple

(AAPL) to privacy rules on its mobile devices, like iPhones—from which many Meta users access its platforms. This week brought another blow: Google parent

Alphabet

(GOOGL) announced that it would introduce similar privacy rules for the Android mobile operating system, which is expected to deepen Meta’s woes.

Forget

Apple

and Google. If we’re talking about existential threats, there are bigger ones than privacy rules for mobile devices: tough European regulators.

It all comes down to regulations about data transfers between Europe and the U.S.. Meta’s advertising-heavy business fundamentally requires it to collect data on its users, which is typically moved, stored, and analyzed overseas. 

This is counter to European rules. A data transfer framework the company previously relied upon was invalidated in July 2020 by the European Union’s highest court, on the grounds that it didn’t protect EU citizens from U.S. surveillance. Since then, Meta has used “standard contractual clauses” (SCCs) as a legal workaround to continue transferring data out of Europe.

Meta’s main European data regulator is the Irish Data Protection Commission (IDPC) because the company’s regional home base is Dublin. The IDPC said in a preliminary decision in 2020 that SCCs “cannot in practice be used.”

Should SCCs be definitively invalidated, Meta would be in a tough spot. Building adequate local data storage facilities could be highly costly, and there may be few options to limit overseas data transfers in cases where customer interactions are inherently international, such as in gaming. Europe’s regulations cover user data wherever in the world it goes.

Meta has warned in the past that it may have to leave Europe if no solution is reached—and a new trans-Atlantic data framework has been slow to materialize from politicians. The company has said it expects a final decision from Ireland on SCCs in the first half of this year.

“If a new trans-Atlantic data transfer framework is not adopted and we are unable to continue to rely on SCCs or rely upon other alternative means of data transfers from Europe to the United States, we will likely be unable to offer a number of our most significant products and services, including Facebook and Instagram, in Europe, which would materially and adversely affect our business, financial condition, and results of operations,” Meta said in its annual report earlier this month.

Meta doesn’t want to leave Europe, but it may have no choice. Doing so couldn’t be anything but painful: the region accounted for more than $29 billion in annual sales or around 25% of Meta’s revenue in 2021. The U.K.—no longer part of the EU and not beholden to the same privacy laws—accounts for a chunk of that, but the loss to the company’s top line would be staggering.

“We have absolutely no desire and no plans to withdraw from Europe,” a Meta spokesperson told Barron’s. “We are closely monitoring the potential impact on our European operations as these developments progress.”

With Meta stock already under pressure, developments in Ireland are another key area for investors to watch. The result may not be the kind that gets liked and shared.

Write to Jack Denton at [email protected]