The European Commission (EC) today announced that it has found Meta’s “pay or okay” model to be in violation of the Digital Markets Act (DMA) on a preliminary basis. From the EC’s press release:
In response to regulatory changes in the EU, Meta introduced in November 2023 a binary “pay or consent” offer whereby EU users of Facebook and Instagram have to choose between: (i) the subscription for a monthly fee to an ads-free version of these social networks or (ii) the free-of-charge access to a version of these social networks with personalised ads.
The Commission takes the preliminary view that Meta’s “pay or consent” advertising model is not compliant with the DMA as it does not meet the necessary requirements set out under Article 5(2). In particular, Meta’s model:
1 Does not allow users to opt for a service that uses less of their personal data but is otherwise equivalent to the “personalised ads” based service.
2 Does not allow users to exercise their right to freely consent to the combination of their personal data.
In March, soon after the DMA had gone into effect and before it had even concluded its compliance workshops with the named gatekeepers, the EC announced that it was investigating Alphabet, Apple, and Meta for possible violations of that law. As I detail in Europe’s misguided hostility towards Pay or Okay, the EC’s contention related to Meta’s implementation of “pay or okay” is that it utilizes the consent granted under the “okay” option to combine data across two “core platform services,” or product use cases, within Facebook and Instagram: the social networks and the ads platform.
I iterate through the history of policy changes that led Meta to arrive at the “pay or okay” model in that piece and won’t recite that here. To my mind, the critical passage from the EC’s press release on the preliminary finding is this:
To ensure compliance with the DMA, users who do not consent should still get access to an equivalent service which uses less of their personal data, in this case for the personalisation of advertising.
I find this position overbearing and, frankly, illogical. The EC essentially obligates gatekeepers to not maximize profits on revenue generated through the sale of digital advertising, providing the EC with enormous power in determining the business models available to digital platforms.
To support this position, I’d highlight several propositions for operating a consumer-facing digital property:
- Advertising is one monetization vehicle among many, as is gating use behind a recurring subscription fee;
- Personalized advertising, as a general rule, has the potential to produce better economics than contextual advertising for a platform that features no inherent context (like a social media platform);
- When advertising and subscription fees are chosen as the available monetization options for the property, a third usage option exists for consumers: to not use the property at all;
- An indifference curve like the above can only feature points at the extremes when advertising and subscriptions are chosen as the available monetization options because exchanging “some” data for a lower subscription price isn’t practical.
If these propositions are accepted, the EC’s determination in the case of Meta’s use of “pay or okay” — that a third, suboptimally-monetized version of the service be offered if advertising and subscriptions are the monetization mechanics chosen to support the business — imposes the requirement that the gatekeeper offer an access option to consumers that is less economically valuable to it than the others, and which may not justify offering the service at all.
In other words: because the indifference curve can only exist at the extremes (since data can’t be exchanged in real-time for a lower or higher subscription price), and because the firm presumably chooses subscription prices that match the expected economic value of personalized advertising in pursuit of profit maximization, then the obligation to offer an equivalent service monetized through non-personalized advertising prevents the firm from maximizing its profit.
The EC’s insistence that a third (really, fourth, since not using a product is always possible!) monetization option that forces a gatekeeper to suboptimally monetize its product through non-personalized advertising is forceful interventionism. It also represents a de facto ban on personalized advertising: given the option, why would any consumer choose personalized advertising over non-personalized advertising if that choice does not impact product quality, noting the EC’s insistence that an “equivalent service” be offered in both cases? As I note in Europe’s misguided hostility towards Pay or Okay, personalized advertising and subscriptions are two of an innumerable catalog of possible monetization mechanisms. Will the EC insist that all possible options for monetization be made available to consumers? Why should the EC have the ability to impose these foundational design choices on companies?
Strikingly, the EC’s commentary offers no justification for the distinction it implicitly draws between Meta’s use of the “pay or okay” model and that of various EU-based newspapers that have survived scrutiny, as I describe here. The “gatekeeper” designation seems to give the EC broad latitude under the DMA to invalidate business models that are otherwise mundane and inoffensive when employed by any other company.