Facebook's growth went into reverse for the first time, and the worst is yet to come

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Facebook growth is going backwards.

• Facebook saw a decline in monthly active users for the first time in its history.
• It's a big deal because the decline was in Europe, which has just introduced the strict new GDPR privacy regulation.
• It shows that regulation is capable of curtailing Facebook's massive growth and capping its revenue.
• The worst is yet to come because the full impact of GDPR is yet to kick in.

Facebook saw a decline in monthly active users for the first time in its history, the company reported during its dramatic second-quarter earnings on Wednesday.

Any decline is significant and bad news for a company generally considered to be a rocket ship of growth. But what should cause some alarm is where the decline happened, and whether it will get worse.

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According to Facebook, European monthly active users dropped by 1 million between the first and second quarters, falling from 377 million to 376 million.

Facebook

It's the only region where Facebook saw declines, with the biggest region, Asia-Pacific, jumping from 873 million users to 894 million users. The US stayed flat quarter over quarter at 241 million monthly active users.

Facebook blamed the decline on "currency headwinds" and Europe's new privacy-focused regulation, the GDPR.

"GDPR was an important moment for our industry," CEO Mark Zuckerberg told analysts. "We did see a decline in monthly actives in Europe, down by about 1 million people as a result."

GDPR was specifically designed to bring the big tech firms to heel, and regulates how companies use people's data.

Executives noticeably dodged talking about the ongoing impact of GDPR beyond the second quarter.

"[We] don't have any update on trends," said Wehner. "We had indicated in the first quarter that we would expect to see a decline. We're not providing any guidance on [monthly active users] and [daily active users] in Europe on this call."

There are multiple signs that Europe won't recover.

Europe only rolled out its new privacy rules in late May - so Facebook will continue to feel its impact into the next quarter

GDPR only kicked in on May 25, two-thirds of the way through Facebook's second quarter. Facebook began showing its privacy notifications around May 24 in order to comply with the new rules.

Facebook's thesis is that these notifications turned off its European users, who then spent less time on the platform and have perhaps become more privacy-conscious.

Given that GDPR only impacted some of Facebook's second quarter, there could be knock-on effects in the third quarter. The decline shows that Facebook, which seemed to be infallible, isn't completely invincible against regulation.

And whether Facebook is even properly complying with GDPR is under some contention. At the moment, Facebook tells users who don't share certain types of data that they won't be able to use parts of its platform. That goes against the spirit of GDPR, which says companies can't penalise users for not sharing information.

As Pivotal analyst Brian Wieser put it: "Our view is that the company is far from 'out of the woods' as the bundling of consent for Facebook to use consumer data with access to the platform appears to be an aggressive interpretation of GDPR, and one that might be more subject to eventual regulatory action.

"While those actions might take time to play out, it is still possible that threatened fines associated with GDPR to Facebook or other sellers of advertising could also have the effect of spooking advertisers into changing how they use data with media owners."

In other words, a court could find that Facebook hasn't complied with GDPR, fine the company, and then force even stricter privacy measures that impact its European user base even more.

Losing money and users in its second-biggest market would be very bad news for Facebook

Europe has, up until now, been an extremely stable market for Facebook. It's the second biggest by active users, behind Asia-Pacific, and the second biggest in how much money the company makes per user, behind the US.

This is how much Facebook makes per user in its biggest markets:

• US: $25.91
• Europe: $8.76
• Asia: $2.62

Facebook

That's why Europe, despite being smaller than Asia-Pacific by user numbers, actually brought in more revenue. Europe made $3.3 billion in revenue, versus $2.3 billion from Asia.

Facebook

This is why any sign of decline in Europe is so drastic. While revenue and average revenue per user looks intact for now, any sign of cratering engagement will scare advertisers away from Facebook's core platform.

Facebook appears to know that, with COO Sheryl Sandberg noting that advertisers were still adapting to the new rules. "GDPR has not had a revenue impact, but we also recognize it wasn't fully rolled out this quarter," she told analysts. "It was very encouraging for us to see that the vast majority of people affirmed that they want us to use information, including from the websites they visit, to make their ads more relevant. But, as we look further out, we recognize that there's still risk, and we're going to watch closely."