Greater Internet Regulations – like NetzDG – Hurt Investment, Innovation, and Free Speech
Recent government mandates across the world calling for greater internet regulation and requiring social media sites remove user-generated content are ineffective, costly, and anti-competitive. One example is Germany’s Network Enforcement Act, or NetzDG, which was passed in 2017 and potentially imposed high fines on social media networks with 2 million or more registered users. The law requires that social media networks review all complaints and remove designated categories of content within 24 hours, and if they do not comply, the network may be fined up to €50 million euros (or $54 million) for noncompliance.
A recent CCIA research center cost-benefit analysis of NetzDG found that in 2022, four leading social media sites – YouTube, Facebook, Instagram, and Twitter – received more than 2,710,327 million complaints in Germany pursuant to NetzDG. Of these complaints, 99.8% – 2,705,189 reports – were either non-violative of NetzDG or duplicative. In fact, 84.4% of all reports were false positives, and 98.8% of the remaining reports were already caught by the social media sites’ community guidelines. Social media sites are already working hard to remove harmful content, both to keep users safe and to protect trust in their brands from users and advertisers.
Additionally, users wasted considerable time filing these complaints. Assuming it takes an average of ten minutes to complete each detailed submission form, users wasted 22.9 million minutes filing false positive NetzDG reports and 4.2 million minutes filing duplicative reports. This amounted to 27.1 million minutes wasted filing NetzDG reports in 2022! That’s 51.6 years of users’ time wasted filing needless reports during a single year, to produce just 5,138 incremental takedowns across four leading sites. Is it worth almost 3.7 days worth of users’ time spent on false-positive or duplicative reports per valid takedown?
NetzDG compliance also requires an enormous amount of trained staff to review and takedown violative content within 24-hours of reporting in order to avoid huge fines. The analysis found that the four social media sites required 441 staffers for NetzDG compliance, resulting in fewer than one incremental content takedown per month per staffer. This means that many workers were hired and trained to handle mostly false positive and duplicative reports, with only a fraction of their workload being dedicated to intended NetzDG takedowns.
Our analysis also looked at the labor compensation cost per incremental NetzDG takedown, which ranges from $1,741 to $5,116 per takedown in 2022. In addition to the compliance costs social media companies faced, NetzDG cost the Germany economy €20.4 million (or $22.25 million) per year, about $4,336 per incremental takedown. These additional costs ultimately discourage competition by impacting smaller intermediaries more than larger sites. Startups and small companies have fewer resources to spend on compliance, and because there are economies of scale in compliance with NetzDG-like policies, startups face higher barriers to entry in the presence of such policies.
Recent research from the CCIA Research Center and the Copia Institute also analyzed the unintended impacts of policies targeting internet services that host user-generated content in seven countries. The study found that the studied regulations decreased innovation, increased barriers to entry for new entrants in regulated spaces, and harmed free speech.
The report found that internet regulations decreased investment in targeted categories of startups by between 15.2% and 73.4%, which suggests that investors decreased investment in social media companies affected by internet regulations because such regulations made it more difficult for these startups to succeed, and because their investment would cover compliance and litigation costs, rather than innovation. This leads to less innovation in social media and fewer companies that can compete with established firms.
This trend can be seen in Germany before and after the NetzDG was implemented. In the three years prior to NetzDG, social media companies raised more than $85 million, and after NetzDG went into effect in Germany, German social media companies only raised $30 million. In contrast, France and the UK received more funding in social media companies after NetzDG. Further confirming that NetzDG, and other internet regulations, limit companies ability to innovate, grow, and succeed.
There was a similar trend in the United States where FOSTA was introduced to stop sex trafficking. Not only did the law make it more difficult for the U.S. Law Enforcement to do their jobs, put sex workers at risk, and increased questionable and costly litigation, but it also hurt investment in social media companies. Two years prior to FOSTA, there were 327 early-stage investment rounds in the U.S.-based social media companies, which totaled $243 million. However, in the two-years after FOSTA was passed, early-stage funding rounds declined to 294 investment rounds, which only raised $206 million. The trend was similar for later-stage investment rounds. Prior to FOSTA, 202 later-stage financing rounds for U.S.-based social media companies raised $5.8 billion, but in the two years following FOSTA there were only 142 financing rounds raising $2.9 billion.
Not only do internet regulations hurt social media investment and innovation, but authoritarian governments also use them to favor local companies and suppress speech. Inspired by Germany, both Pakistan and Indonesia implemented laws similar to that of NetzDG, which are publicized as requiring the removal of unlawful content within a certain timeframe. In actuality, these laws are being used by the government to censor social media users. Over time, the government-directed removal of content tends to suppress dissent, minority ethnic, religious, and cultural identities, and speech generally.
The general trend is clear: policies increasing liability risk for digital intermediaries based on user-generated content, such as penalties for failing to remove disfavored speech under strict timeframes, tend to reduce investment in covered categories of startups in those jurisdictions. The one exception actually proves the rule. India implemented stricter intermediary liability rules in 2021 and saw increased investment in social media startups. This seeming exception to the rule was due to protectionist elements that were designed to help local Indian companies, while hurting international companies. This is evident with Twitter and a very similar Indian microblogging company, Koo. The Indian government threatened to jail Twitter executives if the company did not agree to remove tweets that were critical of the government, required local Twitter employees to comply with censorship demands or be jailed, revoked Twitter’s liability protections, and criticized the platform publicly. However, Koo, which was close with the Indian government leadership and toed the government’s preferred line on messaging and removal of dissident content, was publicly praised by the Indian government and raised large sums of money.
After recent analyses, it is clear that government mandates calling for greater internet regulation related to user-generated content are ineffective, costly, and anti-competitive. They decrease investment, decrease innovation, and hurt free speech.
