New EU Rules Could Gouge Facebook (FB), Apple (AAPL) and Alphabet's (GOOGL) Ad Sales - TheStreet

The EU proposed a new rule on Tuesday which would prevent online messaging services like Facebook's (FB) - Get Report WhatsApp and Messenger, Apple's (AAPL) - Get Report iMessage and Alphabet's (GOOGL) - Get Report Gmail from tracking users without their consent to create targeted ads for individual customers.

These services would have to ask for users' consent before they tracked their activity, and would also have to guarantee the confidentiality of conversations they're following. Companies that violate the guidelines could face fines of up to 4% of their global revenue.

"I want to ensure confidentiality of electronic communications and privacy," Andrus Ansip, EU vice president for the digital single market, said in a statement. "Our draft ePrivacy Regulation strikes the right balance: it provides a high level of protection for consumers, while allowing businesses to innovate."

The law is already in place for major telecom operators for online companies that allow users to place calls and messages over the Internet.

The rules, if extended to electronic message services, could hurt major Internet companies because much of their revenues come from online advertising. As an example, in the third quarter of 2016 Menlo Park, Calif.-based Facebook's advertising revenue comprised $6.8 billion of its $7 billion in total sales.

Shares of Facebook closed down about 0.4% to $124.35 on Tuesday. Alphabet also closed lower by about 0.1% to $826.01. Apple stock closed moderately higher, up 0.1% to $119.11.

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Wedbush analyst Michael Pachter said that the new rules could have a "minimal impact over the near term, but potentially a hit to future revenues and profits."

That's because advertising revenue is an increasingly important part of the online space. In Facebook's case, advertising revenue in the most recent quarter had gained 59% year-over-year. For Mountain View, Calif.-based Alphabet, Google advertising revenues saw an 18% rise over last year to $19.82 billion. CFO Ruth Porat calls the advertising business "core" to the company.

According to the Internet Advertising Bureau, online advertising generates about $12.16 billion in revenue for publishers and content creators in the U.K.

"WhatsApp doesn't advertise much, if at all, and is certainly not far along with targeted ads," Pachter noted. "With that said, it's clear that targeted ads are more lucrative than generic ads, as brands want to actually reach potential customers."

Targeted ads use data gleaned from a customer's shopping and browsing history in order to tailor and optimize advertisements that a user sees on a webpage.

An important key to the new legislation is the "opt in" portion, according to Pachter. "To be honest, I think that a significant number of users will opt in," Pachter said. "If it's a foregone conclusion that a user will be delivered ads, most of us prefer relevant ads to generic ones."

"For example, I will probably be happy if I never see another Boniva ad [for osteoporosis], but I'm not offended by Dos Equis ads," the analyst added.

Pachter noted that the best way for a company like Facebook to fight the new proposed legislation "is to work within the confines of the regulation and give users a reason to opt in."

He suggested that these firms could assure users that if they opt in, they'll see fewer ads while browsing.

The rules are still just a proposal for now, although the Commission said that it hopes the European Parliament and the Council work quickly to make sure they're adopted by late May 2018. "It's up to our people to say yes or no," Ansip said, according to Reuters.

The companies did not immediately return requests for comment.

Separately, Facebook will also begin to roll out "mid-roll" ads for videos on the social media site, sources toldThe Wall Street Journal. The company has an existing feature which inserts videos into the middle of live-streaming videos on Facebook Live, but the update would extend that feature to regular videos on the platform.

Facebook will reportedly be offering publishers 55% of advertising revenues from the feature, which is on par with Google-owned video site YouTube. Ads will also be restricted to 15 seconds long and would only run in videos that are at least 90 seconds in length after users have been watching for 20 seconds.