The Australian government’s attempt to make Google and Facebook pay for news looks likely to destroy media startups caught in the crossfire as the platform giants become more extreme in their reactions to the proposed regulation.

Two weeks ago, Facebook announced it would ban news on social network feeds in Australia if legislation that forced it to strike deals with news companies went ahead.

The expectation that Facebook’s definition of “news” will be drawn widely to avoid any legal fallout has created panic at digital-only newsrooms.

In particular, lifestyle and youth publishers that source the majority of their traffic from Facebook face closure, while traditional media players that campaigned for the laws look set to be the relative winners in a “scorched earth” media environment post-regulation.

Competition law expert Hannah Marshall at Marque Lawyers says Facebook’s planned news ban shows exactly what is wrong with the regulations.

While the code in its current form mandates payment from the platforms to news publishers, significant value flows the other way in the form of traffic referrals. Digital natives are going to be particularly hard hit by the loss of this audience. “They may not survive,” said Marshall. “The resulting landscape in Australia is likely to look very bleak. Only those very big players are likely to survive.”

Marshall says the only way to stop both companies pulling out of the Australian news market would be to create a legal obligation to supply the “service.” This would make sense if the news industry was paying, not vice versa.

The code contains a “non-discrimination” clause that penalizes Facebook or Google for favoring businesses outside the code. To avoid the code, they will have to define “news” and “news businesses” in the broadest way possible.

A group of 10 Australian digital-only publishers, including youth culture site Junkee and lifestyle title Concrete Playground, say “the current proposal has potential to just further entrench the large traditional media companies and accidentally destroy media diversity in the process.”

The situation is worse than the tone of the statement indicates. Schwartz Media CEO Rebecca Costello — whose news titles are not part of the group of 10 — says her own company will be able to deal with a Facebook withdrawal.

But “I am concerned that this is going to have devastating consequences on small digital-only publishers who were not necessarily going to benefit from the new rules in the first place,” she said.

She says that a tax on Facebook and Google would be a better solution than the code.

“I find it ironic that Facebook is apparently going to find it straightforward to ban real news when they have failed to remove fake news and misinformation from the platform.”

Eric Beecher, chairman of the independent Private Media group, says that although his publications would potentially benefit from the code in its current form, it is flawed.

“What message does it send when a government creates legislation to force two specifically named companies to pay an unlimited amount of money to others because they have innovated and out-competed them?” said Beecher. “What message does it send about investment and innovation in Australia?”

Despite the prospect of closed businesses, reduced media diversity and innovation, and no helping hands for startups, few publishers want to go on the record about the real extent of the damage in a post-Facebook world. Naturally they fear an advertiser exodus in an already tough market.

On top of that, there’s a widespread sense that the current threat shows exactly why the code was developed in the first place: platforms that can kill dependent businesses — with whom they also compete for ad dollars — should be regulated.

This kind of situation is what competition law and regulators were created for. The argument is compelling — until it runs up against the particulars of the ACCC’s legislation. A platform can’t be forced to provide a service and also be made to pay for that service. To do so would make the regulation in question a kind of economic perpetual-motion machine.

The most clear-sighted in the Australian media scene say that Facebook and Google’s reactions to the code as proposed were predictable, and are privately hoping the government will hit pause.

What happens next probably depends on what News Corp and Nine, the media gorillas in the room, think of the latest developments and their prospects in a post-platform world.