A UK regulator has provisionally found that Facebook’s $400 million merger with Giphy last year could remove a potential challenger in the display advertising market.

The Silicon Valley merger brought together Facebook, the largest provider of social media sites and display advertising in the UK, with Giphy, the largest provider of GIFs.

Following an in-depth investigation, the Competition and Markets Authority has provisionally found that Facebook’s takeover of Giphy will negatively impact competition between social media platforms.

If confirmed, the ruling could require Facebook to unwind the deal and sell off Giphy in its entirety.

Millions of posts every day on social media sites now include a GIF. The CMA said any reduction in the choice or quality of these GIFs could significantly affect how people use these sites and whether or not they switch to a different platform, such as Facebook. 

As most major social media sites that compete with Facebook use Giphy GIFs, and there is only one other large provider of GIFs – Google’s Tenor – these platforms have very little choice.

The CMA provisionally found that Facebook’s ownership of Giphy could lead it to deny other platforms access to its GIFs. Alternatively, it could change the terms of this access – for example, Facebook could require Giphy customers, such as TikTok, Twitter and Snapchat, to provide more user data in order to access Giphy GIFs. 

Such actions could increase Facebook’s market power, which is already significant. 

The CMA’s analysis suggests that Facebook’s platforms – Facebook, WhatsApp, and Instagram – account for over 70% of the time people spend on social media and are accessed at least once a month by 80% of all internet users.

Before the merger, Giphy was offering innovative paid advertising in the US, which had the potential to compete with Facebook’s own display advertising services. This allowed companies – including customers such as Dunkin’ Donuts and Pepsi – to promote their brands through visual images and GIFs.

The CMA found that, prior to the deal, Giphy was considering expanding its advertising services to other countries, including the UK. This would have brought a new player into the advertising market and a potential challenger to Facebook. It would also have encouraged greater innovation from others in the market, including social media sites and advertisers. 

However, Facebook terminated Giphy’s paid advertising partnerships following the deal, with the CMA concluding therefore that an important source of potential competition has been lost.

This is particularly concerning given Facebook’s existing market power in display advertising – as part of its assessment, the CMA found that Facebook had a share of around 50% of the £5.5 billion display advertising market in the UK.

Stuart McIntosh, chair of the independent inquiry group carrying out the phase 2 investigation, said: “Millions of people share GIFs every day with friends, family and colleagues, and this number continues to grow. 

“Giphy’s takeover could see Facebook withdrawing GIFs from competing platforms or requiring more user data in order to access them. It also removes a potential challenger to Facebook in the £5.5 billion display advertising market. None of this would be good news for customers.

“While our investigation has shown serious competition concerns, these are provisional. We will now consult on our findings before completing our review. 

“Should we conclude that the merger is detrimental to the market and social media users, we will take the necessary actions to make sure people are protected.”

The merger is also being reviewed by other competition authorities.

Facebook responded: “We disagree with the CMA’s preliminary findings, which we do not believe to be supported by the evidence.

“As we have demonstrated, this merger is in the best interest of people and businesses in the UK — and around the world — who use Giphy and our services. 

“We will continue to work with the CMA to address the misconception that the deal harms competition.”

The CMA’s final report, which will take into account any responses to the provisional findings from interested parties, is due by 6th October 2021.