The UK competitions regulator has directed Facebook to sell Giphy after finding that the deal could harm social media users and UK advertisers.
The $400 million Silicon Valley merger last year brought together Facebook, the largest provider of social media sites and display advertising in the UK, with Giphy, the largest provider of GIFs.
In line with its Phase 2 provisional findings issued in August, the Competition and Markets Authority found the deal has already removed a potential challenger to Facebook – now rebranded as Meta – in the display advertising market.
The independent CMA panel reviewing the merger concluded that Facebook would be able to increase its already significant market power in relation to other social media platforms by denying or limiting other platforms’ access to Giphy GIFs, driving more traffic to Facebook-owned sites – Facebook, WhatsApp and Instagram – which already account for 73% of user time spent on social media in the UK; or changing the terms of access by, for example, requiring TikTok, Twitter and Snapchat to provide more user data in order to access Giphy GIFs.
It also found that Giphy’s advertising services had the potential to compete with Facebook’s own display advertising services – and would have also encouraged greater innovation from others in the market, including social media sites and advertisers.
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Facebook terminated Giphy’s advertising services at the time of the merger, removing an important source of potential competition. The CMA considered this particularly concerning given that Facebook controls nearly half of the £7 billion display advertising market in the UK.
After consulting with interested businesses and organisations – and assessing alternative solutions, known as ‘remedies’, put forward by Facebook – the CMA has concluded that its competition concerns can only be addressed by Facebook selling Giphy in its entirety to an approved buyer.
It is the first time the CMA has blocked a major digital tech deal. “It indicates the direction of travel for the UK regulator’s oversight of similar deals going forward,” Peter Broadhurst, partner at Crowell & Moring, said.
“This case is especially significant as the parties don’t actually compete, but could do in the future. The decision also suggests that the CMA will not back down in the face of questions and criticism over jurisdiction and overreach – this is exactly the kind of deal that the CMA feels it should be scrutinising.”
Stuart McIntosh, chair of the independent inquiry group carrying out the phase 2 investigation, said: “The tie-up between Facebook and Giphy has already removed a potential challenger in the display advertising market.
“Without action, it will also allow Facebook to increase its significant market power in social media even further, through controlling competitors’ access to Giphy GIFs.
“By requiring Facebook to sell Giphy, we are protecting millions of social media users and promoting competition and innovation in digital advertising.”
Broadhurst added: “If you accept that Giphy provides a key input, then the vertical foreclosure theory – assuming that customers would switch from other social media platforms to Meta if Giphy were no longer available on those other platforms – is not that contentious, although historically vertical deals have not usually been seen as raising significant competition concerns.
“The more interesting aspect of this decision is its focus on dynamic potential competition – i.e. Meta is big in display advertising and Giphy is a potential entrant. The CMA has, I think, lowered the bar again and this gives a clear indication of how they are proposing to look at potential competition in the context of mergers going forward.
“Let’s be clear: Giphy had no business at all in the UK; only aspirations to start generating revenue internationally, including in the UK.
“This will cause quite a lot of uncertainty for companies trying to do deals where the parties don’t actually compete, but maybe could do in the future – particularly where one of them may be big in its own market.
“The remedy imposed is that Giphy needs to be disentangled from Facebook, have certain key assets and activities reinstated and then sold to a suitable buyer, with sufficient financial resources to allow it to compete as if it have never been acquired.
“This outcome is consistent with the CMA’s position that, although the UK has a voluntary merger control regime, parties complete deals without having first sought approval at their own risk.”