The UK’s Competition and Markets Authority (CMA) has ordered the company formerly known as Facebook to unwind its acquisition of Giphy, Inc. due to potential harms in the markets for social media and digital display advertising. Facebook completed the $400 million acquisition of Giphy on May15, 2020 but has held the businesses separate since June 9, 2020, under CMA orders.
Giphy proclaims itself to be the largest curator of quick-looping silent video clips, or GIFs. The company draws more than a billion searches each month in the UK, traffic that plays right into Facebook’s advertising business which already benefits from the enormous volume of traffic on its flagship platform and on Instagram, Messenger, and WhatsApp. More than 80% of internet users in the UK visit at least one Facebook site per month and Facebook accounts for half of the more than $9 billion in display advertising revenue generated in the UK annually.
In its Final Report, the CMA grappled with defining the relevant market and the respective shares controlled by individual players in a space in which products are wide ranging and constantly evolving and developing. The CMA said it considered evidence on market shares alongside evidence of how closely the merging parties compete, now or in the future, and the stability of those shares, the strength of competitive constraints, and “the extent of past entry and exit from the relevant markets.” The Authority said its assessment was “forward-looking” based on the two companies’ business plans.
As an independent entity, the CMA determined GIPHY would have continued to supply GIFs to Facebook as well as other social media platforms and would have continued to “develop its products and services, generate revenue and explore (with the financial and commercial support of investors) various options to further monetize its products.”
Anticompetitive Effects and the Decision to Unwind
The CMA determined the merger would enable Facebook to perpetuate its dominance in the social media market. Social media platforms use large searchable GIF databases to drive user engagement and only two companies possess such databases – Giphy and Tenor (owned by Google). Therefore, by acquiring Giphy, Facebook would control an important user engagement tool, capturing a competitive advantage in a social media market it already dominates.
The CMA also concluded the merger would eliminate a potential rival in the digital display advertising market. Prior to the merger, Giphy introduced Paid Alignment in the US – an innovative advertising service that allowed companies to promote their brands through GIFs. When acquired, GIPHY was considering expanding Paid Alignment internationally, including in the UK. Regardless of Paid Alignment’s ultimate success, the CMA believed it would spur innovation from others in the display advertising market. Following the merger, Facebook terminated Giphy’s advertising services, removing an important source of potential competition. This was a particular concern in light of Facebook’s 50% share of UK display advertising revenue.
The CMA concluded the only way to cure these competition issues was to force Facebook to divest Giphy. The CMA observed that “[s]tructural remedies [such as divestiture] are normally preferable to behavioral remedies, as they address the adverse effects of the merger at source. Although behavioral remedies may be suitable in certain cases, this merger does not have such characteristics.”
A Welcomed Trend Among Antitrust Regulators
For years, big tech firms have engaged in serial acquisitions exempt from governmental pre-merger review because the transactions were too small or did not trigger close scrutiny because the transactions raised no traditional antitrust red flags (e.g., significant market overlaps or high increases in the HHI index in a well-defined relevant market). As a result, federal agencies failed to challenge several high-tech mergers that turned out to have significant anticompetitive effects, including some that have since drawn agency challenge, such as Facebook’s acquisitions of WhatsApp and Instagram. These unchecked mergers are a major reason big tech companies attained their problematic size and market power. The CMA’s approach to Facebook’s proposed Giphy acquisition reveals a welcomed trend toward taking potential competitive harm more seriously.
Regulators may be learning from their mistakes, as several have updated their thinking concerning acquisitions by big tech firms. Here the CMA condemned Facebook’s acquisition even though Giphy did not yet generate revenue in the UK and had no explicit plans to expand into the UK when it was acquired. While these facts may have led to a swift approval in years past, CMA determined they were outweighed by the CMA’s forecast of how the merger would affect competition and consumers in the relevant markets in the future, including the potential for Giphy to enter the UK display advertising market and drive competition and innovation, which cannot occur if the merger with Facebook were allowed to proceed.
US agencies have likewise revised their attitudes and policies regarding acquisitions by big tech firms. For example, over the past twelve months, the FTC accused Facebook of engaging in a buy-and-bury scheme designed to crush competition after its efforts to innovate failed, which included reversing its position on Facebook’s acquisitions of WhatsApp and Instagram. The Commission also began reviewing a decades’ worth of mergers by big tech companies, including those by Facebook, Google, and Amazon. The agency also renewed its pledge to require aggressive acquirers to obtain prior approval “before closing any future transaction affecting each relevant market for which a violation was alleged, for a minimum of 10 years.”
CMA’s decision could mark a trend toward ending big tech’s unfettered acquisition spree.
To be sure, the CMA’s decision to force Facebook to divest Giphy may not move the needle much on its own. The $400 million price tag pales in comparison to numerous other mergers in this space. But, given the apparent change in attitude toward big tech acquisitions exhibited by multiple influential enforcement agencies, the CMA’s decision could mark a trend toward ending big tech’s unfettered acquisition spree – arguably a significant inflection point toward the development of a pro-consumer big tech policy.
Edited by Tom Hagy for MoginRubin LLP.