The Competition and Markets Authority have threatened to dissolve Facebook’s £289m acquisition of Giphy based on fruitless allegations the merger would be anti-competitive. The only catch is: Facebook and Giphy are not competitors. Breaking up this deal on antitrust grounds will have international consequences.
Regulators across the world are becoming increasingly hostile towards Facebook, as they attempt to tackle its dominance. The social media giant has found itself at the center of antitrust accusations in the United States, India, Brazil — and, now, the UK.
After a months-long probe, the CMA concluded that the acquision of Giphy has “resulted or would result in a substantial lessening of competition in social media and display advertising, harming social media users and businesses in the UK.” Yet, the 300-page report scrambles to find any evidence of anti-competitive conduct, and instead relies upon a convoluted claim of potential competition.
If the CMA successfully unwinds the deal with such meritless claims, it will set an unfortunate precedent for mergers and acquisitions around the world.
For those unititiated, Giphy is an online, searchable library of GIFs. A GIF is a short, soundless video that perpetually loops to create interesting animations. With the aid of websites and mobile apps, they are incredibly easy to make.
But even if we acknowledge that Giphy is the main supplier of GIFs, it still would not — as the CMA’s report argues — have been a potential competitor to Facebook.
The report claims that Facebook and Giphy were both competing in the “display advertising” business. This is an inaccurate characterization and leads to the flawed conclusion that the businesses were in the same product market, which they aren’t — not even close. Aside from obvious dissimilarities between a social media website and GIF library, the two companies offered two vastly different experiences for both users and advertisers.
Facebook offers advertisers space on its social media websites and apps, and typically charges based on clicks. On the other hand, Giphy relied upon VC funding until very recently, when it introduced a “paid alignment” service to partners who wanted branded GIFs. To that end, pre-merger Giphy did not fit into the CMA’s own definition of “display advertising.” Its service was not an owned-and-operated platform, nor part of the open display market, as outlined by the CMA.
But if we’re going to view all forms of advertising as one and the same for the purposes of antitrust enforcement, then Facebook and Giphy are two of many platforms that compete in this space. In that case, the deal would not lead to a “substantial lessening of competition” as described in the report.
Their deal is far from a horizontal merger. And regulators seem to know that. They aren’t making the argument that Giphy would have grown to Facebook’s size but, rather, that both companies may have innovated more to compete with one another.
The British watchdog emphasized the innovative prospects of the paid alignment service to illustrate a potential loss of competition, despite the improbability of the purported, adverse effects. Facebook required the termination of Giphy’s paid alignment activities, but it can’t forbid all companies from adopting the business model. If an actual advertising competitor wanted to use this strategy, they could. And thus the profound innovation, as envisaged by the CMA, could still come to fruition.
On that note, there was no guarantee that the paid alignment service would be a success. Giphy’s advertising business was still very new at the time of acquisition. In its 7-year tenure, the GIF library was not profitable. The Facebook deal likely provided the company a path forward and a means to compete against Tenor, a GIF library owned by Google.
If CMA regulators move forward and require Facebook to divest from Giphy, it would set a negative precedent for future mergers and acquisitions in both the UK and around the world. Regulators are trying to stake their claim where their authority is tenuous and are, subsequently, sending a signal to the international business community that they are neither welcomed nor respected in the UK.