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Meta and Giphy deal ‘the first unwinding of a big tech deal in CMA history’

The CMA requires Facebook (which has recently renamed itself ‘Meta’) to sell Giphy, after finding that the deal could harm social media users and UK advertisers.

In line with its Phase 2 provisional findings issued in August, the Competition and Markets Authority (CMA) has today concluded that Facebook’s acquisition of Giphy would reduce competition between social media platforms and that the deal has already removed Giphy as a potential challenger in the display advertising market.

The independent CMA panel reviewing the merger has 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.

As part of its in-depth investigation, the CMA also looked at how the deal would affect the display advertising market. It found that, before the merger, Giphy had launched innovative advertising services which it was considering expanding to countries outside the US, including the UK. Giphy’s services allowed companies – such as Dunkin’ Donuts and Pepsi – to promote their brands through visual images and GIFs.

The CMA found that Giphy’s advertising services had the potential to compete with Facebook’s own display advertising services. They would have also encouraged greater innovation from others in the market, including social media sites and advertisers. Facebook terminated Giphy’s advertising services at the time of the merger, removing an important source of potential competition. The CMA considers 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 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.

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.”

What does this mean for ‘Big Tech’?

There has been a lot of reporting this morning on the announcement that the deal has been blocked/reversed, and Peter Broadhurst, Partner and Member of the Anti-trust and Competition Group at Crowell & Moring, looks at what he expects to see from on the final findings and the wider implications of any ground-breaking ruling in relation to CMA oversight of big-tech. Broadhurst provided this comment ahead of the offical announcement.

I very much expect that the CMA are going to follow the provisional findings and determine that there is a substantial lessening of competition in this instance. One of the most interesting aspects of this decision will be whether or not it takes into account the horizontal theory of harm (i.e. Meta is big in display advertising and Giphy is a potential entrant) – such a move would suggest challenges going forward for companies trying to do deals where the parties don’t actually compete but could do in the future.

Interestingly, the third-party responses submitted by way of comment to the Provisional Findings are all in favour of the deal. They all say that the CMA is overreaching and that the effect will be to chill the incentives of start-ups and investors. The decision will therefore be a very important one within the context of the CMA’s future oversight of the digital tech space, as well as the relationship between the watchdog and emerging actors within this space going forward.

If the CMA do decide, which now seems possible, to reverse the deal, this will be the first unwinding of a big tech deal in CMA history, and all eyes will be on Meta’s response. My own view is that a remedy will be required, but that the CMA may go for something less than the “reconstitution, then sale” which they said was the only option at the time of the Provisional Findings. In particular, I think that the open access to Giphy products post-merger on fair, reasonable and non-discriminatory terms would remove a lot of the concerns here. But, the CMA, who have become increasingly unpredictable, may not think that is enough.

Could new tech takeover laws threaten the future of British start-ups?

UK start-ups and competition would be damaged if the government cracks down on mergers and acquisitions involving big tech companies, a new report argues.

The report, released at the end of a Government consultation, warns that the plans will chill investment in British tech start-ups, hurting the UK’s competitiveness and attractiveness as a place for tech startups to do business.

Under the status quo, mergers are blocked if the Competition and Markets Authority (CMA) thinks they are likely to reduce competition – the CMA is expected to block Facebook’s acquisition of GIF host Giphy on these grounds. The Government’s proposals would lower the burden of proof for deals involving certain Big Tech companies such as Google and Facebook. Under the new standard, any deal with a “realistic prospect” of reducing competition – defined in law as being “greater than fanciful, but less than 50 percent” – would be blocked. This, the report argues, would amount to a de facto ban on mergers and acquisitions involving big tech companies.

The authors also fear it could leave the UK relatively worse off as a place to set up a tech business if other countries, especially the United States, don’t follow suit. Sam Bowman, the report’s co-author, said: “The UK government has misjudged the prospects for a similar crackdown on tech M&A in the United States, and as a result may back Britain into a corner. If we proceed with such stringent rules blocking these deals, but the US does not, the UK will become a terrible place to found a tech startup, since it will be so much harder to be acquired here than it would be in Silicon Valley. Even the European Union is not proposing such anti-tech rules. The UK startup scene is something to be proud of – it would be a profound mistake to make its life so much harder, and leave the UK as a global outlier.”

The report, authored by entrepreneurship think tank The Entrepreneurs Network along with the International Center for Law & Economics, highlights the importance of takeovers to the UK’s startup ecosystem.

Selling to a larger company is an important route to exit for startup founders and investors. Almost as many British startups (eight) were bought by Microsoft, Google, Facebook, Amazon, and Apple – the companies likely to face this crackdown – as exited through IPO (nine) in 2019.

Restrictions on takeovers can have strong negative effects on venture capital investments  – the report highlights data indicating that US states that pass anti-takeover laws see VC deals decline by more than a quarter.

Camila de Coverly Veale of startup lobby group Coadec said: “This is a vital and timely report. Founders and investors see exits via M&A as an incredibly effective recycler of talent and investment around the tech ecosystem – and they are concerned that the proposals under consideration would obstruct it. When we polled VCs we found that half would significantly reduce the amount they invested if the ability to exit through M&A was restricted. We hope the Government takes notes.”

Competition in digital markets often takes place between large digital platforms, the report argues, using their advantage in the original market to gain a foothold in the new one dominated by another digital platform. And acquisitions of the kind being curbed can accelerate this competition.

There are many examples of this. Google’s acquisition of Android increased competition faced by Apple’s iPhone; Apple’s acquisition of Beats by Dre increased competition faced by Spotify; Google, Amazon, and Microsoft all compete in cloud computing and have used acquisitions. All of these, the report argues, could have been in jeopardy under the government’s proposals.

“By blocking deals that would increase competition between the tech giants, the Government’s plans could seriously backfire.” Sam Dumitriu, Research Director of The Entrepreneurs Network and report co-author.