Facebook / GIPHY merger – The End of Big Tech’s Spending Spree?
This article examines whether the UK competition authority's decision means a change in the analysis of mergers in the digital economy.
On 30 November 2021 the Competition and Markets Authority (CMA) concluded in its Report that its concerns can only be addressed by Facebook selling GIPHY in its entirety to an approved buyer. Unsurprisingly the decision was noted by the technology sector commentators; the online magazine Wired wrote that the CMA’s decision was ‘a bold move – and a global first’ and the title of the article was Meta’s Failed Giphy Deal Could End Big Tech’s Spending Spree. That article title could be correct if either there is a new and restrictive paradigm in the treatment of such mergers, or if the treatment of such mergers is sufficiently uncertain that the business risk of undertaking merger activity is too high.
GIPHY, founded in 2013, is an online database and search engine that allows users to search for and share GIFs. Its service is popular. The CMA identified that ‘on Instagram which integrates solely with GIPHY over 3 million UK users posted/shared content that included a GIF and over 9 million pieces of content containing a GIF were posted/shared by UK users during that one-week period’. Facebook, originally comprising the eponymous Facebook app, now includes a family of apps, namely, Instagram, WhatsApp and Messenger. For each app Facebook generates revenue through display advertising. Together Facebook’s family of apps have an active global user base of 2.80 billion per month, with Facebook generating £50 in revenue per active user per year in the UK.
The CMA’s findings
While the CMA’s findings are commendably clear, it is evident the CMA faced challenges, given it described the relevant products as ‘complex’ and ‘differentiated’ with potential issues that will ‘dynamically evolve over time’. The CMA identified relied heavily in its analysis on its recently amended Merger Assessment Guidelines (the Guidelines). It identified the following three markets: the supply of searchable GIF libraries, the supply of social media, and the supply of display advertising. In relation to the supply of searchable GIF libraries, the CMA found that GIPHY held a market share of 60% to 70%. The next largest player, Tenor, holding 30% to 40%. In relation to the supply of social media, the CMA found that Facebook held a market share of just under 73%. In relation to the supply of display advertising, the CMA found that Facebook held a market share of 40% to 50%. In each case, by reference to other players in the market or close to the market, the CMA concluded that those market shares resulted in each of the parties holding significant market power.
The CMA found a substantial lessening of competition in the supply of display advertising services in the UK arising from a loss of dynamic competition. A merger involving a potential competitor might lessen future competition between the merging parties after the potential entrant would have entered or expanded. This is a loss of potential competitive pressure. Additionally, the potential of market entry influences existing competition in the markets (referred to as the dynamic competitive process). A merger might lead to a loss of dynamic competition.
The CMA found a substantial lessening of competition in the supply of social media services worldwide (including in the UK) because of input foreclosure.
The Legal and Policy Context
The application of competition law to digital markets has been much debated and changes in policy and the law have been proposed. Arguably the reference point for a change in the competition policy debate as regards the technology sector is the publication in the Yale Law Journal in 2016 of the article by Lina Khan entitled Amazon’s Antitrust Paradox. A review of past mergers was undertaken in the UK for the CMA in 2019 in relation to digital mergers (Lear Report). On 13 March 2019 a report was delivered to the UK government by a panel of experts led by Jason Furman, an American academic (Furman Review). This contains recommendations. In relation to mergers is the recommendation for the CMA to ‘take more frequent and firmer action to challenge mergers that could be detrimental to consumer welfare through reducing future levels of innovation and competition’.
The Lie of the Land for Technology Mergers
The Lear Report identifies that in future if the CMA is to be able to attack mergers such as Facebook/Instagram and Google/Waze, then the CMA would have to ‘accept a greater degree of uncertainty in their evaluation’.
On 23 December 2021 Facebook submitted to the Competition Appeal Tribunal an application for review of the CMA’s decision. Facebook’s main argument is that the CMA has misapplied the SLC test by basing its analysis on the concept of a loss of dynamic competition.
For technology companies generally, the CMA’s decision will likely be interpreted as a paradigm shift, albeit one that in the context of the legal and policy debate over the last few years is perhaps not a surprise The concept of dynamic competition seems to be an Achilles heel rendering many potential mergers susceptible to a full inquiry, particularly in the digital sector. The result of Facebook’s appeal will be critical, depending upon the outcome, to either support for the CMA’s approach or the need for a stronger theoretical basis and (economic) analysis for the use of dynamic competition arguments. Probably such work, in any event, should be encouraged to create a rigorous normative and conceptual competition framework that stakeholders can comprehend and act upon with reasonable predictability. This might require a broadening of the (economic) analysis that largely underpins competition law. It might require a change in the law.
*With kind permission of the publisher, this article is a summary of the article Facebook / GIPHY Merger – The End of Big Tech’s Spending Spree? by Kiran Desai, published by Lexxion in European Competition and Regulatory Review, (1/2022) – see CoRe - European Competition and Regulatory Law Review (lexxion.eu)
Link to article