Facebook/Giphy: UK, EC Dial Up Antitrust Scrutiny as Giphy Acquisition Hangs By a Thread

Published on Jun 08, 2021

The UK’s competition watchdog last week intensified scrutiny of Facebook’s (FB) dominance in digital advertising, further complicating the authority’s ongoing review of the social network giant’s completed acquisition of Giphy.

The Competition and Market Authority antitrust probe—which is looking into whether Facebook unfairly uses the advertising data it collects—was jointly announced with the European Commission, showing how the two agencies can act in tandem against the dominance of Big Tech in a post-Brexit world.

While the CMA antitrust investigation and the Giphy merger review aren’t directly linked—the new UK investigation focuses on online classified ads and online dating—the UK regulator said in its decision opening a phase II review that Facebook’s ownership of Giphy “may reduce future competition in display advertising.”

In light of the antitrust probe, the CMA will likely find it hard to justify approving any move by Facebook that shields the company from competition in digital advertising. That puts the UK watchdog in prime position to require Facebook to unwind the Giphy deal, which closed in May 2020.

Such a move would back the authority’s tough talk on digital industry mergers. Even though the CMA’s new merger guidelines, published in March, don’t introduce new theories of harm, they do require the authority to “consider carefully its approach to the assessment of mergers in such digital markets.”

Ominously for Big Tech companies, and not just Facebook, the guidelines specifically refer to the need to address the risk of under-enforcement, particularly concerning digital markets.

The CMA opened its in-depth probe into the Giphy acquisition on April 1. The agency is evaluating whether Giphy—a provider of short, looping, soundless videos known as GIFs—would have become a competitor to Facebook in the UK by expanding digital advertising partnerships it had already struck with brands elsewhere.

According to the watchdog’s administrative timetable, it will soon consider its provisional findings before notifying Facebook of those initial conclusions in mid to late July. But that timeline was thrown into doubt yesterday when the CMA published a notice extending its inquiry period because

Facebook failed to comply with an information request. That extension will delay the review and push back the statutory deadline for the phase II review, which was September 15.

A spokesperson for the CMA declined to comment on the suspension, adding that the Giphy and antitrust cases are separate investigations.

Failure to file. Competition scrutiny of the Giphy acquisition extends beyond the UK. The transaction has triggered U.S. reviews by the FTC and New York attorney general’s office. And now Austria’s Federal Competition Authority (AFCA) has fined Facebook 9.6 million euros for failing to file the deal for merger approval prior to completion.

Facebook “cooperated comprehensively” with the investigation, according to the AFCA statement, though the social network will now have to notify the deal “so that a substantive review of the merger can be conducted.”

That requirement raises the prospect of EC involvement through an upwards referral request. Austria recently referred Facebook’s Kustomer acquisition to Brussels for an EC review. Austria was also responsible for the initial request transferring Apple’s purchase of music identification app Shazam for an EU level review.

A Spokesperson for the AFCA said the Giphy deal “has not yet been notified to our Competition Authority. As a result the question of referral does not arise yet. But the AFCA has already done a lot of preparatory work over the past few months and has been in close contact with other global competition authorities. It is expected that Facebook will notify the merger soon.”

The European Commission didn’t reply to a request for comment.

Facebook has been rather notification-shy with its Giphy takeover. Apart from the failure to notify in Austria, the social network argues it should not have to go through a CMA review because “the various strands of Facebook’s business do not overlap with the activities of Giphy.”

The CMA sees things differently, concluding in its phase I assessment that the country’s share of supply test is met “in relation to the supply of apps and/or websites that allow UK users to search for GIFs.”

A spokesperson for Facebook said “we have settled this case with the Austrian Federal Competition Authority and will formally file the Giphy transaction for merger review,” adding that “we look forward to demonstrating that Facebook and GIPHY would offer more choices and better services through this pro-competitive deal.”

The deal also avoided pre-merger notification requirements in the U.S., as it fell below the agencies’ reporting threshold.

Display advertising. To date, Facebook has been adamant that its purchase of Giphy is pro-competitive. A company spokesperson in March said the merger “is good for competition and in the interests of everyone in the UK who uses Giphy and our services—from developers to service providers to content creators.”

Facebook argues that the Giphy acquisition improves the offerings of photo and video sharing platform Instagram, bought by Facebook for $1 billion in 2012, by giving users more features and tools. Facebook has pledged that developers and partners will continue to have the same access to Giphy, allowing the creative community to create content.

But in the competition analysis of the transaction, one area of contention is whether all advertising should be lumped together or whether, as the CMA says, display advertising should be regarded as a distinct market. That analysis could also be important for the new UK and EC antitrust investigations.

Google, for example, is a dominant force in search advertising, where companies pay to have their website linked to a specific search word or phrase.

Display advertising, meanwhile, involves companies paying to show ads within web pages or mobile apps. Facebook argues that that “all types of digital advertising” should be included in the assessment.

The CMA, though, has some powerful evidence to back up its position: Last year the authority published the results of a market study into online platforms and digital advertising, finding that search and display advertising “serve distinct purposes, with only limited substitutability between them.”

Regarding Giphy, the UK authority says of the acquisition that the “loss of a potential future competitive constraint is particularly concerning given Facebook’s existing market power in display advertising.”

Yet Facebook argues if Giphy had remained independent, it wouldn’t have posed a competitive constraint on it or on “advertising generally.” That’s because Giphy’s maximum potential revenue in the UK “would have accounted for less than 0.01% market share” in digital advertising.

Facebook has even wielded a Covid-19 argument, stressing that as an independent company, Giphy would have struggled to attract investment because the pandemic “disrupted financial markets and advertising markets.”

The CMA, so far at least, isn’t buying those arguments and said in its decision opening the in-depth merger probe that the deal’s competitive impact may have been even greater if Giphy had partnered with or been acquired by an existing social media platform. Apple, ByteDance, Snap, Twitter and Kuaishou had all shown an interest in buying Giphy, the CMA says.

One area in which Facebook may have scored a minor victory, though, is the CMA’s finding that the Giphy acquisition doesn’t increase Facebook’s data advantage in display advertising—at least as far as a standalone theory of harm is concerned.

The CMA does nevertheless say in its decision that the data advantage point should be considered should Facebook “require more user data from its integration partners as a condition of accessing Giphy.”

Specifically, this theory of harm involves Facebook’s ability and incentive to foreclose rivals by worsening the terms of Giphy’s supply.

Unfair advantage. On top of a fraught merger review, the CMA’s new antitrust probe, launched Friday, raises further uncomfortable questions for Facebook concerning its dominance in display advertising.

The UK watchdog said it “will look into whether Facebook has unfairly used the data gained from its advertising … to benefit its own services, in particular Facebook Marketplace – where users and businesses can put up classified ads to sell items – and Facebook Dating – a dating profile service it launched in Europe in 2020.”

The commission, launching a parallel probe on the same day, has said it will “examine in detail whether Facebook’s position in social networks and online advertising allows it to harm competition in neighbouring markets.”

“When advertising their services on Facebook, companies, which also compete directly with Facebook, may provide it commercially valuable data. Facebook might then use this data to compete against the companies which provided it,” the EC said.

The commission added that “Facebook might make use of the data obtained from competing providers in the context of their advertising on Facebook’s social network, to help Facebook Marketplace outcompete them.”

That could allow Facebook to “receive precise information on users’ preferences from its competitors’ advertisement activities and use such data in order to adapt Facebook Marketplace,” according to the EC.

Responding to the probes, a Facebook spokesperson said the company is “always developing new and better services to meet evolving demand from people who use Facebook. Marketplace and Dating offer people more choices and both products operate in a highly competitive environment with many large incumbents. We will continue to cooperate fully with the investigations to demonstrate that they are without merit.”

Both the CMA and EC have said they’ll “seek to work closely” with each other – a signal that while relations between the UK and EU remain politically frosty, they do share the common goal of cracking down on abuses by Big Tech.

Such a victory in the context of an antitrust conduct investigation wouldn’t be exceptional. But if the CMA ultimately blocks the Giphy merger, it would represent something of a quantum leap in competition enforcement.