*The views expressed in this article do not represent the views of Santa Clara University.
On October 18, 2022, Meta Platforms Inc. (“Meta”), formerly known as Facebook, was ordered to sell the GIF animation company, GIPHY, by the United Kingdom’s Competition and Market Authority (“CMA”), which is primarily responsible for merger review in the U.K. The CMA predicated its reasoning on potential competition concerns surrounding similar social media companies and platforms and the “digital advertising market” in the U.K.
Meta acquired GIPHY in May 2020 for $400 million, but since then, has been faced with the CMA’s investigation, which presented only one solution: to sell GIPHY. The CMA determined that if the GIPHY acquisition did go through, that, according to Stuart McIntosh, chair of the investigation,
This deal would significantly reduce competition in two markets. It has already resulted in the removal of a potential challenger in the U.K. display ad market while also giving Meta the ability to further increase its substantial market power in social media.
Meta has tried to appeal the order to sell. Still, the Competition Appeal Tribunal in July 2022, the specialist judicial body deciding cases over competing claims in the U.K., upheld the decision on five out of the six challenges, with “‘no hesitation in concluding that the regulator’s finding that the merger substantially reduced dynamic competition was lawful.”
In early October, the CMA fined Meta £50.5 million for not complying with an order stating that Meta had to keep GIPHY separate from its business until the investigation was completed. In addition, the CMA instigated an initial enforcement order (“IEO”), which, in essence, is an injunction that “[prevents] any further integration of a business that has been acquired and allows it to compete as it would have pre-merger until the CMA completes its investigation.” However, Meta is but one of many companies to have its merger investigated by the CMA for antitrust and anti-competition violations. The CMA has a specific process for determining whether mergers and acquisitions are allowed to persist under U.K. antitrust law.
How Mergers are Analyzed under U.K. Law
The CMA examine a merger when (1) two or more enterprises cease to be distinct, and (2) the U.K. turnover of the acquired enterprise exceeds £70 million, or the two enterprises supply or acquire at least 25% of the same goods or services supplied in the U.K. and the merger increases that share of supply.
The CMA’s analysis of mergers centers around the question: Would the merger result in a substantial lessening of competition (“SLC”)? To determine this, the CMA identifies the relevant markets, examines the effects of the merger on competition, and assesses countervailing factors.
Identifying the Relevant Markets
To define the market, the CMA identifies the relevant products of the merger firms and the geographic markets they operate in. Then, it evaluates their strength in the relevant product markets by identifying the most effective alternatives available to customers considering the merger firms’ most direct competitors.
Examining the Effects on Competition
In examining the effects on competition, the CMA considers the impact on competition. Accordingly, CMA’s analysis of the Facebook/GIPHY merger considers the merger’s horizontal and vertical impact.
Horizontal mergers involve two competitors who compete to supply products that are directly competing or are substitutes for one another. The CMA is wary of horizontal mergers that remove a competitive restraint and allow the merged entity to effectively monopolize within their own sphere by raising prices, lowering the quality of their product, or slowing innovation. Another concern is where the firms may have engaged in enhanced competition absent the merger.
Vertical mergers are between firms at different levels of the supply chain in the same industry. Here, the CMA is concerned with mergers that allow the merged entity to restrict competitors’ access to a critical input. In this case, the concern is that Facebook could limit competitors’ access to GIPHY, a powerful engagement tool for social media companies.
Assessing Countervailing Factors
The CMA may also consider the pro-competitive impacts of the merger that might prevent or reduce harmful effects of the merger. The most common countervailing factors the CMA considers are efficiencies that make the merged business a more effective competitor and upcoming entry and expansion into the market.
After a merger, the merged business may lead to improved competition, allowing the merged entity to provide consumers with lower prices or a better product. The CMA uses the following factors to determine if a merger results in substantially lessen competition (SLC), the merger efficiencies must:
(1) enhance rivalry in the supply of those products where SLC may otherwise arise; (2) be timely, likely, and sufficient to prevent SLC from arising; (3) be merger-specific; and (4) benefits customers in the U.K.
The CMA weighs these factors in determining if the harms of the merger are offset by improved market conditions and benefits to the consumer.
The CMA may also consider entry and expansion plans of rivals who will enter into the relevant market; this analysis can include competitors who plan to enter the market irrespective of, or in direct response to the merger. An entry or expansion would prevent SLC and therefore support the merger if the entry or expansion is: (1) timely, (2) likely, and (3) sufficient to prevent an SLC.
Meta Acquisition of GIPHY, Inc Merger Analysis
The U.K. Competition Appeal Tribunal summarized its conclusion as follows: “the completed merger between Meta and GIPHY has resulted or may be expected to result in a substantial lessening of competition (a) in the supply of display advertising in the U.K. due to horizontal, unilateral effects from a loss of dynamic competition and (b) in the supply of social media services worldwide due to vertical effects resulting from input foreclosure.”
During the Remittal Inquiry, the CMA looked at the evidence to (1) determine the market power of the Parties, (2) analyze what would happen if the merger had not taken place, (3) determine the horizontal effects of the merger, and (4) determine the vertical effects of the merger. Finally, the CMA handed down a final judgment and provided a summary.
Analysis of the Horizontal Effects of the Merger
The Appeal Tribunal decided the merger would result in substantially less competition in display advertising from a loss of dynamic competition. The purchase of GIPHY potentially “removed from the market a business that was competing, or had the potential to compete, with Facebook.” The market of competition between Meta and GIPHY is the display advertising market.
The Appeal Tribunal determined the loss of dynamic competition in display advertising substantial for the following reasons (found in Summary, Pg. 5):
“Facebook’s significant market power in display advertising.”
“GIPHY’s strong position as a leading provider of an important social media engagement tool.”
GIPHY’s effort to monetize with a unique advertising model with the potential to compete with Facebook.
Evidence that Facebook was interested in monetizing the same or similar social media features.
“Evidence that absent the merger, Facebook would increasingly have had the incentive to respond to a dynamic threat of competition from GIPHY.”
“The fact that successful expansion into display advertising can be magnified by networks effects in two-sided social media platforms.”
“The high barriers to entry and expansion in display advertising.”
Analysis of the Vertical Effects of the Merger
Furthermore, the Appeal Tribunal decided the merger would substantially lower competition “in the supply of social media services worldwide due to vertical effects resulting from input foreclosure.” Input foreclosure would occur if Meta could disadvantage its rivals by limiting access to GIPHY services or allowing access on worse terms. The key to the vertical analysis, in this case, is “whether Facebook would have [1] the ability and [2] incentive to limit access to GIPHY … and [3] whether this ‘foreclosure’ would have an effect on the ability of rival apps to compete with Facebook in social media.”
Meta can foreclose access because GIPHY has distinctive features, and Google owns the only comparable service. Competitors need a range of reasonable alternatives. Meta would be incentivized to foreclose because reducing the engaging features available on the market for rival social media would produce direct benefits. Ultimately, Meta strengthening its market power will have the effect of reducing competition.
CMA’s Inquiry into Market Power
When the U.K.’s CMA conducted its inquiry into the Meta and GIPHY merger, market power was a significant factor that they considered in whether the merger would result in a substantial lessening of competition. The CMA first evaluated the power each respective company had in its relevant markets. In doing this, they considered whether good alternative options were available to customers of each company.
Ultimately, the CMA found social media platforms were considerably limited in their choices for GIF libraries, and aside from GIPHY’s only close competitor owned by Google, Tenor, GIPHY had undeniable market power in GIF libraries. Similarly, when looking at Meta’s social media presence and advertising in the U.K., the CMA found that Meta had significant market power capable of foreclosing its rivals if it were to acquire GIPHY, given both companies’ pre-eminent strength in their respective core markets.
Counterfactual Analysis: What Would Have Happened Had the Merger Not Taken Place
The CMA further examined the counterfactual, what would have happened had the merger not taken place, to provide a complete picture of the potential impact the merger would have had on competition. GIPHY would have continued to explore new avenues to monetize its products and services further, and Meta would have continued to use GIFs from GIPHY in the short term.
After the Competition Appeal Tribunal decision, the CMA conducted an additional review in which it doubled down on its finding that the merger promotes a substantial lessening of competition and that the only acceptable remedy would be the divestiture of GIPHY to a suitable purchaser, unlike Meta. In response, Meta accepted the order to sell GIPHY. However, this was only achieved after Meta was fined for refusing to provide information following an order to separate GIPHY’s business from Meta during the investigation period. Given the merger’s capacity to markedly reduce competition in two markets, the display advertising market and GIF libraries, it’s plain to see why the U.K.’s CMA pushed back and how the application of the U.K.’s antitrust laws runs counter to Meta’s wishes.
Conclusion
In Meta’s official statement expressing disappointment and acceptance of the order to sell GIPHY, a spokesperson said, “We will continue to evaluate opportunities – including through acquisition – to bring innovation and choice to more people in the U.K. around the world.” Likewise, the CMA will continue to preserve market competition and fairness in the types of mergers and acquisitions they allow to materialize within their borders. Who the victor is in their conflicting goals is a matter of future observation. Here, however, it’s evident who is at a loss.