Earlier this week, the Competition and Markets Authority (CMA) ordered Meta (the conglomerate that owns Facebook and WhatsApp) to sell Giphy, the gif search engine and database. The order reveals a number of questionable assumptions and could lead to technology companies avoiding British acquisitions.
Facebook bought Giphy in 2020 for a reported $315m. The purchase attracted the scrutiny of CMA, which in November 2021 ordered Meta to divest Giphy. Earlier this year, the Competition Appeal Tribunal (CAT) ordered CMA to reconsider its ruling. As Victoria Hewson noted in a CapX post in May, the CAT hearing revealed that CMA had failed to disclose the fact that Snapchat owner Snap had made Giphy an offer much lower than Facebook’s after concluding that Giphy’s advertising revenue was negligible.
Giphy’s lack of significant advertising revenue is important, as it was one of CMA’s key concerns when it considered Meta’s purchase of the company. According to CMA’s final report, the CMA concluded that the merger would result in a substantial lessening of competition in display advertising in the UK and social media services worldwide. Both of these claims are worth examining.
The CMA notes that in purchasing Giphy, Meta could be removing a potential competitor from the market for display advertising. This is a curious claim given that Giphy is hardly a major competitor in this market. As Works in Progress editor Sam Bowman correctly explained last year, this theory of harm proves too much. Giphy is a small fish in the display advertising pond where large Meta and Google whales swim. If Giphy is a potential competitor, it is surely a small one that has a negligible effect on the display advertising market. It is unlikely that anyone working at YouTube, Twitter, or TikTok was losing sleep over Meta’s acquisition of Giphy.
CMA’s second claim, that the acquisition would reduce competition in social media services, is also weak. This is in large part due to CMA’s treatment of social media. In its final report, CMA defined social media as follows
‘we took as our starting point a relatively broad definition of social media consistent with that used in the Market Study, including a range of online platforms that allow consumers to interact with each other and with engaging content. Included in this group are: Facebook Blue, Facebook Messenger, Instagram (part of the Facebook Group), WhatsApp (part of the Facebook Group), LinkedIn, Pinterest, Reddit, Snapchat, TikTok, Tumblr, Twitter, and YouTube.’
While it is true that these companies have a lot in common (e.g. they provide platforms for user-generated content) it is misleading to assume they compete in a market for ‘social media services’. No one reading this article has ever received a bill from Facebook, Twitter, YouTube, Reddit, or TikTok for their monthly consumption of ‘social media services’. In its report, CMA mentions that ‘we have concluded that there is limited direct competition between YouTube and Facebook’. But Facebook and Youtube are fierce competitors, each one seeking to make themselves more attractive to firms seeking to advertise their products online. If you want to advertise your widgets online, every pound you pay for a YouTube advert is a pound you are not paying Facebook. Users often visit Facebook and YouTube for different reasons, but that does not preclude them from being competitors.
The CMA’s ruling is likely to have an unwelcome chilling effect on British startups. Last year, Sam Dumitriu wrote in a CapX post that mergers and takeovers provide a major route of exit for small businesses. Entrepreneurship is risky, and investors and entrepreneurs often consider the possibility of a takeover from a tech giant such as Meta when calculating risk. The chance of such a takeover allows smaller firms to feel safer to innovate. After this week’s news, investors and entrepreneurs can be forgiven for recalculating.
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