The recent announcement of the final verdict in the U.K.’s case to block Meta’s acquisition of GIF library Giphy is a partial victory for consumers and innovation. Meta is the parent company of Facebook, and had moved to acquire another American company, Giphy, which is a library of the moving digital images called GIFs. Acquiring this library would allow for easier posting of the images by Meta’s users on apps like Facebook and Instagram. The British competition regulator, the Competition and Markets Authority, ruled that the acquisition would substantially lessen competition in the U.K. The U.K.’s appeals tribunal undermines that decision.
The CMA’s case had two major flaws: one procedural and one on the merits of the case. The British tribunal, which by law could only rule on technical grounds, found that the CMA had abused process. However, the ruling made it clear it agreed with Meta on the merits, too.
The Competition Appeals Tribunal found that the decision by the CMA was procedurally flawed. The CMA had failed to disclose to Meta important information about Meta competitor Snap’s proposed acquisition of Giphy, despite having an obligation to do so. The tribunal noted that, on its face, this flaw “undermines the entirety of the Decision.” The tribunal has invited suggestions from the parties to the case as to what to do about that.
No matter how large or unpopular American companies are, they are still entitled to procedural justice. This is particularly pertinent when, as is the case here, decisions are taken by bureaucratic agencies without the possibility of appeal on the merits of the case — the U.K.’s law does not allow the CAT to say that the CMA reached the wrong decision and instead allows appeals only on matters of law (i.e., did the CMA apply the law the way it is allowed to?) or procedure (i.e., did the CMA follow its own rules for due process?).
Indeed, while the tribunal made it perfectly clear that the CMA was within its jurisdictional rights to reach the decision it did and had what in America we would describe as a “rational basis” for doing so, it suggested that the CMA might not have reached the wisest of decisions on the merits.
The CMA’s major theory of harm to competition was that the acquisition prevents Giphy from growing into a direct competitor to Facebook in the area of display advertising (the ads that pop up when you visit a web or mobile-phone-app page.) A secondary theory was that Meta would cut off a supply of GIFs to competitors and thereby lessen competition, but the tribunal did not consider that argument. Even if Meta had gone on to limit access to its newly acquired GIFs, that would have created an enormous opportunity for another existing GIF site to service those competitors or created the incentives for new GIF sites to be built. There’s no barrier to entry for new GIF-providing firms, other than the fact that it doesn’t appear to be a very profitable business.
That leads to how the second, “potential competitor,” argument does not stand up very well. At the time of the acquisition, Giphy wasn’t profitable and did not generate revenue from advertising. It was chugging along on the $150 million of venture capital it had raised since its founding. It’s a big leap to go from zero profitability to becoming an advertising rival of one of the biggest companies in the world. The reality is that regulators, like everyone else, cannot predict the future.
While the tribunal found that the CMA had the very wide discretion to construct such a speculative scenario with Giphy entering the U.K. ad market, it found that Giphy presented no real threat to Meta at the time of acquisition, saying “there is in this case no substantial lessening of static competition [i.e., the market as it actually existed at the time].” It was the speculative case that the CMA said required it to act to stop the merger. The tribunal responded that rather than relying on this speculation alone, the authority should introduce a new “cross-check” test that would ask what might the effects of such intervention be on the market.
Our organization, the Competitive Enterprise Institute, was concerned that relying on such speculation would allow the CMA to become a powerful global regulator of acquisitions. We joined with the U.K.’s Adam Smith Institute to submit comments on the decision. The tribunal’s judgment reflects our concern that forbidding this merger would have a chilling effect on the startup ecosystem, particularly for those viewing merger or acquisition as an exit strategy for founders wanting to sell their business.
We see similar fundamental misunderstanding of how markets work on display in the U.S. Generally, there’s a stateside push for expanding the scope of antitrust, untethering it from the long-standing consumer-welfare approach and moving it away from individual cases towards broad prohibitions on business practices and combinations. Specifically, the Federal Trade Commission’s case against Facebook’s acquisition of Instagram and the agency’s recent opposition to the merger of an early-detection cancer-test firm with a test distributor are good examples. In the latter, the delay might have meant loss of lives; at least Giphy is only in the business of images of sassy cats and memorable reactions of Michael Scott.
Read the full article at National Review.