Facebook positive over UK Giphy deal probe, but data-sharing questions lie in wait

12 Jun 2020 7:37 pm by Victoria Ibitoye

Facebook-Giphy merger

Facebook is likely to argue that its completed acquisition of Giphy is a straightforward case of vertical integration and doesn’t give rise to competition issues, as it looks to get the deal past the UK antitrust regulator, MLex has learned.

But its rivals may well take a different view, and the watchdog may pose questions over the competitive heft of the data that Giphy can provide to the social-media giant.

The Competition and Markets Authority issued a freeze order earlier today, preventing Facebook from making corporate changes pending an investigation. The regulator has not officially started the clock on its probe, but it has called for views on the deal until July 3.

Facebook announced the Giphy acquisition last month, highlighting plans to integrate the business into Instagram, its social-networking and photo-sharing site. Giphy, founded seven years ago, provides a platform that lets users search for and share short, looping animated videos, typically in the GIF format.

"Giphy improves Instagram’s offerings by giving people more features and tools," a Facebook spokesperson said today. "Developers and [application programming interface] partners will continue to have the same access to Giphy, and Giphy's creative community will still be able to create great content."

"We are prepared to show regulators that this acquisition is positive for consumers, developers and content creators alike," the spokesperson said.

Currently, around 50 percent of Giphy’s traffic currently comes from Facebook products, with half of that from Instagram alone.

But Giphy also provides searches across a range of other social platforms, such as Snapchat, Twitter, TikTok and Slack. That would possibly allow Facebook insights into how such rival services are being used, and how much they are used, through data on the use of Giphy on those products.

The deal has attracted attention from competition regulators — with the Australian Competition & Consumer Commission also initiating a probe into the Giphy deal earlier this week. The watchdog said it would look at the deal's impact on local markets and consider how Facebook’s access to additional data could strengthen the social-media giant’s market power.

Speaking to MLex, ACCC Chairman Rod Sims criticized Facebook’s failure to notify the transaction. He suggested the nature of GIFs made the deal of particular concern, because the animations could provide Facebook with sensitive information about rivals of Facebook’s Messenger, WhatsApp and Instagram messaging services.

The concern is that the acquisition could give Facebook insight into emerging trends from searches on rivals' platforms. For example, Facebook could attract more users to Instagram, if it realized that a certain type of GIF was trending on Twitter or Slack and it created its own GIF that would be used exclusively for Instagram users.

The deal is not expected to be looked at by other competition regulators in Europe, because it falls below the merger thresholds.

MLex understands that the tech giant believes the concerns aired stem from a misunderstanding of how data actually works in the industry and the ways in which companies seek to get market intelligence — much of which can be obtained via web reports.

— Third-party concerns —

Some tech companies have already voiced concerns. US nonprofit Mozilla, the developer of the Firefox web browser, said in a May 27 blog post that “the full scale of potential data-sharing harms” from the transaction deserves “substantial exploration” by competition authorities.

“User data previously collected by Giphy — such as the terms used to look for images — may at some point in the future be collected by Facebook, and potentially integrated with other services, the same fact pattern as with WhatsApp,” Mozilla said.

“Facebook should commit not to combine data collected by Giphy with other user data that it collects — a commitment that fell short in the WhatsApp case, but can be strengthened here,” Mozilla said, referring to Facebook's $19 billion buyout of the messaging service in 2014.

The UK's top privacy regulator, Elizabeth Denham, earlier this week called for greater scrutiny by competition and privacy authorities on the effect of the processing of personal data when a merger involves a combination of two companies’ data sets.

— Rationale —

Facebook’s main rationale for the transaction is to benefit from Giphy’s engineering talent and improve the functionality for users of Facebook's products and for Giphy's platform partners, MLex understands. Users are expected to benefit from improvements to the Giphy library and better tools, while Facebook intends to continue to invest in Giphy and the developers it supports.

It is understood that Giphy had been struggling financially, and it is believed to have approached Facebook in the hope of agreeing a deal quickly. Despite reports that the acquisition was valued at around $400 million, MLex understands that the actual value is significantly lower.

The CMA has been increasingly skeptical of mergers in digital markets — particularly where tech giants buy smaller rivals, often for a price that seems disproportionate unless the value of removing future competition is factored in.

It heavily scrutinizes internal documents to uncover an acquirer's merger rationale, and it is more dynamic in its assessment of the counterfactual — what would have happened if the merger hadn’t occurred.

In addition, the CMA’s “share of supply” test for establishing jurisdiction allows the regulator to call in deals that don’t meet the statutory turnover threshold of 70 million pounds ($82 million), provided that the two companies supply or acquire at least 25 percent of the same goods or services supplied in the UK, and the merger increases that share of supply.

— With additional reporting by Matthew Newman.

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