Why U.K. Regulators Demand A Divestment

Key Takeaways

• Meta saw potential for additional revenue opportunities with Giphy.
• U.K. regulators saw the purchase as anti-competitive, and this is one of several rulings against social media companies in recent years.

U.K. Regulators recently demanded that Meta, parent company of Facebook, divest its acquisition of Giphy. The lawsuit went through the court system for nearly two years as Meta tried to overturn the ruling. This final ruling was the last chance Meta had to overturn the decision, but to no avail. Here is why Meta purchased Giphy and why the U.K. decided it was not in the user’s best interest to have the social media giant own this company.

Giphy is a searchable database of GIF files used on social media platforms and messaging apps to punctuate conversation. GIF files are short video clips taken from various sources. We’ve all seen them.

Why Meta bought Giphy

Facebook bought Giphy in May 2020 before changing its name to Meta in October 2021. There are a handful of reasons why Meta was interested in the online database. For starters, it could sell advertising within user-created GIFs. Giphy was starting to experiment with sponsored GIFs and allowing advertisers to put their overlays onto GIFs created by users.

Disney entered into an experiment with Giphy to judge how well users would respond to advertising efforts by using filters that made spaceships from Star Wars fly around in user-generated GIFs. No money was ever exchanged between the two companies, but the potential to use GIFs as another avenue for advertising caught Meta’s attention.

By owning Giphy, Meta could also collect more user data. The company would know what GIFs people are sharing on non-Meta platforms like Snapchat, Twitter, TikTok, and even iMessage. Having additional personal information allows Meta to offer better targeting for advertisers. As for the metaverse, it’s unclear how or if Meta could use GIFs to its advantage.

While Meta figured out what to do with the information generated by Giphy users, the company allowed its new subsidiary to run independently. Clearly, U.K. regulators did not care for Meta’s acquisition of Giphy and ordered Meta to sell it off under U.K. antitrust laws.

The issues among U.K. regulators

The Competition and Markets Authority (CMA) in the U.K. investigated Meta’s purchase of Giphy and found that the takeover created the potential for Meta to limit the use of the database to its own platforms. In turn, Giphy ran the risk of becoming less attractive to users and less competitive because you would need a Meta account to access and use the GIFs.

Another issue the CMA found was the fact that the deal took Giphy out of the U.K. advertising market and prevented U.K. businesses from taking advantage of Giphy’s services.

These findings were published in November 2021 and concluded that the deal had the potential to harm U.K. social media users and advertisers. The CMA ordered Meta to sell Giphy as a result. Meta appealed the decision to the Competition Appeal Tribunal (CAT) as soon as the decision was announced.

In July 2022, the CAT agreed with the CMA on five of the six counts challenged by Meta, citing the merger substantially reduced competition and that the CMA’s conclusion was lawful. The only count that was decided in Meta’s favor had to do with the sharing of third-party confidential information.

After losing the appeal, Meta tried to argue in a court filing that the market for Giphy had deteriorated to the point where it would be impossible to sell the company. This fell on deaf ears, and Meta eventually agreed to sell the company. In the meantime, the CMA fined Meta a whopping £50.5 million for refusing to comply with their decision.

TryqAbout Q.ai’s Global Trends Investment Kit | Q.ai – a Forbes company

Why Meta decided to divest Giphy

The final ruling by the CMA was delivered on October 18, 2022, and Meta decided to comply by putting Giphy up for sale. The reason why Meta agreed to divest itself of Giphy has yet to be revealed, but the substantial fine issued by the CMA most likely played a role in the decision. Another potential reason stems from the cost of keeping Giphy and the consequences of doing so; to keep Giphy, Meta would actually have to shutter its operations in the U.K.

The cost of closing down Facebook, Instagram, WhatsApp, and its other properties in the U.K. would have significantly affected Meta’s bottom line. Selling Giphy — even at a loss — would be less expensive than giving up the ongoing revenues from all of Meta’s platforms combined. The best decision for Meta is to sell Giphy, take the hit, and keep operating its other outlets to generate revenue.

The rise of governments in regulating social media

It’s unusual for an American-based business to give in to a European government when it comes to being forced to divest itself of an acquisition. The move by the U.K. government is another step in governments worldwide taking action against the unregulated nature of social media.

In April 2022, the European Union passed the Digital Services Act, giving users more power to flag content and allowing regulators to issue fines to social media companies. The Justice Department and Federal Trade Commission have filed antitrust actions against Meta and Google in the U.S. However, Congress is divided on taking action against social media companies. Australia passed the Online Safety Act in 2021, helping to protect users from bullying on social media and unmasking trolls.

In passing legislation, governments are attempting to protect users from the unregulated and, in many people’s eyes, poorly moderated content on these platforms. Additionally, governments aim to protect users from personal harm and limit the personal information these companies collect and sell to advertisers.

Bottom Line

The firm stance of the U.K. against Meta further signals to social media companies that they need to review their practices and ensure they put their customers’ best interests first. This ruling is just one of many by governments across the globe that social media companies are not immune to regulation. They need guardrails to ensure user safety and to ensure that social media is a positive force in society.

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