Meta grudgingly agrees to sell Giphy after admitting defeat in UK battle

Giphy is worried that GIFs becoming "cringe" will “dampen investor appetite.”

Considering that Meta bought WhatsApp and Instagram without issue, it may come as a surprise that Meta’s purchase of Giphy will be blocked. But that’s the situation, as the United Kingdom’s Competition and Markets Authority (CMA) has now ordered Meta to sell Giphy.

The decision comes two years after the merger came under the increasingly intense scrutiny of UK regulators. Fighting every step of the way, Meta has since said in a statement to Reuters that although it’s “disappointed” in the decision, it will “accept today's ruling as the final word on the matter.”

Among the reasons why Meta must sell Giphy are the CMA’s concerns that Meta and Giphy dominate the GIF marketplace and that Meta could cut off competitors from accessing Giphy content. Meta could also possibly change its terms and charge its competitors exorbitantly for access. This, the CMA feared, threatened to increase Facebook’s already dominant presence in the social media marketplace by pushing users to prefer the platform where they can access the best GIFs. The regulator noted that 73 percent of the time UK residents spend on social media is on Facebook.

Also at issue was Giphy’s prior place in the display advertising market at the time of Meta’s (then Facebook’s) $400 million acquisition. The CMA seemed to suggest that Meta’s acquisition could have been driven by an urge to shut down a budding Giphy display advertising business that could have diversified display ad choices for UK businesses. (Meta told Ars that it believes there is no evidence to suggest this.) In a press release, the CMA said that Meta already controls half of UK display advertising.

“Before the merger, Giphy was offering innovative advertising services in the US and was considering expanding to other countries, including the UK,” the CMA said in the press release. That included attempting to recruit big brands like Dunkin Donuts and Pepsi to purchase promotional GIFs. The CMA reviewed evidence from Meta and Giphy, finding that “Giphy’s advertising services had the potential to compete with those of Meta and would have encouraged greater innovation from Meta and other market players.”

“The only way this can be addressed is by the sale of Giphy,” said Stuart McIntosh, a chair of the independent inquiry group conducting the investigation, in CMA’s press release. “This deal would significantly reduce competition in two markets. It has already resulted in the removal of a potential challenger in the UK display ad market while also giving Meta the ability to further increase its substantial market power in social media.”

Meta provided Ars with the same statement given to other outlets. Giphy did not immediately respond to Ars’ request for comment. The CMA directed Ars to its press release.

A unique struggle to sell Giphy

CNBC reported that Meta being forced to sell off Giphy marks “the first time a global regulator has unwound a completed deal by a Big Tech company.” Commentators have noted that this outcome for Meta does not bode well for those opposing some of the CMA’s other major anti-competitive inquiries—like Microsoft’s intended merger with Activision.

Among critics of the CMA's order is Kayvan Hazemi-Jebelli, who serves as competition and regulatory counsel for the Computer and Communications Industry Association (CCIA) Europe—which provided comments in support of Meta and Giphy to the CMA through its investigation. Today's order, Hazemi-Jebelli told Ars, "sends a clear signal to industry and investors. The UK authorities, backed by UK Courts, are ready to block deals where they find the mere possibility of reduced competition. Unfortunately, any reduction in the number of competitors seems to be enough.”

Nobody knows yet who will become the buyer to step in and scoop up Giphy, but a Meta spokesperson told CNBC that it “will work closely with the CMA on divesting Giphy.”

During the CMA’s investigation, Giphy attempted to sway the regulator to impose behavioral ordinances on Meta rather than force the sale as it did today. In Giphy’s view, finding a suitable purchaser will be extremely difficult, partly because, in the two years since Meta acquired the service, GIFs just aren’t as popular as they used to be, the company said.

“User sentiment towards GIFs on social media shows that they have fallen out of fashion as a content form, with younger users in particular describing GIFs as ‘for boomers’ and ‘cringe,’" Giphy previously told the CMA this summer.

“There is a high risk that the only purchasers interested in acquiring the Giphy business (if any) will be weak or inappropriate,” Giphy wrote, emphasizing that “the universe of potentially interested purchasers is limited.” Giphy also pointed out that two of its major competitors, Tenor and Gfycat, have since been acquired by major companies—Google and Snap, respectively—with no pushback.

Giphy argued that GIFs today are just worth less than they were in 2020. The platform noted a decline in new accounts being created as existing users download and upload GIFs less often. Combined with the current general economic decline, these factors will significantly “dampen investor appetite,” Giphy said.

From Giphy’s perspective, the ideal buyer is not a financial buyer who will attempt to monetize the platform, potentially cutting key staff or damaging Giphy’s reputation. Instead, Giphy wants the CMA to hold out for a purchaser “with industry knowledge and experience managing a group of young tech engineers, product managers, and staff.”

“It is essential that Giphy is closely involved in the selection process,” Giphy concluded.

How involved Giphy will be depends on the CMA’s guidance, which the regulator said in the summary of its final report will be issued after it consults “publicly on the approach to be taken.”

Within the next 12 to 18 weeks, the CMA is expected to lay out its plan to end Meta’s ill-fated merger with Giphy.

The CCIA's Hazemi-Jebelli told Ars that the CMA's order breaking up the tech companies could impact innovation in the markets it's trying to protect. “This could result in reduced investment and startup formation in the digital economy, internationally as well as in the UK, given the CMA’s extra-territorial reach,” Hazemi-Jebelli said.

In a statement, however, Meta hinted that the CMA’s order would not necessarily give the company any pause when seeking acquisitions in the future.

“We are grateful to the Giphy team during this uncertain time for their business and wish them every success,” a Meta spokesperson told CNBC. “We will continue to evaluate opportunities—including through acquisition—to bring innovation and choice to more people in the UK and around the world.”

Meta grudgingly agrees to sell Giphy after admitting defeat in UK battle

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Meta grudgingly agrees to sell Giphy after admitting defeat in UK battle

Giphy is worried that GIFs becoming "cringe" will “dampen investor appetite.”

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