On May 23, Facebook's parent company Meta sold Giphy for a loss after an investigation by the UK Competition and Markets Authority (CMA) found the acquisition anti-competitive. While the news focused on Meta's staggering loss—more than $260 million—the real tragedy is that Giphy is a shadow of its former self, and the once-promising business has atrophied under Meta's ownership.

Meta's failed Giphy acquisition is a case study on the limitations of behavioral remedies and why the CMA ultimately ordered the complete divestiture of the company. The same principles that led the CMA to conclude that Meta's acquisition of Giphy would reduce competition can be applied to recent decisions by the CMA to block Microsoft's acquisition of Activision.

Meta's proposed behavioral remedies to clear the deal with regulators included maintaining open access to Giphy's GIF library and allowing API users to continue to access the platform under the same pre-acquisition measures. This sounds similar to Microsoft's 10-year deals with various gaming companies. So what's the issue?

The CMA found that both Meta's and Microsoft's proposed remedies suffer from similar flaws and cannot preserve competition. Chiefly among the CMA's concerns were the limitations of behavioral remedies to mitigate how acquisitions like these fundamentally create less competition. Here's just a preview of the CMA's concerns:

1. The Proposed Remedies Cannot Keep Pace with Dynamic Underlying Markets: In the case of Giphy, the CMA concluded that open access agreements like Meta offered wouldn't be able to keep up with a rapidly evolving marketplace. The CMA also concluded that Meta, as the owner of Giphy, would be incentivized to prioritize the development of GIFs to use on its own services rather than those of competitors.
2. The Proposed Remedies Cannot Account for Indirect Degrading of Access or Other Discriminatory Conduct: CMA worried Meta could circumvent the open access remedy by reducing quality or service levels associated with providing GIF access to third parties. For example, Meta could prioritize the development of Meta-specific GIFs and GIF stickers at the expense of the "open" GIF library or even delay the release of GIFs to third parties.
3. The Proposed Remedies Create Dependence on a Dominant Incumbent and Prevent Innovation: Because of Meta's dominance, the CMA concluded an open access remedy would create "distortions" to the extent that it would make Meta's social media competitors dependent on Meta. The remedy could create disincentives for third parties to develop their own broader libraries of unique content and thereby reduce innovation and consumer choice.
4. The Proposed Remedies Are Difficult to Monitor and Enforce: Most importantly, behavioral remedies are difficult for regulators to monitor and enforce. Anyone outside Meta selected to independently monitor the company would face a near-impossible task. They'd be at an immediate disadvantage because Meta controls the information flow.

Almost immediately after the acquisition of Giphy in May 2020, Meta killed the company's nascent ad sales operation, and the lack of revenue made the company nearly impossible for Meta to sell. Even though Meta was blocked from acquiring the company, it still succeeded in killing it.

Can Shutterstock revive the once potentially rich company? It is impossible to say. It may be too late for Giphy…but that shouldn't stop regulators from moving away from behavioral remedies in highly dynamic and nascent technology markets.

Rumors that Microsoft may move forward with its acquisition of Activision despite the CMA ruling could lead to the same slow death of the nascent cloud gaming marketplace. Just as frightening was news that the EU has accepted similar arguments from Microsoft, despite a long history of flaunting regulation in the name of profit.

Consumers must not let that happen.