The social media group bought Giphy, which supplies images to Snapchat and Twitter, last year for US$400mln (GBP290mln).
However, the CMA has “provisionally found” that the deal “will negatively impact competition between social media platforms”.
Because millions of people use gifs on social media regularly, a reduction of their choice and quality “could significantly affect how people use these sites and whether or not they switch to a different platform, such as Facebook”.
Social media platforms have “very little choice” because there is only one other large provider of gifs, namely Google’s Tenor.
“The CMA provisionally found that Facebook’s ownership of Giphy could lead it to deny other platforms access to its GIFs,” the watchdog said.
“Alternatively, it could change the terms of this access – for example, Facebook could require Giphy customers, such as TikTok, Twitter and Snapchat, to provide more user data in order to access Giphy GIFs. Such actions could increase Facebook’s market power, which is already significant.”
According to the investigation, Facebook’s platforms – Facebook, WhatsApp, and Instagram – account for over 70% of the time people spend on social media and are accessed at least once a month by 80% of all internet users.
Before the merger, Giphy offered paid advertising by allowing companies to promote their brands through gifs.
The firm was thinking of expanding this service beyond the US, which would have been “a new player into the advertising market and a potential challenger to Facebook” in the UK, the CMA said.
“It would also have encouraged greater innovation from others in the market, including social media sites and advertisers. However, Facebook terminated Giphy’s paid advertising partnerships following the deal, meaning an important source of potential competition has been lost,” it added.
“This is particularly concerning given Facebook’s existing market power in display advertising – as part of its assessment, the CMA found that Facebook had a share of around 50% of the GBP5.5bn display advertising market in the UK.”
Shares were flat at US$361.82 in premarket trading.