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Facebook takeover of Instagram may substantially lessen competition, UK regulator says

The Office of Fair Trading is considering whether Facebook's planned takeover of photo-sharing company, Instagram, could raise competition concerns.25 Jun 2012

The UK competition authority is seeking "written representations about any competition or public interest issues" from interested parties on whether Facebook's $1 billion bid for Instagram raises competition law issues. The OFT's consultation is open until 5 July.

A spokesman for the OFT told that the proposed deal may result in a "substantial lessening of competition" in the market for "conduits" for the uploading of pictures in the UK. Whether a proposed merger would result in a substantial lessening of competition is the test applied by the OFT in determining whether to refer a case for more detailed investigation by the Competition Commission.

The spokesman said that the OFT is considering whether Instagram "has the potential to become a straight competitor to Facebook" and whether the impact of the two companies joining together would have a detrimental impact on users and advertisers.

However, there is a question of whether the OFT has jurisdiction to rule on the case which "will need further investigation," he added. The OFT can assess competition concerns arising in the UK if the turnover of a company being acquired is £70 million or more or if it meets a 'share of supply' test. The OFT has "reason to believe" that the planned acquisition meets its 'share of supply' test, the spokesman said.

According to the OFT's merger guidelines, the 'share of supply' test is satisfied if the combining businesses "supply or acquire goods or services of a particular description" and would "collectively supply or acquire 25 per cent or more of those goods or services, in the UK as a whole or in a substantial part of it, provided that the merger results in an increment to that share."

If the OFT concludes that it has jurisdiction to investigate the merger and identifies substantive competition concerns, it could require Facebook to provide undertakings about how Instagram would operate under its control in order to remedy those concerns or refer the proposed transaction to the Competition Commission for a more detailed investigation, the spokesman said.

He said it was the first time the OFT had assessed competition issues arising from a merger in the social media sector.

Competition law expert Alan Davis of Pinsent Masons, the law firm behind, said: "The OFT will be seeking to understand whether Facebook's acquisition of Instagram would enable it to prevent competing apps from being able to upload pictures to Facebook, or restrict the use of the Instagram app from uploading pictures to other social networking sites including Twitter – given the strong market position of Facebook, this potential market foreclosure would be likely to cause competition concerns".

In a statement Facebook said it would "continue to work closely with the OFT" and that it would "look forward to answering any questions that arise," according to a report by the Guardian.

Facebook announced its plans to takeover Instagram in April. The proposed deal is already subject to a probe by US antitrust authorities at the Federal Trade Commission.