On July 27, 2022, the Federal Trade Commission (FTC) is trying to block Meta (Facebook) from acquiring Within Unlimited and its popular virtual reality-specific fitness app, Supernatural, in the first time since FTC Chair Lina Khan took the agency’s helm in 2021. This is the first antitrust action brought by FTC Chairwoman Lina Khan against a major tech company since she took the helm in 2021.
Because of the unusual nature of this antitrust challenge against a technology company, some have even criticized the legal basis as being somewhat “flawed. In the words of Meta’s Deputy General Counsel Nikhil Shanbhag, “How could Meta’s acquisition of a single fitness app from …… harm competition?”
However, if the FTC is successful in this action, it may well point to a new trend and direction for “antitrust” regulation. We need to analyze it and keep an eye on it.
I. The FTC’s Position – Why “Monopoly”
- The acquirer – Meta’s position in the virtual reality (VR) field
According to the FTC’s filing, Meta is a global technology giant that owns Facebook, Instagram, Messenger and WhatsApp, is the largest provider of virtual reality devices, and is the leading app provider in the United States. Driven by the popularity of its best-selling Quest headset, Meta’s Quest Store has become the leading app platform in the U.S., with more than 400 apps available for download.
As part of its app expansion, Meta has acquired seven of the most successful virtual reality development studios and now has one of the largest catalogs of first-party virtual reality content in the world. The acquisition of Beat Games Studios gave Meta control of the popular app Beat Saber.
Meta acquired Beat Games, the developer of Beat Saber, in 2019, followed by Sanzaru Games and Ready at Dawn in 2020, and Twisted Pixel, Downpour Interactive and BigBox VR in 2021.
Tabulation: Internet Law Review
- The Acquired Party – Within’s Supernatural Fitness Game
According to Within’s co-founder and CEO, “fitness is the killer app for VR,” and the FTC carved out a specific category of market – the VR fitness app market – in order to convince the court.
Beat Saber, which has come under Meta’s control, has obvious similarities to the proposed acquisition of Supernatural – rhythmically cutting floating spheres and cubes. However, Beat Saber falls into the “spin-off fitness app” category, meaning that while it doesn’t focus primarily on fitness, fitness may be a byproduct of the game; Supernatural is considered a “dedicated fitness app” because it “offers a variety of high-quality fitness apps. Supernatural is considered a “dedicated fitness app” because it “offers a variety of high-quality musical workouts,” all in “amazing, realistic environments like the Galapagos Islands.
▲Beat Saber test pictures
▲Supernatural official website photo (boxing mode)
It’s safe to say that Beat Saber and Supernatural have a somewhat competitive relationship in the specific VR fitness APP space.
According to the FTC’s analysis: Meta has two options, either to develop its own VR fitness app or to purchase Beat Saber’s competitor, Supernatural; the former would increase consumer choice, promote innovation, and spur more competition, while the latter would eliminate this entry prospect and inhibit future innovation and competition. Reducing competition would violate the antitrust laws, and therefore the acquisition is illegal.
FTC Internal Disagreements
Sources reportedly told Bloomberg that some FTC members had been “advising against” a lawsuit to block the Meta acquisition Within, but were ultimately overruled by FTC head Lena Khan, and the FTC ultimately voted 3 to 2 in favor of the lawsuit.
Foreign media outlets have emphasized that Lena Khan is pushing extraordinarily hard to limit the power of companies like Meta.
What are the legal flaws in the “monopoly” determination?
- Too narrow a definition of markets?
The FTC described these markets as highly concentrated today or likely to become highly concentrated as a result of the merger.
In order to convince the court to sustain its case, the FTC defined an overly narrow relevant market for “monopoly.
Indeed, the FTC argued that Meta’s acquisition of Within Studios would reduce competition in the narrow market of “VR-specific fitness apps” as well as the broader market of “VR fitness apps. As noted earlier, Meta’s Beat Saber, while not designed as a fitness app, has ancillary fitness benefits.
The FTC’s theory of harm is that, absent the merger, Meta would likely have entered the market for dedicated fitness apps. Thus, the merger would have prevented the expected fragmentation of that market. It would also eliminate direct competition between Meta and Within in the broader market for VR fitness apps.
However, market participants include not only those who are aggressively selling in the market, but also those who can “provide a rapid supply response with direct competitive impact …… without incurring significant sunk costs. There is no reason to believe that fitness apps are any more difficult to develop than other VR apps. Therefore, any VR app developer, not just fitness app developers, should be considered a potential competitor.
- Exaggerated market concentration?
Virtual reality (VR) is considered a relatively nascent market, rather than an area that is already mature and dominated by major tech companies. in March 2020, only 20 VR apps had total revenue of more than $1 million. By the end of 2021, the number of VR apps reaching that mark increases to 120. In addition to these high-revenue apps, one can expect to see an explosion in new app development. Quest’s App Lab, for example, currently has more than 800 VR apps.
Despite the popularity of Beat Saber and Supernatural, in addition to Supernatural, the Virtual Reality Institute of Health and Exercise, which evaluates the amount of body heat consumed by VR apps, has determined that nearly half of all VR apps are for health and exercise. Health and Exercise, which evaluates body calories consumed by VR apps, has identified nearly 100 apps that have the same or greater body calorie impact (fitness function) as walking.
Given a large number of VR fitness app developers, and a large number of VR app developers more generally, it is unlikely that the VR fitness app market, or even the VR-specific fitness app market, is as concentrated as the FTC claims.
- exaggerated barriers to entry for VR app development?
If consumers continue to show a willingness to purchase VR fitness apps, it is reasonable to assume that other VR app developers will likely launch similar products. The number of apps in Meta’s Quest VR app store over the past two years suggests that the barriers to entry are not significant.
The FTC may have fundamentally misunderstood the economics of a bilateral platform; the FTC believes that Meta may be slowing down the app approval process for its Quest VR app store, thereby creating barriers to new app development. In reality, Meta’s VR platform is only attractive to users if there are many apps, and only attractive to app developers if there are many users. The presence of these cross-network effects means that Meta wants to attract as many quality apps to its app store as possible, so odds are there will be no incentive to slow down the approval of other non-affiliated apps.
In addition, the existence of alternative app stores such as SteamVR and Quest App Lab will prevent Meta from limiting the availability of competing apps. As you can also see from the chart below, Meta does not have a dominant market position in terms of VR stores.
▲ Number of apps available for virtual reality headsets in major app stores/platforms worldwide in January 2022 (Source: Statistics)
The FTC’s move is said to be a disincentive for entrepreneurs to innovate, according to the venture capital community.
The fact that the FTC targeted Meta to acquire a “smaller, relatively low-visibility startup” immediately set off alarm bells among many tech industry insiders whose businesses depend on startup acquisitions.
Early investors in VR app development want to see a return on their investment, and the most common way to report back is through startup acquisitions. in 2020, nearly 90 percent of all venture-backed startups successfully exited their ventures through acquisitions.
Critics of the FTC’s decision to sue Meta claim that the lawsuit, if successful, will limit the ability of other startups to be acquired by larger, more established tech companies, harming the future of other startups and thus reducing innovation in VR apps. The goal of eventual acquisition by tech giants is a core element of many startups’ and investors’ exit strategies. And by hindering acquisitions, there is actually less incentive for innovative tech startups.
Box CEO Aaron Levie argues that stopping the acquisition of startups could have an unintended impact by discouraging entrepreneurs from starting startups and indirectly helping large tech companies.
Some commentators even suggest that the FTC’s action, not Meta’s, is the real threat to nascent competition in the emerging VR app ecosystem.
Conclusion
Meta executives argue that the FTC’s monopolization finding is “based on ideology and speculation, not evidence. In an informal response to the lawsuit, Meta said that the lawsuit “completely misunderstands the nature of the (virtual) space and ignores the realities of the marketplace.
Tech industry executives and venture capital insiders say the FTC’s action actually shows that they are trying to make up for “bad decisions” in allowing Facebook (Meta), Google, Amazon and Microsoft to make large acquisitions and that this compensation appears to be “excessive. excessive”.
But in any event, the lawsuit represents a change in antitrust enforcement by U.S. federal regulators: they have traditionally intervened in large acquisitions that concentrate companies in dominant positions in established markets; however, virtual reality is considered a relatively new market, and Within is not a significant company.
It remains to be seen whether antitrust will continue along this vein and whether it will have a positive or negative impact on the market.
