FTC’s case against Meta’s acquisition of Within aims to shape emerging VR market

On October 21, 2021, the day after Facebook rebranded to Meta, the company agreed to acquire Within Unlimited, a virtual reality development studio that designed and built the popular virtual reality fitness app, Supernatural. But on July 27, 2022, the U.S. Federal Trade Commission (FTC) filed a lawsuit and request for a preliminary injunction with the U.S. District Court for the Northern District of California to halt the transaction.

The FTC’s attempt to halt this takeover transaction is widely seen as a risky attempt to push the boundaries of merger antitrust enforcement. “It’s a riskier business, but one they think is worth pursuing because if they’re successful, it will help push the frontier of enforcement,” said former president William E. Kovacic. of the FTC and highly respected antitrust expert.

The case is new — and risky — because antitrust agencies typically seek to block mergers and acquisitions in well-developed markets where a company seeking to merge already holds a dominant position. It’s true that Meta’s Oculus division leads the VR hardware market with its Quest headsets, and Meta operates a key VR app distribution hub through its Quest store. But Meta is not the leader in VR apps, although it produces some apps itself. The agency takes aim at Meta’s attempt to grow in the VR app market through acquisitions rather than its own internal development work.

The FTC does not accuse Meta of leveraging its position in VR headsets and VR app distribution to dominate the VR app market. Nor does it allege that Meta uses its position to disadvantage competing applications or to favor its own, or to force Within to sell itself to Meta. Moreover, the agency does not claim that Meta has a dominant position in the distribution of VR headsets or applications. The FTC’s complaint states that the acquisition of Meta is anti-competitive because Meta could have developed a fitness app to compete with Supernatural, which would have provided an additional alternative for users and incentivized other developers to work harder to improve their own. apps. “Instead of competing on the merits, Meta is trying to buy its way to the top,” said John Newman, deputy director of the FTC’s Competition Bureau.

Meta reasonably asks how Meta’s acquisition of Within could threaten VR app competition when even after the acquisition Meta would not have a strong position in the VR app market, not even in the smaller “relevant market. for fitness applications dedicated to VR”. He also argues that VR app start-ups have more incentive to develop innovative VR apps, knowing that they have a possible market exit in the form of a sale to Meta. Moreover, it is difficult to articulate the rule or principle that the FTC is implicitly adopting. Shouldn’t large companies expand into adjacent markets through acquisitions?

But, despite these reservations, which must have reached the FTC, the agency has already seen this film. Meta consolidated its position in social media thanks to the strategy of buying businesses in the adjacent markets of messaging (WhatsApp) and photo sharing (Instagram), and now holds strong positions in all of these markets. With no action from the FTC now, before Meta has a controlling position, the agency fears the same thing could happen to the VR market.

The FTC isn’t alone in worrying about a metaverse monopoly. Tim Sweeney, the CEO of Epic Games, which developed the wildly popular video game Fortnite, which has had its own antitrust dispute with Apple over restrictive App Store policies, told reporters in 2016: “If a central corporation takes control of this, they will become more powerful than any government and be a God on Earth.

One thing the FTC understands in its complaint is the importance of early action in shaping the development of the emerging virtual reality market. Technology markets are subject to particular economic forces, especially network effects that make popular products much more valuable. These forces tend to create concentration and winner-takes-all markets. Time and time again, in computer operating systems, search, social media, and e-commerce, these forces produce a common pattern of vigorous competition followed by the emergence of a market leader who enjoys a dominant position. sustainable in the market.

The FTC is not ignoring these market realities. He acknowledges that a market leader will likely emerge in the VR space. He just wants to make sure the competitive fight is happening “on the bottom”; that is, based on independent development efforts, rather than based on Meta’s deep pockets. If Meta were to become the dominant developer of VR apps through its own internal innovation efforts, the FTC might not have a problem with that market outcome, at least that complaint suggests.

It is not yet clear whether the courts, under existing antitrust law, will accept such an attempt to guide and shape the emerging virtual reality market. Courts may not recognize this prospective approach as appropriate to the antitrust jurisdictional approach. A strategy to shape the emerging VR market before it solidifies is typical of what a regulator would do when seeking to protect the public interest in an industry over which it has been given oversight authority. .

Previously, Congress recognized the need to regulate infant industries to ensure they emerged in a form that advanced public policy goals. Broadcasting only emerged as a business after Congress in 1927 authorized a federal agency, the Federal Radio Commission, to assign exclusive rights to spectrum and ensure that broadcast licensees operated in the public interest. When commercial aviation became a real possibility in the 1930s, Congress created the Civil Aeronautics Board in 1938 to govern the entry and exit of aviation companies from the industry, allocate routes and set tariffs for emerging industry. The industry grew dramatically under this regulatory oversight over the following decades.

Until the 1970s, this model of early intervention in emerging industries persisted. When credit reporting agencies began digitizing, maintaining, and analyzing people’s credit record systems, Congress passed the Fair Credit Reporting Act in 1974, giving consumers the legal right to fair and requiring credit bureaus to protect these rights. Under the supervision of the FTC, the industry flourished in a way that protected consumers from abuse.

Around the same time, the then fledgling credit card industry sought to protect itself against fraud by making consumers liable for losses due to fraud. In response, in 1974 Congress passed the Fair Credit Billing Act limiting consumer liability and providing other consumer protections and appeal rights. With consumer confidence bolstered by these protections, the industry has grown rapidly. It even developed sophisticated neural networks (the very first commercial application of this artificial intelligence approach) to minimize fraud losses that it was unable to pass on to the consumer.

Congress may also need to step in to regulate the emerging virtual reality industry in the same way it established the rules of conduct for these other industries. And these rules may need to go beyond preventing the emergence of a monopoly. Measures may need to directly address industry privacy, consumer protection and content moderation concerns. As venture capitalist Matthew Ball says (p. 17) in his book The Metaverse“The metaverse will also sharpen many of the difficult issues of digital existence today, such as data rights, data security, misinformation and radicalization, platform power and regulation, abuse and user happiness.”

Europe seems to have gotten the message of the need to anticipate industry developments in the metaverse with an agile and forward-looking regulatory regime. Recently, the European Commission considered that its new regulation establishing content moderation rules, called the Digital Services Act, and its separate regulation creating new ex ante digital competition measures, called the Digital Markets Act, covered the metaverse. In response to a question from the European Parliament, an official from the European Commission stated that the DSA and DMA “provide the appropriate framework and the tools necessary to solve problems concerning the metaverse”. On competition, the Commission official said the Digital Markets Act “would foster contestability in the metaverse, either because the relevant services fall within its scope or through the provisions that guarantee the sustainability of the law on digital markets”.

Currently, the United States is far behind such a forward-looking approach. Bills to promote competition and establish good social media content moderation policies are pending in Congress and expected to pass. But for now, they won’t reach the emerging VR market. As a result, risky and novel as it is, the FTC’s complaint to halt Meta’s acquisition of Within may be the best policymakers can do with the tools at their disposal to shape the emerging market of reality. virtual to protect the public interest.

Apple and Meta are general, unrestricted donors to the Brookings Institution. The findings, interpretations and conclusions published in this article are solely those of the author and are not influenced by any donation.