FTC’s case against Meta’s acquisition of Within seeks to shape the emerging virtual reality market

On October 21, 2021, the day after Facebook changed its name 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 United States Federal Trade Commission (FTC) filed a complaint and a preliminary injunction request with the United States District Court for the Northern District of California to stop the transaction.

The FTC’s attempt to halt this acquisition transaction is widely seen as a risky attempt to push the envelope of antitrust merger enforcement. “It’s a riskier case, but they think it’s worth pursuing because if they succeed it will help push the application frontier outward,” said William E. Kovacic, former president of the FTC and a respected specialist at antitrust.

The case is new and risky because antitrust agencies typically try 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 is a market leader in VR hardware with its Quest headsets and that Meta operates a key VR app distribution hub through its Quest store. But Meta isn’t the leader in VR apps, even if it produces some apps on its own. The agency points to Meta’s attempt to expand into the virtual reality app market through acquisition rather than through its own in-house 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. It also does not claim that Meta is using its position to disadvantage competing apps or to favor its own, nor to force Within to sell itself to Meta. Furthermore, the agency does not claim that Meta has a dominant position in headsets or in the distribution of VR apps. The FTC complaint claims that the Meta acquisition is anti-competitive because Meta could have developed a fitness app to compete with Supernatural which would have provided an additional alternative to users and spurred other developers to work harder to improve their apps. “Instead of competing on merit, Meta is trying to reach the top,” said John Newman, deputy director of the FTC Bureau of Competition.

Meta reasonably asks how Meta’s acquisition of Within could threaten competition from VR apps when, even after the acquisition, Meta would not have a strong position in the VR app market, not even in the smallest “relevant market for. fitness apps dedicated to virtual reality “. He also argues that VR app start-ups have a greater incentive to develop innovative VR apps knowing they have a possible exit ramp in the form of selling to Meta. Furthermore, it is difficult to articulate the rule or principle that the FTC is implicitly adopting. Is it that large companies shouldn’t grow in adjacent markets through acquisition?

But despite these reservations, which must have come to the FTC, the agency has seen this film before. Meta has consolidated its position in social media through its strategy of buying companies in the adjacent messaging (WhatsApp) and photo sharing (Instagram) markets, and now holds strong positions in all of these markets. In the absence of FTC action now, before Meta has a controlling position, the agency fears the same thing will 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 hugely popular video game Fortnite, which had its own antitrust clash with Apple over the App Store’s restrictive policies, told reporters in 2016: “If a central company gets control of this, they will become more powerful than any government and become a God on Earth ”.

One thing the FTC is right in its complaint is the importance of timely action to shape the development of the emerging virtual reality market. Technology markets are subject to special economic forces, particularly network effects that make popular products disproportionately more valuable. These forces tend to create concentration and winner-take-all markets. From time to time, in computer operating systems, research, social media and e-commerce, these forces produce a common pattern of vigorous competition followed by the emergence of a market leader who enjoys an enduring position of dominance in the market. .

The FTC does not ignore these market realities. He acknowledges that a market leader in the VR space is likely to emerge. He just wants to make sure that the competitive fight takes place “on the merits”; that is, based on independent development efforts, rather than on the basis of Meta’s deep pockets. If Meta were to become the dominant VR app developer through its own in-house innovative efforts, the FTC may have no problem with that market outcome, or so it seems from this complaint.

It is still unclear whether courts under existing antitrust law will support such an attempt to lead and shape the emerging virtual reality market. Courts may not recognize this forward-looking approach as appropriate to the antitrust arbitration approach. A strategy to shape the emerging virtual reality market before it solidifies is typical of what a regulatory agency would do in trying to protect the public interest in an industry over which it has been given supervisory authority.

In the past, Congress recognized the need to regulate nascent industries to ensure they emerge in a form that improves public policy goals. Broadcasting emerged as an activity only after Congress in 1927 authorized a federal agency, the Federal Radio Commission, to assign exclusive rights to spectrum and to ensure that broadcast licensees operated in the public interest. When commercial aviation became a real possibility in the 1930s, Congress in 1938 established the Civil Aeronautics Board to govern the entry and exit of airlines from the industry, assign routes and set fares for the emerging industry. The industry grew spectacularly under this regulatory oversight over the next several decades.

Even in the 1970s, this pattern of early intervention in emerging industries persisted. When credit reporting agencies began digitizing, maintaining and analyzing systems of records relating to people’s creditworthiness, Congress passed the Fair Credit Reporting Act in 1974 which gives consumers legal rights to fair treatment and requires credit reporting agencies to protect these rights. Under the oversight of the FTC, the industry has grown to protect consumers from abuse.

Around the same time, the then fledgling credit card industry tried to protect itself from fraud by making consumers accountable for fraud-related losses. In response, Congress passed the Fair Credit Billing Act in 1974 which limits consumer liability and provides other protections and redress rights for consumers. With consumer confidence boosted by these protections, the industry expanded rapidly. It even developed sophisticated neural networks (the first ever commercial application of that AI approach) to minimize the fraud losses 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 set the rules of the way for these other industries. And these rules may have to go beyond preventing the emergence of a monopoly. The measures may have to directly address industry concerns regarding privacy, consumer protection and content moderation. As venture capitalist Matthew Ball (p. 17) says in his book The Metaverse“The Metaverse will also sharpen many of the difficult problems of today’s digital existence, such as data rights, data security, disinformation and radicalization, platform power and regulation, user abuse and happiness. “.

Europe seems to have received the message on the need to anticipate sector developments in the metaverse with an agile and far-sighted regulatory regime. Recently, the European Commission found 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, cover the metaverse. In a response to a question from the European Parliament, a European Commission official said that DSA and DMA “provide the appropriate framework and tools to address metaverse issues”. In connection with the competition, the Commission official said the Digital Markets Act “will foster contestability in the metaverse, both because the relevant services fall within its scope and through provisions that ensure future proof of the Digital Markets Act.”

Currently, the United States lags far behind such a forward-looking approach. Bills to promote competition and establish good social media content moderation policies are under consideration in Congress and should be passed. But right now, they won’t reach the emerging virtual reality market. As a result, risky and new as it is, the FTC’s lawsuit seeking to stop Meta’s acquisition of Within may be the best policy makers can do with the tools at their disposal to shape the emerging virtual reality market. to protect the public interest.

Apple and Meta are general and unlimited donors to the Brookings Institution. The results, interpretations and conclusions published in this piece are solely those of the author and are not influenced by any donations

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