The FTC has been working on the virtual reality fitness market for a long time

Is it illegal for a company to own two related virtual reality games? The Federal Trade Commission (FTC) thinks it is and is now suing Facebook’s parent company Meta for buying virtual reality studio Within, best known for the extremely niche game Supernatural. A closer look at the FTC’s challenge, however, suggests that the lawsuit was more likely to grab the headlines than to promote competition in the fast-growing virtual reality business.

Meta’s purchase of Within is part of their frenzied drive to get consumers interested in the so-called “metaverse,” which presumably will include tons of VR content in the future. To date, Meta is best known in the VR space for owning the best-selling VR headset, the Quest 2, which has sold nearly 9 million units. The company, however, is increasingly entering the software and games market.

In 2019, Meta acquired Beat Games, which produces Beat Saber, a game that combines physical body movements (slash “saber”) with music. Think of it as Dance Dance Revolution meets Fruit Ninja, but with a VR headset. They followed it up in October 2021 with the deal to acquire Within. Just days before the deal closed, the FTC filed a lawsuit to stop the merger, on the grounds that Meta already owned related games.

The Clayton Act gives the FTC the authority to challenge mergers that “reduce competition or tend to create a monopoly.” When the FTC fears that a merger is illegal, it must define the market in which competition would be reduced or a monopoly merger would occur. If they define it too narrowly, then every company could be considered a monopolist. In this case, the FTC says Meta’s acquisition of Within reduces competition in the “VR fitness apps” market.

It is implied in this market definition that Meta does not face competition from other popular fitness programs, such as Nintendo, Xbox and PlayStation, as those platforms are not virtual reality. It also rules out possible competition from mobile fitness apps like Nike Training Club, Strava, or Peloton. And finally, it rules out the possibility of VR fitness apps competing with other non-fitness VR apps. Neither of these sources of competition matters, according to the FTC.

But the courts shouldn’t accept the FTC’s contention that “VR fitness apps” are a separate market. What matters to consumer behavior, and what should matter to antitrust law, is the extent to which customers believe apps are substitutes. It’s hard to imagine that anyone looking for a fitness app will only be married to virtual reality or that anyone looking for a VR app (like Beat Saber) will only consider fitness apps. It’s much more plausible that customers are arguing between Supernatural or Peloton app subscriptions, on the one hand, or between Beat Saber and Blade & Sorcery (the most popular games on Oculus), on the other.

The FTC played a similar market definition game in a different lawsuit filed against Meta, seeking to nullify Facebook’s acquisition of Instagram and WhatsApp. According to the commission, Facebook and Instagram together represent a monopoly in the “personal social networking” market, a definition that no one has ever used before, but which conveniently excludes rival social media platforms such as Twitter, LinkedIn, TikTok, Reddit and Youtube. Does anyone really believe that Facebook doesn’t have to face competition from Twitter or that Instagram doesn’t have to face competition from TikTok?

These market definition questions are not exclusive to Facebook cases, but emerge antitrust in any case. For example, the FTC tried to block a merger between Whole Foods and Wild Oats in 2007. Even though the two stores together accounted for only 1.5% of US grocery sales, the FTC said the market relevant was “premium and organic supermarkets”.

The problem for the FTC is that, unlike Whole Foods and Wild Oats, there is a clear benefit to consumers in integrating Supernatural into the Oculus ecosystem. Meta has the most popular hardware on the market, which greatly improves in value when combined with ever better software. Supernatural will now reach more players thanks to the possible integration with the hardware. Hardware and software are the textbook example of a gain from consolidation, as each generates a lot of value for the other.

Rather than a well-articulated pro-consumer case, the current challenge looks like another attempt to chase “Big Tech”. According to a leaked to the Capitol Forum, the FTC sees the challenge as a “significant blow to Meta”. The intention is clear: the FTC wants to lower Meta. But antitrust is not about taking down large companies. On the contrary, the priority has been and should be to protect competition and help consumers to enjoy better products at lower prices.

Brian Albrecht is chief economist of the International Center for Law & Economics.

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