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Meta Buy Challenge From FTC Targets Future Harm to Competition

July 29, 2022, 9:00 AM

The Federal Trade Commission’s challenge of Meta Platforms Inc.’s acquisition of a virtual reality gaming company revives a little-used argument against Big Tech’s classic acquisition playbook.

The agency, in a July 27 lawsuit in the US District Court for the Northern District of California, alleges Meta’s acquisition of Within Unlimited would likely create a monopoly by eliminating competition for virtual reality fitness applications. Within is the developer of the popular fitness app Supernatural.

But rather than only challenging the acquisition as harmful to competition now, the FTC is primarily alleging that Meta is seeking to eliminate a future competitor.

Big Tech companies often make a series of smaller acquisitions in an attempt to roll up nascent future competitors, said Chris Sagers, a law professor at Cleveland State University’s Cleveland-Marshall College of Law. If the FTC’s strategy in the Meta case pays off, it could become a template for challenging similar corporate moves.

Determining what the consumer market is for virtual reality exercise games, though, is likely to prove a significant hurdle in the commission’s case, Sagers said.

“This is throwing down the gauntlet,” Sagers said. “The FTC likely sees this as a case that could bring life back to what we call the incipiency doctrine: stopping them in their incipiency before they become monopolies.”

The case offers a chance for the commission to improve antitrust laws so smaller, incremental acquisitions no longer fall through the cracks, Sagers said.

FTC Chair Lina Khan has said she hopes to crack down on the market power of Big Tech. If the latest bid works, it would both satisfy that goal and clamp down on a sector that’s proved resistant to traditional antitrust regulation because of its tactic of rolling up smaller companies before they become competitors.

“While a relatively new legal approach, we know from the past decade that ignoring these types of acquisitions leads to strangleholds on the market by dominant firms,” said Robins Kaplan partner Kellie Lerner in an email. “If history is prologue in the tech space, applying this more flexible approach to antitrust enforcement may prevent the next generation of Big Tech monopolies.”

Even so, potential competition cases are rare and difficult to win, said Stephen Calkins, a professor at Wayne State University Law School. The commission lost FTC v. Steris Corporation, the most recent case in which it made such an argument, in 2016.

Meta has said the FTC lawsuit is meritless.

“The idea that this acquisition would lead to anticompetitive outcomes in a dynamic space with as much entry and growth as online and connected fitness is simply not credible,” Meta spokesperson Christopher Sgro said.

Market Contradictions

The FTC alleges that there is a narrow market defined as “VR dedicated fitness apps,” and that if Meta didn’t move to acquire Within, it would have entered the market itself. That move would have increased competition—and even now, Meta’s position on the edge of the market has done that, the FTC said.

“Instead of competing on the merits, Meta is trying to buy its way to the top,” John Newman, deputy director of the agency’s Bureau of Competition, said in a July 27 statement.

To prevail, the FTC must show that the merger would disincentivize Meta from building its own, competing app, Sagers said.

“If the government is going to challenge a merger for ending potential competition, it has to show that one of these companies is likely to enter the market soon,” Sagers said. “By definition, one of them isn’t in the market yet. They need to show that they’ll enter soon if they don’t stop the merger.”

In the VR dedicated fitness app market, Meta’s Beat Saber is not a competitor to Within’s Supernatural, the FTC argued. Beat Saber is still a fitness app—just not a dedicated one, the commission said in filings.

That argument depends on the idea that customers differentiate between apps that incidentally provide a workout versus ones entirely focused on exercise, Calkins said. Because the virtual reality market is so early in its development, making any strong judgments about its market characteristics is tenuous because of how little data is available, Calkins said.

The FTC is also arguing that the two products compete in a larger market covering all virtual reality exercise apps. In the context of that market, Meta’s acquisition is a horizontal merger, which is typically much easier for regulators to challenge than the potential competition strategy.

But because the market is so much larger, the commission will likely face a weighty obstacle to proving that a single merger could noticeably effect concentration, Calkins said.

It will be difficult to convince a judge of both arguments, Calkins said. They are superficially opposed, if not mutually exclusive, he said.

“It’s hard to be persuasive when you’re arguing that two products don’t compete when you’re also arguing the contrary,” Calkins said.

The case is Federal Trade Commission v. Meta Platforms Inc., et al, N.D. Cal., no. 5:22-cv-04325, 7/27/22.

To contact the reporter on this story: Dan Papscun in Washington at dpapscun@bloombergindustry.com

To contact the editors responsible for this story: Keith Perine at kperine@bloombergindustry.com; Melissa B. Robinson at mrobinson@bloombergindustry.com