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FTC Antitrust Challenge to Meta Is a Needed Corrective

Sept. 9, 2022, 8:00 AM

Large tech companies have long bought out potential rivals to eliminate future competition. If Facebook hadn’t acquired WhatsApp and Instagram, today’s consumers would now have a more varied menu of social media platforms.

These giants eliminated any future competition posed by those rivals and solidified Facebook’s dominance over the social networking market.

The Federal Trade Commission, it appears, wants to prevent history from repeating itself in the market for virtual reality (VR) fitness apps. In a bold move with an uncertain outcome, the commission has gone to court to challenge the tech industry’s inclination to acquire the competition.

A successful suit could set precedent for antitrust enforcement against a wider range of anti-innovation practices by large tech firms. But failure could raise a higher bar to government challenges against tech acquisitions.

In a complaint filed in federal district court in San Francisco, the FTC seeks to block Meta Platforms, Inc. (formerly Facebook)—which says its future is the virtual reality-fueled metaverse—from acquiring Within Unlimited and its popular Supernatural fitness app.

On Supernatural, users don a VR headset and work out with a trainer on a mountaintop while listening to their favorite pop star in the background. The global market for these apps is expected to reach $19 billion by 2027, according to some estimates.

Already the largest provider of VR headsets with the goal of being “completely ubiquitous in killer apps” for the VR market, Meta wants to control both the platform and the apps for the VR market, the complaint alleges.

The acquisition, if allowed to proceed, violates antitrust law because it would “substantially lessen competition, or tend to create a monopoly, in the relevant market for VR dedicated fitness apps and the broader relevant mark for VR fitness apps,” the FTC says.

Entering those VR markets by independently creating its own products would increase consumer choice and innovation and encourage more entrants to the market, according to the agency. Meta is trying to buy its way in, reducing competition and the public benefits it brings, the complaint alleges.

When Meta gobbles up smaller companies to eliminate competition in a market it wants to control, it tips network effects in its favor. That is why challenging acquisitions like this one before the slide towards monopoly begins is so important.

‘Buy or Bury’ Business Model

The FTC has been pursuing a separate case against Meta for the past two years. In that case, the commission claimed that Meta is on an “anticompetition shopping spree,” illegally buying rivals to “maintain its monopoly.” It seeks to force the company to sell WhatsApp and Instagram.

After throwing out the commission’s first complaint, a judge in January denied Meta’s motion to dismissand allowed the case to proceed on a narrower theory, that Meta employs a “buy or bury” acquisition strategy to illegally maintain a monopoly.

In the new lawsuit, the FTC is pursuing a similar approach, taking aim at Meta’s business strategy to remove competitors one by one. The prevalence of network effects in many online services markets, including social networking and gaming, causes markets to reward the earliest, fastest-growing players with durable monopoly power.

That is how we got to where we are now, with behemoths like Meta, Apple, Google, Amazon, and Microsoft controlling vast swaths of internet communications and e-commerce.

The FTC gambles that it can convince the courts to expand the categories of mergers that are blocked to include a large company with monopoly power in a closely related market acquiring a smaller company likely to be a future competitor in a new market—even when the acquisition does not immediately create monopoly power.

Deprives Users of Benefits

These kinds of mergers stifle competition and innovation when they produce a giant with tentacles in adjacent markets and a massive amount of cash that it uses to buy its way into a market.

The “buy or bury” business model deprives users of the benefits of a competitive market. Without monopoly power, an acquirer would offer a product and developers, rather than seeking to just get bought out and merge with the acquirer, would enter a market with new and innovative products to challenge the dominant player.

VR Focus

As in many antitrust lawsuits, defining and proving relevant markets will be a big challenge. The FTC’s complaint alleges two product markets — “VR Dedicated Fitness Apps” and a broader category of “VR Fitness Apps.”

Supernatural has an app in the VR dedicated fitness apps market, according to the FTC, but Meta has an app in the broader VR fitness apps market, which presumably has lots more apps.

It will be harder for the FTC to show that Meta is likely to acquire monopoly power in the narrower market of dedicated VR fitness apps, because the acquisition will not reduce the number of apps in that market.

That said, this is a case where harm to competition is likely to happen in a variety of markets—including VR apps more generally, in online advertising, and in the market for hiring talented VR software developers.

The FTC may be hoping to get the courts to look at the potential effects of this merger more holistically, without a narrow focus on one subcategory of apps. That could set a valuable precedent for how to apply antitrust law to internet apps and services more generally.

But if Meta prevails, future challenges to large tech firms acquiring smaller rivals could become more difficult. That’s why this case could strongly affect the direction of innovation in online platforms in the coming years.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Mitch Stoltz is the Electronic Frontier Foundation’s competition director and a member of the legal team, leading its work on antitrust and competition including litigation, legislative advocacy, coalition building, and policy analysis to address effects of market concentration on user rights and innovation.