Beware Entrepreneurs — Is Biden’s FTC Challenge Of The Meta-Within VR Deal About Competition Or Politics?

Meta (formerly Facebook) has been a frequent target of FTC antitrust investigations. It is currently litigating the FTC’s challenge to its now 10- and 8- year old acquisitions of Instagram and WhatsApp.

A core issue in that case is whether Facebook competes with the likes of TikTok, Twitter, YouTube, LinkedIn and Spotify, for similar functionality on the Facebook platform. If the Court finds these companies do in fact compete for users, the FTC will likely lose the case because it will not have proven its asserted market containing only Facebook and Snapchat.

The FTC believes it has enough evidence to survive that analysis. But of course this belief will be heavily litigated, and if there is good evidence that there is cross-platform competition amongst Apps, this will be difficult for the FTC to overcome.

Now the FTC has made a new salvo against Meta: it wants to stop its acquisition of VR-App builder Within because of a single fitness-focused VR App called Supernatural (offering full body workouts like boxing and mediation). Why? Because according to the FTC, Supernatural competes with an App called Beat Saber, owned by Meta, in which users hit targets in time to popular music, and fitness is an incidental benefit of the game.

Out of the gate, however, the FTC admits that Supernatural and Beat Saber do not compete in one of the markets it believes exists. If one looks at the “VR Dedicated Fitness App Market,” according to the FTC, Supernatural is a competitor in that market while Beat Saber is not. The FTC also contends that if one looks the broader “VR Fitness App Market,” the Apps do compete, because all VR Apps that include fitness as an incidental benefit should be viewed as competitive to those that focus on fitness.

There are two head-scratching issues with this strategy. First, if the Court agrees with the FTC’s “VR-Dedicated” Market and not the “VR Fitness” Market, then the FTC has lost its case based on any actual competition theory. Most antitrust cases do not alleviate a market where if the Court agrees with the plaintiff in part, it is an admitted loss on the main theory of competitive harm. (To use an analogy, this would be akin to finding that electric cars compete with one another, but do not provide a meaningful competitive restraint on the price of all non-electric cars.)

Still, the FTC claims, in such a “VR-dedicated fitness” scenario, it can prove that Meta would have built a competitive App to the Supernatural App on its own, but it has been reported that the FTC did not talk to any Meta executives before filing suit. That is, at a minimum, a very risky and troublesome strategy for the FTC.

Second, if the FTC’s intention is to prove that both the “VR-Dedicated” Market and the “VR Fitness” Markets co-exist (though a concept called sub-markets; the car analogy would be overlapping electric car and all-car markets ), the star witness in any such case would be an expert economist, who would also try to avoid the above scenario. But importantly, it has been reported that the non-politically appointed FTC staff economists and lawyers who investigated this deal recommended against challenging the transaction.

So why was the suit filed nevertheless? Because Biden-appointed FTC chair Lina Khan overruled FTC staff, and persuaded the other democratically appointed FTC commissioners to vote in favor of the challenge, 3-2 (see my past post here on the new FTC).

This begs the question: was this suit filed because of a true competition concern in the VR space, which is still in its early stages, or because Chair Khan believed it had to be done politically as a matter of policy. In light of the head-scratching questions raised by the above, it appears to be a fair question.

Even a quick comparison of the Instagram-WhatsApp lawsuit to this lawsuit further confirms these questions. The Instagram case, brought by the FTC under the last administration, provided facts explaining the FTC’s view of a single proposed market excluding other non-Facebook social media platforms.

The FTC lost its first attempt (the Court dismissed its case), but then came back to try again and the Court found that enough was alleged about the market to get into litigation depositions. In the VR litigation, however, there is a deliberate concession by the FTC about the lack of direct competition between the companies, and the people at the FTC whose job it is to study these markets in detail did not recommend the lawsuit.

Before Chair Khan, the FTC (and DOJ Antitrust Division) had a long policy of following the market facts to determine what actions they ultimately bring, rather than political or policy based forces. This further begs of the question of what has changed since Biden’s appointment of Khan.

Leadership implications. One of the FTC’s assertions is that innovation and options in VR Apps will suffer if the deal is permitted to proceed. But this begs the question: why have many creative entrepreneurs been entering and will likely continue to enter the VR space? One reason is likely to be the potential of being acquired by a larger company.

This lawsuit itself appears to put a damper on that very phenomenon. If you are an entrepreneur assessing what risk to take, you now have to take account of the fact if your potential acquirer is a political enemy of the FTC, regardless of whether you think you compete against that acquirer.

Until recently, the business and legal communities have been able to rely on the fact that enforcement decisions are first and primarily informed by market and competitive facts, leading to appropriate assessments of risk to both businesses and consumers. This approach seems inconsistent with a lawsuit alleging that a company who changed its name to “Meta” is somehow doing something nefarious by making an investment in the space.

So in short, entrepreneurs beware: you could run into a fight based on your ingenious innovation if a non-competitive acquirer of your company is a political target of the FTC.

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