On July 27, 2022, the Federal Trade Commission (“FTC”) voted 3-2 to sue in federal district court to block Meta Platforms, Inc.’s (“Meta”) acquisition of Within Unlimited, Inc. (“Within”), a virtual reality (“VR”) app developer. In authorizing the complaint, the commissioners took the unusual step of overruling an FTC staff recommendation to close the agency’s investigation. Further, the two Republican commissioners dissented but, as is customary in this context, did not issue separate statements explaining their views. The case has implications for future FTC review of transactions across industries, but in particular for VR, video game, and tech mergers.
Meta is a global technology company that is best known for its Facebook, Instagram, and WhatsApp family of apps. Meta also develops and markets VR devices and apps, such as the Oculus Quest VR headset and the Meta Quest Store, which distributes apps on VR headsets.
Within is a privately held software company that develops apps for VR devices. Within’s flagship product is Supernatural, a VR subscription fitness service. Supernatural offers over 800 fully immersive VR workouts, each set to music and located in a virtual setting such as the Galapagos Islands or the Great Wall of China.
The FTC’s claims
The FTC’s complaint suggests that nothing less than the future of the metaverse is at stake in the transaction. According to the complaint, “Meta in recent years has set its sights on building, and ultimately controlling, a VR ‘metaverse.’” ¶ 2. If the transaction were to proceed, “Meta would be one step closer to its ultimate goal of owning the entire Metaverse.” ¶ 13. The FTC’s actual claims are, however, limited to two types of VR fitness apps.
Elimination of Potential Entrant in VR Dedicated Fitness App Market.
VR dedicated fitness apps are VR apps that are “designed so that users can exercise through a structured physical workout in their own homes,” as distinct from incidental fitness apps where physical movement and exertion are part of a larger experience. ¶¶ 38, 40. The FTC alleges that the market does not include “non-VR at-home smart fitness solutions, such as digitally connected exercise bikes, treadmills, weight machines, mobile phone apps, video games, or workout videos.” ¶¶ 44-47.
Within offers a VR dedicated fitness app (Supernatural); Meta does not. The FTC alleges that the acquisition will eliminate Meta’s potential entry into the VR dedicated fitness app market. As a result of the acquisition, the FTC argues, Meta would use Within’s offerings to compete in the market instead of entering with its own VR dedicated fitness app, thereby lessening competition in the market. Further, the FTC argues that the barriers to entry to develop a VR dedicated fitness app will prevent any other competitors from entering if Meta were to acquire Within.
Many of the FTC’s allegations in support of this claim are redacted such that the details of FTC’s claims are as yet unknown. Nevertheless, the unredacted allegations suggest that Meta was not actually taking steps to enter the market. Rather, the FTC’s claims appear to be premised on Meta having the ability and the incentive to develop its own VR dedicated fitness app on account of its large size and capabilities. ¶¶ 71, 83.
Horizontal Concentration in VR Fitness App Market.
VR fitness apps are VR apps that are “recognized and marketed as providing a fitness benefit to the user” ¶ 50. This would include both VR dedicated fitness apps (such as Supernatural) and incidental fitness apps (such as Meta’s Beat Saber app). The FTC alleges that the acquisition would result in horizontal concentration of the broader VR fitness app market as Meta’s Beat Saber and Within’s Supernatural apps currently are close competitors in this market.
Meta issued a blog post responding to the FTC’s suit. Meta argues that “there is no merit to the FTC’s case” and that the complaint is “based on ideology and speculation, not evidence.” Meta relies on four primary arguments.
- The FTC “misunderstands the nature of the [VR fitness] space entirely and ignores market realities.” Supernatural and Beat Saber “couldn’t be more different” and are fundamentally different products.
- The FTC’s assertion that Meta would create a Supernatural-like product is “based on little more than Meta’s size,” and other “well-established brands like Apple and Peloton are far better positioned than Meta” to expand into the VR fitness market. Importantly, Meta “looked into building a fitness-specific service” and decided that it was not “in a position to do so.”
- Fitness-specific app developers “don’t see [Meta] as their current or future competition and are focused on the strong existing players in the space.”
- Meta is not trying to control the VR ecosystem and is “supporting and growing a viable and sustainable ecosystem for developers.”
Meta’s arguments are capped by its fundamental point: “How could Meta’s acquisition of a single fitness app in a dynamic space with many existing and future players possibly harm competition?”
Implications for future merger reviews
The complaint provides insight into the current FTC majority’s priorities going forward for merger reviews both in the VR and gaming spaces, as well as in other industries.
First, the FTC seemingly has adopted the position that companies with sufficient financial and technical resources should build instead of buy their way into a new market, even if the acquirer has no intention to enter on its own or if the success of its entry would be uncertain. In the broader video game industry, for example, a large game developer that has the resources to develop new games, but instead acquires an existing game studio to fill gaps in its catalog, may have to defend against allegations from the FTC similar to those raised against Meta/Within. To be clear, however, there is no indication that the FTC’s position is limited to the metaverse, video games, or even the technology industry. Companies across industries may face similar concerns in merger reviews going forward.
Second, the FTC’s complaint references Meta’s history of acquisitions in the VR space as evidence of harmful market consolidation and Meta’s motive to control the relevant markets. While the FTC does not seek to unwind these prior acquisitions (as it is seeking for Meta’s prior acquisitions of WhatsApp and Instagram in a separate case), it is clear that the FTC views prior acquisitive activity in the same area in a negative light.
Third, both of the alleged relevant markets are notable for their narrowness: both are limited to one genre of VR apps as opposed to all VR or all fitness apps. This may have implications for other mergers in the VR and video game space where the merging parties offer apps or games that overlap in the same genre, such as first-person shooters or role-playing games.
Fourth, the complaint signals the FTC’s focus on protecting competition in the broader “metaverse.” The FTC does not define the metaverse as a relevant market in the complaint. However, VR is considered one of the primary drivers of the metaverse, and at a conference in October 2021, FTC Chair Lina Khan mentioned VR as an example of a developing platform technology that the FTC would scrutinize. The complaint’s focus on the metaverse is also consistent with Khan’s oft-stated concern regarding technology companies allegedly seeking to control nascent platforms as part of an “ecosystem play, where the goal is to capture the ecosystem as a whole.” This step by the FTC to block Meta’s acquisition of Within, combined with the language in the complaint, suggests that other acquisitions with implications for the development of the metaverse will be closely scrutinized.
The FTC’s latest merger challenge reveals that the newly solidified Democratic majority of FTC commissioners’ views protecting competition in nascent industries and preventing “ecosystem plays” as essential to its enforcement agenda, even when the agency lacks a strong case. On numerous issues — including market definition, potential competition, and entry barriers — the FTC’s case is novel and may face a skeptical court. Nonetheless, the expansive theories of harm expressed in the complaint may have significant implications for future merger reviews across industries at the FTC.