Because of the unusual antitrust challenge against tech companies, some have even criticized its legal foundation for being “flawed”. In the words of Meta Deputy General Counsel Nikhil Shanbhag,“How could Meta’s acquisition of a…single fitness app possibly hurt competition?”
However, if the FTC’s lawsuit is successful, it is likely to point to a new trend and direction for “antitrust” regulation.It is necessary for us to analyze it and keep an eye on it.
1. FTC’s position – why “monopoly”
1. Acquirer – Meta’s position in virtual reality (VR)
Meta, the global tech giant that owns Facebook, Instagram, Messenger and WhatsApp, is the largest provider of virtual reality devices and a leading provider of apps in the United States, according to the FTC filing. Driven by the popularity of its best-selling Quest headset, Meta’s Quest Store has become the leading app platform in the United States, with more than 400 apps available for download.
As part of its app extension,Meta has acquired seven of the most successful VR development studios and now has one of the largest catalogs of first-party VR content in the world.The acquisition of Beat Games studio gave Meta control of the popular app Beat Saber.
Meta acquired Beat Games, the developer of Beat Saber, in 2019. It has since acquired Sanzaru Games and Ready at Dawn in 2020, and Twisted Pixel, Downpour Interactive and BigBox VR in 2021.
Tabulated: Internet Law Review
2. Acquired party – Supernatural fitness game owned by Within
According to Within’s co-founder and CEO, “Fitness is VR’s killer app.”In order to convince the court, the FTC has designated a specific category of market – the VR fitness application market.
Beat Saber, already under Meta’s control, bears a clear resemblance to the proposed takeover of Supernatural — rhythmically cutting through floating spheres and cubes. Beat Saber, however, falls into the “fitness app” category, meaning that while it’s not primarily focused on fitness, fitness may be a byproduct of the game; Supernatural is considered a “dedicated fitness app” because it “provides a variety of high- quality music workouts”, all in “a stunning, realistic environment like the Galapagos”.
▲Beat Saber evaluation picture
▲Photo from the official website of Supernatural (boxing mode)
It can be said that Beat Saber and Supernatural have a certain competitive relationship in the specific VR fitness APP field.
According to FTC analysis: Meta has two options, one is to develop its own VR fitness app, and the other is to buy Beat Saber’s competitor, Supernatural; the former will increase consumer choice, promote innovation, and stimulate more competition.The latter would eliminate the prospect of such entry, inhibiting future innovation and competition.Reducing competition violates antitrust laws, so this acquisition is illegal.
3. FTC internal disagreements
Sources have reportedly told Bloomberg that some FTC members had been “suggesting against” suing to block Meta’s acquisition of Within, but it was ultimately overruled by FTC chief Lena Khan, who ultimately voted 3-2 in favor of the lawsuit.
Foreign media emphasized thatLena Khan is pushing unusually aggressively to limit the power of companies like Meta.
2. Where are the legal flaws in the determination of “monopoly”?
1. Too narrow market definition?
The FTC describes these markets as highly concentrated today or likely to become highly concentrated as a result of consolidation.
In order to persuade the court case to stand, the FTC delineated a too narrow relevant market for “monopoly”.
In fact, the FTC believes that Meta’s acquisition of Within Studios will reduce competition in the narrow “VR-specific fitness app” market as well as the broader “VR fitness app” market. As mentioned earlier, Meta’s Beat Saber, while not designed as a fitness app, has accompanying fitness benefits.
The FTC’s theory of harm is that without the merger, Meta would likely enter the dedicated fitness app market. Therefore, mergers and acquisitions will hinder the desired diversification of the market. It would also eliminate direct competition between Meta and Within in the broader VR fitness app market.
However, market participants include not only those actively selling in the market, but also those who can “provide a rapid supply response with direct competitive impact…without incurring substantial sunk costs”.There’s no reason to believe that fitness apps are harder to develop than other VR apps.So any VR app developer, not just fitness app developer, should be considered a potential competitor.
2. Exaggerated market concentration?
Virtual reality (VR) is considered a relatively nascent market, rather than an area that has matured to be dominated by major big tech companies.In March 2020, there were only 20 VR apps with a combined revenue of more than $1 million. By the end of 2021, the number of VR applications reaching this metric will increase to 120. In addition to these high-paying apps, one will also see an explosion in new app development. For example, Quest’s Application Lab, currently has more than 800 VR applications.
Despite the popularity of Beat Saber and Supernatural, in addition to Supernatural, the Virtual Reality Institute of Health and Exercise, which evaluates the calorie burn of VR applications, identifiedNearly 100 apps that have the same or greater caloric impact (fitness function) than walking.
Given the sheer number of VR fitness app developers, and the number of VR app developers more generally, the VR fitness app market, or even the VR-specific fitness app market, is unlikely to be as concentrated as the FTC claims.
3. Exaggerated barriers to entry for VR app development?
If consumers continue to show willingness to buy VR fitness apps, we can reasonably assume that other VR app developers are likely to launch similar products. The number of apps in Meta’s Quest VR app store over the past two years shows that,Barriers to entry are not significant.
The FTC may have fundamentally misunderstood the economics of bilateral platforms.The FTC believes that Meta could slow down the app approval process for its Quest VR app store, creating barriers to new app development. In reality, Meta’s VR platform is only attractive to users if there are many applications, and only to application developers if there are many users. The existence of these cross-network effects means that Meta wants to attract as many high-quality apps as possible to its app store, so there is a high probability that it will not slow down the incentives for approving approvals of other non-owned apps.
Additionally, the existence of alternative app stores like SteamVR, Quest App Lab, etc. would prevent Meta from limiting the availability of competing apps. As can be seen from the figure below,Meta doesn’t have a market dominance when it comes to VR stores.
▲ The number of applications available for virtual reality headsets in major app stores/platforms around the world in January 2022 (Data source: Statistics)
3. Considerations from an economic point of view – the venture capital community said that FTC’s move inhibited entrepreneurs’ enthusiasm for innovation
The fact that the FTC took aim at Meta’s acquisition of a “smaller, relatively lesser-known startup,”It immediately sounded alarm bells among many tech industry insiders whose businesses depended on startup acquisitions.
Early investors in VR application development want to see a return on their investment,The most common way to get reported is through an acquisition by a startup.In 2020, nearly 90% of all VC-backed startups made successful VC exits by being acquired.
Critics of the FTC’s decision to sue Meta claim that the lawsuit, if successful, would limit the ability of other startups to be acquired by larger, more established tech companies, hurting other startups’ futures, thereby reducing innovation in VR applications. Targets that are eventually acquired by tech giants are a central element of exit strategies for many startups and investors. And blocking acquisitions actually reduces incentives for innovative tech startups.
Box CEO Aaron Levie believes,Stopping startup acquisitions may have indirectly helped Big Tech by disincentivizing entrepreneurs to start startups,resulting in unexpected effects.
Others pointed out that the actions of the FTC, not the actions of Meta, are the real threat to the nascent competition in the nascent VR app ecosystem.
Meta executives believe that the FTC’s determination of a monopoly is “based on ideology and speculation, not evidence.” And in an informal response to the lawsuit, Meta said the lawsuit “completely misunderstands the nature of (virtual) space and ignores market realities.”
Tech industry executives and venture capital insiders say the FTC’s actions actually show thatThey allow Facebook (Meta), Google, Amazon andMicrosoftThe “wrong decision” to make a large acquisition,And this compensation seems a bit “excessive”.
But in any case, this lawsuit represents a change in antitrust enforcement by U.S. federal regulators: they have traditionally intervened in large acquisitions that would concentrate companies’ dominance in mature markets; however, virtual reality is considered a relatively In the nascent market, Within is not a very important company.
Whether anti-monopoly will continue to develop along this line, and whether it will have a positive or negative impact on the market, remains to be further verified.