Federal Trade Commission Chair Lina Khan has consistently criticized past FTC leadership for being too lenient with Big Tech M&A activity, and for not bringing the “hard cases” that push antitrust law to its limits. Khan and others in the progressive antitrust movement have often cited Facebook’s 2012 acquisition of Instagram as a prime example of the FTC’s failure to act to protect “nascent competition,” thus allowing an allegedly already dominant player to extend and fortify its position to the detriment of the competitive process. Now, 10 years later, Khan has seized an opportunity to put her ideas to the test.
Khan led the FTC’s 3-to-2 vote on July 27th to file a last-minute and unexpected complaint
seeking to prevent Meta’s proposed acquisition of virtual reality (VR) app developer Within Unlimited Inc. (Within), maker of the popular VR fitness app Supernatural. The complaint acknowledges that Meta does not compete with Supernatural in its alleged relevant market for “VR dedicated fitness apps.” However, the FTC nonetheless alleges that Meta has the proximity, knowledge and resources to enter with its own product, and thus that its acquisition of Within would substantially lessen competition in that market. Although such a theory of competition from potential entrants is not entirely novel, as applied in these circumstances the theory is largely untested in court, and could backfire on Khan. Conversely, a victory for the FTC could have a chilling effect on tech M&A activity going forward, particularly by constraining the decisions of larger established incumbents weighing “build or buy” options for growth.
The Basics of the FTC’s Case
In addition to the “dedicated” VR fitness app space, the FTC alleges the Within acquisition would result in a loss of competition in a second product market where Meta is already an established player: the broader “VR fitness app” market. This space includes both the “dedicated” VR fitness products like Within’s Supernatural that are used solely for fitness purposes, and the so-called “incidental” VR fitness apps, the use of which provides incidental fitness benefits (e.g., rhythm/dancing apps and active sports games). In its complaint, the FTC argues that dedicated VR fitness apps offer distinct functionalities from incidental VR fitness apps (e.g., designed for maximum exertion), while the broader VR fitness app market “comprises VR apps that are recognized and marketed as providing a fitness benefit to the user.” The FTC claims Within’s Supernatural app is a dedicated fitness app, while Meta’s Beat Saber is an incidental fitness app competing in the broader market. It also claims that Meta’s Beat Saber and Within’s Supernatural are “two of the most significant VR fitness apps” and contends consumers benefit today from the competition between the two apps.
These product market definitions offer Khan two tactical advantages. First, the narrower “dedicated VR fitness app” product market where Within currently competes provides an opportunity for the progressives at the FTC to pursue what they regard as an important but long-ignored theory of harm—and just as importantly, to begin firmly establishing its legitimacy in the courts. Second, as discussed below, if the FTC prevails on the broader market definition, it could provide an upper hand within the courtroom.
With respect to the dedicated VR fitness app market, it is important to note that the basis of the FTC’s arguments is almost solely Meta’s ability to enter the market and compete with Supernatural, with no citation to evidence of any past or present intention to enter the dedicated fitness app space organically. “Meta has the financial resources to develop a dedicated fitness app on its own—either by creating a new app or by adding new features to an existing app such as Beat Saber.” The FTC cites Meta’s financial resources, its employee base skilled in developing apps, Meta’s hiring of Supernatural’s head of product, its “name awareness” among users and its experience in building VR apps in-house all as reasons that Meta would probably have the incentive and ability to enter the market for dedicated fitness apps. However, Meta has in fact publicly contended that "many other well-established brands like Apple and Peloton are far better positioned than Meta to bring their existing fitness products and content to VR,” and that Meta looked into building a fitness-specific service and decided it simply was not in a position to do so. Based on the complaint, the FTC does not appear to have the ability to rebut Meta’s points.
The FTC further alleges that Meta’s entry into the dedicated VR fitness app market, if done organically and not via an acquisition, would substantially deconcentrate market shares and increase competition, and that the mere perception that Meta might enter the market creates competitive pressures that influence the market. Conversely, according to the FTC, Meta entering the market via acquisition would dampen innovation.
The FTC may have more difficulty in establishing the broader market definition that encompasses all VR fitness apps in which both companies currently compete (not the least reason for which is that incidental and dedicated VR fitness apps are generally not good substitutes for each other, as the FTC appears to concede elsewhere in the complaint). However, the advantage to the FTC is that this is a space where they can demonstrate an actual concentration of market shares. This is important because of Within’s purportedly high share in dedicated apps and Meta’s apparently relatively high share in incidental apps. Under the FTC’s and the Department of Justice’s (DOJ) Horizontal Merger Guidelines—which courts accept as authoritative guidance on the application of antitrust laws to M&A transactions—if the FTC were to prevail on the definition, the level of market share concentration would give them the advantage of a rebuttable legal presumption that the proposed transaction was unlawful. Although precise shares are redacted in the complaint, the FTC asserts that the relevant share thresholds are met with respect to the broader all AR fitness apps market.
With respect to both alleged relevant product markets, the FTC further alleges that Meta’s move into the VR app space is consistent with demonstrated current and past behavior aimed at establishing lasting dominance through achievement of network effects in the early days of the technology’s commercialization.
Risks to FTC
The FTC faces notable risks in bringing this case. First among these, of course, is the risk that the challenge may fail on a traditional antitrust merits analysis, the chances of which appear to be significant. For instance, one weak spot of the FTC’s case is the tremendous dynamism of the VR space, and the ability for a large number of well-funded small players and newer entrants to make huge inroads in the space in a relatively short period of time. This speaks to the likely continuation of robust competition even if one of the players is acquired by a larger established incumbent. There are over a dozen established players in the broader VR fitness app space, but the complaint all but ignores their existence, and gives no recognition to the relatively low barriers that helped make their entry possible. Indeed, Meta itself only entered this space in 2019 through its acquisition of Beat Games, and the continued vibrance of competition—including Within’s 2020 launch of Supernatural—will undoubtedly serve as evidence that the FTC’s theories may be too ambitious. Such structural realities could prove difficult for the FTC to overcome, even if market share concentrations give them the advantage of a presumption of harm. Further, although a loss on the merits would be unlikely to stem the enforcement zeal of FTC management, it nonetheless could have a demoralizing effect on FTC staff (particularly in light of reports that the Commission proceeded with this challenge despite the staff’s recommendation to not bring the case).
More importantly for the FTC, however, is the risk associated with litigating the question of what constitutes a potential competitor in the context of a merger challenge. The FTC currently benefits from the deterrent effect of judicial ambiguity on this question. This case, however, may provide an opportunity for the court to remove some of that uncertainty. The court could draw the line in a place the FTC does not like, which in turn could ultimately hamper the agency’s efforts to challenge or deter other so-called “killer” acquisitions.
Key Takeaways: Impacts on Tech M&A
- M&A parties already must consider whether the acquisition of a smaller or newer competitor by an established incumbent might create antitrust risk. This action demonstrates that the FTC wants such consideration extended to acquisition targets that could be considered potential competitors.
- The FTC’s complaint, together with other measures and public statements, reflects a desire by the FTC leadership to establish what amounts to a “No-Merger Zone” around at least the largest tech companies, and in which zone the antitrust authorities will work to aggressively curb any nonorganic growth.
- Regardless of whether the FTC’s action succeeds, the salience of Meta’s decision to grow into the VR fitness space via M&A rather than organically will likely translate to reinvigoration of the antitrust agencies’ focus on acquiring companies’ “build or buy” decisions in other tech and non-tech transactions.
- FTC Chair Lina Khan and DOJ Assistant Attorney General Jonathan Kanter continue to implement their plans while adhering to their philosophical roots. This presages further execution on progressive priorities ranging from jointly rewriting the merger guidelines to introducing an ambitious rulemaking agenda at the FTC.
- Finally, for all of its apparent novelty, the FTC’s complaint actually reveals a recognition on the FTC’s part that they remain constrained by existing law and traditional antitrust merits analysis. As such, parties to the vast majority of M&A deals should remain steadfast in pursuit of efficiency-enhancing transactions and not mistake the currently more hostile enforcement agenda by the antitrust agencies for a change in the law against which courts evaluate transactions.