The US Federal Trade Commission decided to drop its objection to the acquisition by Meta Platforms Inc. virtual reality exercise app developer Within Unlimited, Inc. after U.S. District Judge Edward J. Davila for the Northern District of California denied the FTC. statement of preliminary injunction to block the transaction. After failing due to the Biden administration’s tougher approach to anti-competitive mergers, the judge found that entering the market through the acquisition of Within was Meta’s only option because, despite its vast resources, the company had no “viable funds available.” the opportunity to independently develop their own business of VR applications for sports.
An order to waive a preliminary injunction was issued on January 31, 2023 in FTC v. Meta Platforms Inc. et al., #5:22-cv-04325-EJD (NDCa., filed July 27, 2022), which allows a transaction to end on the 8th. The commission could appeal the court’s decision or initiate proceedings before an ALJ. On Feb. 6, the FTC said it would not appeal the district court’s decision not to suspend the merger, and on Feb. 10 suspended the administrative proceedings.
The commission argued that the market consists of VR apps “dedicated” to fitness and excludes “occasional” fitness apps such as YouTube workout videos. The FTC claims that products described as “virtual reality fitness apps” have their own respective markets as they have different customers and pricing schemes and offer products that are different from other apps on the VR platform. The merger was contrary to the fact that the Commission’s market definition was too narrow, as it excluded too many products that were reasonably interchangeable.
The court agreed with the FTC’s definition of a market, noting that while there is “a broad fitness market that includes everything from virtual reality applications to bicycles”, it “in no way precludes the existence of [the] sub-markets that are markets for related products for antitrust purposes.” The court said users of VR-only fitness apps are “embodied” in a virtual environment in a “completely different” way than they would be rendered on an exercise bike or mobile phone. Also, VR-only fitness apps are more subscription-based than other VR apps.
The court also noted that “neither fitness companies in general nor VR companies in general have the manufacturing capacity to produce alternative VR fitness apps, even if VR fitness apps raise prices and make market entry more attractive… that The fact that companies cannot easily change their capacity to produce virtual reality fitness apps is further evidence that such apps represent a unique product market.
Before ruling on the Commission’s application for a preliminary injunction, the court considered the defendant’s motion to dismiss the complaint on the basis of a major or alleged competing theory, examined in two cases in the mid-1970s. [I]
The parties to the merger argued that the FTC “failed” because the complaint did not assert “oligopoly” or the prospect of “interdependent or parallel behavior.” This fee is standard in merger cases where the deal could reduce existing competition in the market by eliminating a competitor, increasing the likelihood of a “coordinating effect” between the remaining market participants.
But the theory behind the FTC case is not based on the threat the deal poses to existing competition in the VR fitness app market, but rather on the FTC’s assertion of high market concentration and lack of competition. The deal jeopardizes Meta’s potential future competition as a competitor to Within. Therefore, in order to prevail in the theory of potential competition, the Commission must first determine that the relevant market is not a competitive market, but only if Meta is forced to compete with Inside rather than acquire it. It makes little sense to defend the FTC’s underlying theory of competition on the basis that the complaint does not allege that existing competition in the relevant market has suffered from synergies.
The court denied the merging party’s motion to dismiss the case, and the decision made it clear that the Commission’s complaint adequately asserted a violation of section 7 of the Clayton Act based on prejudice to potential competition. While the FTC may view the decision as a victory for its scheme to identify and ban deals that threaten future competition by concentrating adjacent centers of innovation, the court’s application of the law to the fact that the Meta-Within deal is purely mechanical and threatens create a very high standard of evidence.
The industrial logic of challenging the Meta-Within acquisition is irrefutable. In addition to investing billions in its VR Reality Labs division, Meta has spent a lot of energy trying to break into the relevant market. Meta operates the Quest Store (formerly the Oculus Store (acquired through a previous acquisition)), a distribution platform for third-party app developers, and App Lab, a virtual reality app distribution service. He also acquired Beat Games, the developer of Beat Saber, the popular sword fighting game and the best-selling VR app of all time. Clearly, Meta is positioning the Metaverse as the dominant VR platform.
In April 2020, Within Unlimited launched Supernatural on Meta’s Quest Store, a subscription-based VR fitness service that dominates the VR-only fitness app market. The two companies agreed to merge in October 2021. Microsoft’s dominance of the PC app market, and Apple and Google’s dominance of the iPhone and Android app markets respectively, give us reason to believe that a VR-only fitness app would be a viable option if Meta banned the acquisition of Within, or in other words, requiring In order for Inside to remain independent of innovation decision centers outside of the dominant platform operators, the market is likely to become more competitive.
Concern about the emerging protection of competition that may arise in the future is precisely the focus of the theory of latent competition. The Court identified two economic mechanisms from case law that eliminated potential future competition and were found to be in breach of Article 7. First, the transaction may, in the short term, eliminate the prospect that the buyer will actually enter into it on its own. Second, the deal can remove the competitive discipline imposed by the perception that one side is willing to step in.
The FTC argued that the deal would substantially reduce competition by depriving the relevant market of the pro-competitive effect of Meta’s independent entry. The court framed the question as to whether Meta had the “affordable and viable means” of re-entering the relevant market, which the FTC would need to demonstrate with “reasonable probability.”
While the Commission argued that its burden was decided by the evidence of “the overall size, resources, capabilities and motivation of the Meta”, the parties insisted that the Meta did not plan to enter the relevant market de novo, and it would not have entered it if would not have acquired it in the house.
The court found that Meta did not have certain capabilities that were “unique and critical” to success in the relevant market, such as personal trainers optimized for virtual reality training through consultation with kinesiology and biomechanics experts. The Met also lacked the studio production facilities needed to create and record workouts in virtual reality. The court noted that its Armature Studio was in fact a gaming studio that lacked the production capacity needed to develop a virtual reality fitness app. The court also found that the FTC’s theory that the Meta could turn the Beat Saber into a dedicated fitness app “is not supported by concurrent comments on the Beat Saber proposal, nor by the timing of subsequent investigations into the proposal.”
The court conducted a detailed analysis of the evidence of Meta’s motives for entering the relevant market to compete with Within. While it acknowledged that input with its own dedicated fitness app would help Meta develop fitness-related virtual reality equipment, the court still concluded that input from scratch was not necessary to develop the fitness equipment. The court also recognized the benefits of deep hardware and software integration for VR fitness, but concluded that Meta’s apparent enthusiasm for fitness as a primary use case for VR would not necessarily lead to an intent to create its own dedicated fitness app if it could enter the market. . through acquisition.
Ultimately, the court ruled that Meta could not be considered a real potential participant in the relevant market. “There is no serious doubt that Meta had the financial resources to enter the de novo market, but the financial and engineering capabilities alone are not enough to conclude that there is a ‘reasonable likelihood’ that Meta will enter the VR fitness market.” The court did not find sufficient evidence that Meta believed that a possible future market entry would mitigate anti-competitive behavior in the market. An approach that was “unacceptable speculation”. on the merits of his claim s.7.
Whether or not the Commission is satisfied that its potentially competing legal theories have survived the parties’ motions to dismiss, any such response will certainly have to be mitigated by the heavy – and almost impossible – burden of proof that the courts will place on the FTC. It is difficult to imagine a situation where a potential buyer could enter ab initio, as required by the courts, to qualify as an actual potential player by attempting to enter by way of acquisition. The court’s supposed knowledge of the world “if not” on the basis of the evidence presented to it shows a lack of humility in the face of powerful but undiscovered forces of industrial innovation. From a counterfactual perspective, when Meta is banned from acquiring Within, the court envisions a world in which Meta is helplessly marginalized in a VR-only fitness app market dominated by Within while others outside of Meta can strive to enter while at the same time striving to become the dominant platform – even the defining platform – in the “Metaverse”. This inaction on the part of Meta, whether re-entry or gaining a foothold, is similar to Google’s move away from developing maps or messaging apps based on Android to completely independent third parties.
The Court’s concern in this case should be that requiring Meta to independently innovate VR fitness apps, rather than acquire Within, would avoid anti-competitive terms that could reduce competition in the future. As the dominant virtual reality platform operator, Meta is well positioned to innovate in the market that complements its platform. By being the dominant innovator in the complementary market, Meta greatly enhances its ability to face future competition in that market. For this reason, the deal may reduce competition.
[i] United States v. Falstaff Brewing Corp., 410 US 526 (1973) United States v. Marine Bancorporation, Inc., 418 US 602 (1974).
Mr. Rubin was previously an antitrust partner at Patton Boggs LLP in Washington, DC. For the past 15 years, his legal practice has focused on antitrust and competition policy.
As an attorney, Mr. Rubin led litigation teams in major antitrust cases in courts across the country. A thought leader in the field of competition law, he has published in influential academic journals and has spoken before numerous professional groups, including the European Commission’s Directorate-General for Competition, the Antitrust Division of the American Bar Association,…
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Post time: Feb-22-2023