FTC suit to thwart Meta's 'campaign to conquer' VR could be a long shot

The Federal Trade Commission is making good on its promise to scrutinize Big Tech, though antitrust lawyers say its new bid to block Meta's (META) "campaign to conquer virtual reality" is a long shot.

In a complaint filed Wednesday, the FTC asked a judge to temporarily halt Meta’s acquisition of virtual reality company Within Unlimited — the creator of the popular exercise app “Supernatural.” That deal, along with Meta's 2014 acquisition of headset maker Oculus VR, aligns with Meta's broader ambition to position itself as a central developer of the nascent 3-D digital world known as the metaverse.

The FTC's lawsuit relies on two potentially challenging arguments that require it to identify markets still in their infancy. The problem is a common one for antitrust watchdogs in the fast-moving technology sector where it can be difficult to define the scope of a still-developing market, Temple University law professor Erika Douglas explains.

"I think the FTC has the tougher case to argue, but that doesn't mean they shouldn't be arguing it," Douglas says. "They want the law to change in this direction."

In its lawsuit, the FTC contends the deal would curb competition in two markets for VR fitness apps: the narrower market for dedicated VR fitness apps, like Supernatural, and the broader market for incidental virtual reality fitness apps, like Meta's Beat Saber, which Meta acquired in its 2019 purchase of Beat Games.

“That lessening of rivalry may yield multiple harmful outcomes, including less innovation, lower quality, higher prices, less incentive to attract and keep employees, and less consumer choice,” the FTC’s lawsuit says.

In response to the lawsuit, Meta's spokesperson told Yahoo Finance that the FTC's case relies on ideology and speculation, rather than evidence.

"The idea that this acquisition would lead to anticompetitive outcomes in a dynamic space with as much entry and growth as online and connected fitness is simply not credible. By attacking this deal in a 3-2 vote, the FTC is sending a chilling message to anyone who wishes to innovate in VR," the spokesperson said in an email.

To be sure, the outcome of the case is difficult to predict at this early stage. Still, the FTC could face an uphill battle because of its so-called nascent competition arguments — that is, the agency contends that Meta wants to buy Within because its prospective innovation threatens Meta’s dominance.

“Typically, these sort of nascent competition challenges would be for mergers in areas where the developmental pipeline is long and predictable, like medical devices or drugs, or farming pesticides…where the writing’s on the wall that one of the parties is going to start competing with the other,” Douglas says.

In Meta’s case, she explains, it’s not so far clear that it planned to enter the dedicated fitness market.

“That makes the case a little bit different…and harder for the FTC,” she said.

The agency's broader claim challenging the incidental market where Meta is already competing, she says, shows it's hedging its bets.

Duke University School of Law law professor Barak Richman echoed that skepticism, noting that this "is not the kind of case that the FTC has routinely won in the past."

Nonetheless, he says, the agency has a compelling argument to make in that Meta has other VR capabilities, both in hardware and software. That, he says, makes it easier for the FTC to argue that preventing the acquisition would not stop Meta from innovating in the fitness VR market.

The case will likely attract scrutiny given the swell of antitrust policy concerns preceding the FTC’s complaint — including those of the Biden administration's new FTC’s chair, Lina Khan, who has long advocated to expand antitrust enforcement.

Lawmakers from both sides of the aisle have spent years pushing to rein in Big Tech. And federal and state governments have already hit Meta and Alphabet's Google (GOOG, GOOGL) with a series of antitrust suits. Meanwhile, federal regulators are conducting investigations into the competitive practices of Amazon (AMZN) and Apple (AAPL).

In 2020, the FTC brought a separate antitrust lawsuit claiming Meta's previous acquisitions of Instagram and WhatsApp, which went unchallenged by regulators, now enable it to maintain an illegal monopoly in the social networking market.

The 2020 lawsuit seeks to break up Meta; some may view the latest case as less aggressive because it's challenging a proposed acquisition rather than seeking to undo past deals.

“It is the kind of case that — if you’re worried about the dominance of platforms — that you’d want to see from antitrust regulators as a very targeted and not disruptive way of addressing these kinds of problems,” Richman said.

Within did not respond to Yahoo Finance’s request for comment on the lawsuit.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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