Wilson Sonsini provides extensive and cutting-edge legal services for innovators, technology pioneers, and disruptors. As part of our focus on emerging technologies, our attorneys are publishing a series on applying and adapting existing law in the Metaverse throughout 2022. This is the fifth item in our Metaverse series.
The Federal Trade Commission (FTC) filed suit seeking to enjoin Meta Platforms, Inc.'s (Meta, f/k/a Facebook) acquisition of Within Unlimited, Inc. (Within).1 Republican Commissioners Christine Wilson and Noah Phillips voted against blocking the deal, making this the first 3-2 merger challenge since Commissioner Alvaro Bedoya joined the FTC in May 2022.
The FTC's complaint alleges that by pairing Meta's leading platform with Within's "killer app" Supernatural, the acquisition places Meta "one more step along [a] path towards dominance" in the virtual reality (VR) space. The FTC's challenge to is significant both in the gaming industry and for M&A in the technology space, demonstrating that:
- The current FTC is willing to push aggressive theories, especially when it perceives a large integrated company is making an acquisition as part of an "aspiration" to gain "control of the entire ecosystem," which the FTC alleges may "tend to create a monopoly."
- Harm to consumers of a specific and narrow product set (here VR fitness apps) may be enough to invite a challenge.
- Acquisitions by "big tech" companies are likely to get heightened scrutiny even where conventional antitrust analysis would not raise concerns.
Meta owns the leading VR ecosystem, with the Meta Quest 2 (headset), Quest Store (VR app distribution platform), and many first-party and third-party apps. Meta's Beat Saber, a dancing game, is one of the most popular VR apps. Within's Supernatural, meanwhile, is one of the most popular fitness-focused apps for the Quest 2. One study found that playing Supernatural allows users to burn 12-13 calories per minute, more than any other VR app. Meta agreed last October to acquire Within,2 in a deal reportedly worth around $400 million.3
The FTC alleges that the transaction would violate Section 7 of the Clayton Act under two theories: a potential competition theory for VR Dedicated Fitness Apps, and a traditional horizontal theory for VR Fitness Apps more broadly.
VR Dedicated Fitness Apps: First, the FTC alleges the deal threatens "potential competition" between Meta and Within's Supernatural in the market for "dedicated" VR fitness apps. The FTC claims that Meta—as a massive, well-capitalized enterprise with control over many aspects of the VR ecosystem—should simply build its own dedicated fitness app to compete with Supernatural rather than buy Within.
The FTC has had mixed results when alleging harm to potential competition and courts have treated such claims with skepticism, imposing high evidentiary standards. The doctrine of potential competition had been out of favor since the Department of Justice's (DOJ's) loss at the U.S. Supreme Court in the Marine Bancorp. case of 1974.4 The FTC attempted to revive it in 2015 by challenging the merger of Steris Corp. and Synergy Health PLC, but a court allowed the merger to proceed.5 Since then, the FTC has challenged so-called "killer acquisitions" under Section 2 of the Sherman Act instead of using the potential competition doctrine,6 as it did in its ongoing attempt to unwind Meta's acquisitions of Instagram and WhatsApp.7
In this case, the FTC tries the potential competition theory once again, alleging that Meta is a potential competitor in the "market for VR dedicated fitness apps." According to the FTC, Within is a leading competitor in this market, which includes only VR apps that specifically focus on fitness, such as Supernatural, FitXR, Holofit, VZFit, and Les Mills Bodycombat. Other VR apps that allow users to burn calories as an "incidental" benefit, such as Meta's Beat Saber, are not in the same market. The FTC alleges it is "reasonably probable" Meta would have entered the VR dedicated fitness app market organically absent the acquisition, to the benefit of users and that the perception Meta would soon enter "likely" creates competitive pressure on incumbents that would be lost through the acquisition.
VR Fitness Apps: The FTC's second theory argues that Meta and Within currently compete in a broader market for VR fitness apps (including both dedicated and incidental fitness apps) and that the merger would lessen competition between Beat Saber and Supernatural on dimensions such as price, quality, and innovation. The FTC admits there are at least several other competitors in the space, but alleges that Beat Saber and Supernatural are "close competitors in this broader market." It will be interesting to see how the court grapples with two market definitions that are arguably in tension with each other.
Whatever the result, this challenge shows that businesses should prepare for antitrust scrutiny in most deals involving "big tech" platforms, even if the target is a relatively small company in a dynamic space.
The suit is part of the antitrust agencies' broader push to oppose small "killer" acquisitions by so-called "big tech" companies. Additionally, the FTC and DOJ have both stated an intention to prevent "roll-up" strategies, whereby a large corporation or private equity firm makes a series of acquisitions of small companies in one industry. According to FTC Chair Lina Khan, roll-ups may violate Section 7 of the Clayton Act, which prohibits acquisitions that may "tend to create a monopoly."8
[1] Complaint for Temporary Restraining Order and Preliminary Injunction, FTC v. Meta Platforms, Inc., Mark Zuckerberg, and Within Unlimited, Inc., No. 3:22-cv-04325 (N.D. Cal. 2022).
[2] Brian Heater, Meta (Facebook) Is Buying Within, Creators of the ‘Supernatural’ VR Fitness App, TechCrunch (Oct. 29, 2021), https://techcrunch.com/2021/10/29/meta-facebook-is-buying-within-creators-of-the-supernatural-vr-fitness-app/.
[3] Josh Sisco, FTC Slows Meta Platforms’ Metaverse Strategy by Extending Antitrust Probe of VR Deal, The Information (Dec. 16, 2021), https://www.theinformation.com/articles/ftc-slows-meta-platforms-metaverse-strategy-by-extending-antitrust-probe-of-vr-deal.
[4] United States v. Marine Bancorp., 418 U.S. 602 (1974).
[5] FTC v. Steris Corp., 133 F. Supp. 3d 962 (N.D. Ohio 2015).
[6] See Scott A. Sher, Keith Klovers, and John Ceccio, Nascent Competition, Section 2, and the Agencies’ Quixotic Quest to Avoid the Potential Competition Doctrine, ABA Antitrust Magazine (Aug. 24, 2021), https://www.americanbar.org/groups/antitrust_law/resources/magazine/2021-august/nascent-competition/; Mike Moiseyev, Potential and Nascent Competition in FTC Merger Enforcement in Health Care Markets, Competition Policy International (May 11, 2020), https://www.competitionpolicyinternational.com/potential-and-nascent-competition-in-ftc-merger-enforcement-in-health-care-markets/.
[7] First Amended Complaint, FTC v. Facebook, Inc., No. 1:20-cv-03590 (D.D.C. 2021).
[8] Remarks of Chair Lina M. Khan Regarding the Request for Information on Merger Enforcement, Dkt. No. FTC-2022-0003 (Jan. 18, 2022), https://www.ftc.gov/system/files/documents/public_statements/1599783/statement_of_chair_lina_m_khan_regarding_the_request_for_information_on_merger_enforcement_final.pdf.
