FTC sues to block Meta’s VR deal as it takes on big tech

WASHINGTON — The Federal Trade Commission on Wednesday filed an injunction to stop Meta, the company formerly known as Facebook, from buying a virtual reality company called Within, potentially limiting the company’s push into the so-called Metaverse and signaling a shift in how the agency approaches technology deals.

The antitrust lawsuit is the first under Lina Khan, chair of the commission and a leading progressive critic of corporate concentration, against one of the tech giants. Ms Khan argued that regulators must end breaches of competition and consumer protection when it comes to cutting-edge technology, including virtual and augmented reality, and not just in areas where companies are already become giants.

The FTC’s injunction request puts Ms. Khan on a collision course with Mark Zuckerberg, chief executive of Meta, who is also named as a defendant in the request. It has invested billions of dollars in creating products for virtual and augmented reality, betting that the immersive world of the metaverse is the next technological frontier. The trial could serve these ambitions.

“Meta could have chosen to try to compete with Within on the merits,” the FTC said in its lawsuit, which was filed in the U.S. District Court for the Northern District of California. “Instead, he chose to buy” a leading company in what the government has called a “vitally important” category.

In a statement, Meta said the FTC case was “based on ideology and speculation, not evidence.” He added that the lawsuit was an attack on innovation and that the agency “sends a chilling message to anyone who wants to innovate in virtual reality.”

Meta had said it would acquire Within, which produces the wildly popular fitness app called Supernatural, last year for an undisclosed sum. The company promoted its virtual reality headsets for fitness and health purposes.

The FTC lawsuit is highly unusual and pushes the boundaries of antitrust law. Regulators are primarily focused on transactions between big companies in big markets, rather than their acquisitions of smaller start-ups in emerging technology areas. Courts have also been skeptical of applying antitrust law to block mergers on the assumption that the two companies involved would later become competitors if the deal is blocked.

But critics said government inaction allowed Meta and other giants to suck up services that later turned formidable. The agency approved Facebook’s 2012 acquisition of Instagram, the photo-sharing app that has more than a billion regular users. Instagram helped Meta dominate the social media photo-sharing market, although other start-ups have sprung up since.

“It’s a riskier business, but one they believe is worth carrying because if they’re successful, it will help push the frontier of enforcement,” said former president William E. Kovacic. of the FTC. “I think this is a first of its kind.”

The FTC lawsuit is part of a larger wave of actions against Meta and other big tech companies like Google, Apple and Amazon, which have come under increasing scrutiny for their power. and their domination. Under Ms. Khan’s predecessor, the FTC filed a lawsuit against Facebook, saying the company had ended nascent competition through acquisitions. The Justice Department also sued Google over whether the company abused a monopoly on online search.

Other cases could happen. The FTC is investigating whether Amazon violated antitrust laws, and the Justice Department is investigating Google’s dominance over ad technology and Apple’s App Store policies.

For Mr. Zuckerberg, the FTC lawsuit is a setback. It has steered Meta away from its social media roots as its apps, like Facebook and Instagram, face more competition amid stumbles over privacy and content moderation. Instead, he bet on the metaverse.

Mr. Zuckerberg has reassigned employees and appointed a top lieutenant responsible for the metaverse efforts. It also allowed executives to sue some of the most popular games in the VR space. In 2019, Facebook bought Beat Games, creators of the hit title Beat Saber, one of the best VR games on the Oculus platform. It also authorized the purchase of about half a dozen other virtual reality or game studios over the past three years.

The FTC filed the lawsuit Wednesday hours before Meta reported its first quarterly revenue drop since going public in 2012. The company recently cut employee benefits and limited spending amid an uncertain economy. John Newman, deputy director of the FTC’s Competition Bureau, said the agency acted on the Within deal because Meta was “trying to buy its way to the top.” The company already had a top-selling virtual reality fitness app, he said, but then opted to acquire Within’s Supernatural app “to buy market position.” He said the deal was “an unlawful acquisition, and we will pursue all appropriate remedies.”

The FTC’s vote to allow the filing was split 3-2. Christine Wilson, Republican commissioner at the agency, said she was one of two votes against the lawsuit. She declined to comment his reasoning.

The FTC said in its filing that seeking an injunction is sometimes a prelude to filing a lawsuit against a merger, which could embroil Meta and the agency in a lengthy trial and appeal process. An FTC spokeswoman said the agency had not filed such a complaint and declined to comment further on the agency’s strategy.

Ms Khan, 33, who was nominated by President Biden last year to acclaim from the left, has tried to deliver on her expansive promises to rein in corporate power. She shot to fame after writing an article in law school in 2017 criticizing Amazon. As chair of the FTC, she called on regulators to vigorously enforce antitrust laws and said she could craft sweeping online privacy rules that would implicate Silicon Valley companies.

The trial drew praise from Ms Khan’s allies. Sandeep Vaheesan, the legal director of the Open Markets Institute, a liberal think tank, said in a statement that the lawsuit was a “step forward in making building, not buying, the norm for Facebook. “.

But allies in the tech industry have beset Ms Khan’s actions. Adam Kovacevich, chief executive of Chamber of Progress, an industry group funded in part by Meta, said that with the new lawsuit, “the agency is more focused on headlines than results.” He said Meta “comes no closer than pickleball or synchronized swimming to locking up the fitness market.”

Meta said in a blog post that the FTC would fail to prove that the Within deal would “significantly lessen competition,” which is usually the bar that is typically set for blocking a deal under federal antitrust law.

In its lawsuit, the FTC said that if Meta purchased Within’s Supernatural, it would no longer have any incentive to improve Beat Saber, the virtual reality fitness game it already owns. But Nikhil Shanbhag, associate general counsel at Meta, said in the blog that the games were not competitors.

“Beat Saber is a game people play for fun and it has many competitors,” he said. “Supernatural couldn’t be more different.”

Seamus Hughes contributed to the research.

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