The FTC’s Unfair Jab at Meta Is a Sharp Blow to the Nascent VR App Market
Now that the Federal Trade Commission (FTC) has a full complement of commissioners, it has made good on its promise to aggressively pummel large technology platforms with new cases, even when it does not expect to win. The FTC filed a complaint in federal district court on July 27 seeking to block Meta’s acquisition of Within Unlimited—a virtual reality (VR) startup created in 2014. While the complaint is seriously flawed, a successful challenge to this acquisition could deliver a serious blow to the nascent VR app market.
Within is best known as the development studio behind the hugely popular fitness app Supernatural. Supernatural launched as a VR fitness app exclusive to Meta’s Quest VR headset. Since its launch, it has established itself as one of the most successful VR apps—ranking in the top 10 of all apps in the Quest VR app store.
Meta’s proposed acquisition of Within is part of Meta’s broader VR development studio acquisition strategy—Within would be the sixth such acquisition in the last two years. These acquisitions have allowed Meta to assemble a portfolio of VR “killer apps” that is necessary to attract new consumers to VR, and to Meta’s VR platform, due to their appeal relative to existing non-VR technologies. Meta's acquisition of these VR development studios provides Meta with an additional revenue stream to invest in the maintenance and expanded functionality of these killer apps thereby ensuring Meta’s VR platform remains attractive to consumers.
In order to persuade the court that its complaint has merit, the FTC delineated an excessively narrow relevant market, just as it did in its monopolization complaint against Meta in 2020. Indeed, the FTC argues that Meta’s acquisition of Within will reduce competition in the narrow “VR dedicated fitness apps” market but also in a broader “VR fitness apps” market. The broader market would capture Meta’s Beat Saber app which, while not designed as a fitness app, has incidental fitness benefits. The FTC characterizes these markets as highly concentrated today or likely to become highly concentrated due to the merger. The FTC’s theory of harm is that but for the merger, Meta likely would have entered the dedicated fitness app market. Therefore, the merger would prevent an anticipated deconcentration of this market. It would also eliminate direct competition between Meta and Within in the broader VR fitness apps market.
The FTC’s case against Meta suffers from a number of serious flaws—the most glaring of which is an unduly narrow definition of the relevant product market. But even if one accepts the FTC’s market definition, there are additional reasons to think the FTC’s case is unlikely to be a winner. One is that the FTC overstates the degree of market concentration and ignores the dynamism and vibrancy of the nascent VR app ecosystem. In March 2020, just 20 VR apps grossed more than a million dollars. By the end of 2021, the number of VR apps hitting that metric increased to 120. And looking beyond these high-grossing apps, one finds an explosion of new app development. For example, the Quest’s App Lab—a Meta-sanctioned app store with less stringent app-approval requirements—currently hosts over 800 VR apps.
There is no reason to believe the VR fitness app ecosystem is any less vibrant. In its complaint, the FTC identifies at least four other dedicated fitness apps besides Supernatural. Furthermore, the Virtual Reality Institute of Health and Exercise, which evaluates the caloric impact of VR apps, identified nearly 100 apps that had the same or greater caloric impact as walking. This suggests that, despite the popularity of Beat Saber and Supernatural, there are many VR apps that provide incidental fitness benefits.
In addition, market participants include not only those actively selling in a market but also include those that could “provide rapid supply responses with direct competitive impact… without incurring significant sunk cost.” There is no reason to believe fitness apps are more difficult to develop than other VR apps. Consequently, any VR app developer, not just fitness app developers, should be viewed as potential competitors. The FTC points out the ease with which developers can switch between VR app types when it describes how Meta added the “FitBeat” track to Beat Saber in response to the entry of Supernatural. Given the large number of VR fitness app developers and the large number of VR app developers more generally, it is unlikely that the VR fitness app market, or even the VR dedicated fitness app market, is as concentrated as the FTC claims.
Another flaw in the FTC’s complaint is that it overstates entry barriers to VR app development. If consumers continue to show a willingness to pay for VR fitness apps, other VR app developers will likely launch similar products. The doubling of the number of apps in the last two years in Meta’s Quest VR app store suggests that barriers to entry are not significant. And the FTC’s suggestion that Meta may slow roll the app approval process for its Quest VR app store, and thereby create a barrier to new app development, demonstrates that the FTC fundamentally misunderstands the economics of two-sided platforms. Meta’s VR platform is only attractive to users if there are many apps and only attractive to app developers if there are many users. The presence of these cross-network effects means that Meta wants to attract as many quality apps to its app store as possible and therefore is not incentivized to slow down app approval. Furthermore, the presence of alternative app stores such as the Quest App Lab would prevent Meta from limiting the availability of competing apps.
Despite these flaws, there is always a risk that the judge will find the FTC’s arguments persuasive. Should the FTC succeed in blocking this acquisition, VR app innovation will suffer. The mere filing of the complaint alone is likely to deter VR app development. Mergers and acquisitions have an important impact on incentives to innovate. App development for small studios relies heavily on venture capital to fund their projects. For example, FitXR, which the FTC identifies as a direct competitor to Supernatural, relied on venture capital funding from Boost VC. These early investors in VR app development expect to see a return on their investment. The most common way this happens is through acquisition. In 2020, nearly 90 percent of all venture-backed startups exited their venture-funding through an acquisition. The looming threat that this exit strategy may no longer be available, or will face costly litigation, will limit the ability of small studios to access venture capital and thereby reduce VR app innovation.
Due to the novelty of VR, hardware investment has largely been driven by large firms—such as Meta, Valve, HTC, and Sony—as they possess the financial muscle to absorb the risk of creating a new market. But as these companies develop VR hardware, they must ensure that it is accompanied by appealing content, otherwise, consumers will be reluctant to adopt this new technology. Acquiring a development studio with market-tested apps is the best way to secure content for their platforms, while also allowing these studios to expand and sustain their operations and providing users continued support for content that they enjoy. Ultimately, users, developers, and hardware companies are all better off.
This low blow by the FTC, which unfairly targets Meta just because of its size, will crowd out smaller VR app developers who will find it more difficult to obtain funding to support their innovative new apps to the detriment of consumers. The FTC’s actions, not Meta’s, are the real threat to nascent competition in the burgeoning VR app ecosystem.
