A California court recently denied the FTC’s motion to block the Meta-Within merger. Brandon Nye writes that the FTC could have expanded its argument with a Section 2 challenge to take into account Meta’s broader strategy to dominate what may be the next generation of social networking.
In January, a California court denied a motion by the Federal Trade Commission to block the merger between Meta Platforms (formerly Facebook) and Within Unlimited. Meta is a dominant player in the burgeoning virtual reality (VR) headset market, and Within offers the most popular VR fitness service.
The FTC challenged the merger under Section 7, arguing that the merger would reduce competition in the narrow market of VR fitness apps. The FTC alleged that Meta had the incentive and ability to develop a VR fitness app itself and was therefore a “potential competitor” with Within. The court appeared open to the “potential competitor” theory but was unpersuaded that the facts of this case met the high evidentiary burden that the court applied. Yet again, a giant digital platform came away from antitrust enforcement unscathed.
In a world of dominant digital platforms, should antitrust enforcement attempt to chip away at monopolistic conduct in a piecemeal fashion, or should it pursue comprehensive, systematic challenges? In this case, the FTC chose a narrow Section 7 merger challenge focused on VR fitness apps. Steven Salop argues that the FTC could have strengthened this challenge by adding a vertical merger count, incorporating harms to the VR headset market. I argue that a Section 7 challenge is limited because it focuses on blocking a single merger.
A more systematic approach would be a Section 2 monopolization challenge that targets a company’s broader strategy to dominate a market. The FTC has already accused Meta of using a series of anticompetitive acquisitions and foreclosure tactics to maintain its dominance in traditional social networking. The FTC could have amended its existing Section 2 challenge to include Meta’s conduct in the up-and-coming VR market. The Meta-Within merger and similar acquisitions by Meta offer strong evidence that Meta is continuing its anticompetitive conduct to maintain its monopoly into the next generation of social networking—virtual reality.
Meta’s Conduct in the Virtual Reality Market
Meta is creating a new platform, a Metaverse, on which it hopes the future of social media, gaming, creative content, and professional collaboration will live. Meta will want to steer as many consumers as possible to the Metaverse, leaving no opportunity for the entry of competing VR platforms during this key period of technical transition. To achieve this, Meta will want to ensure that all the best apps are compatible only with Meta’s VR hardware and only with Meta’s existing social networking products. Acquiring the most popular VR fitness app and potentially foreclosing the app from competitor systems would be the first step because fitness apps draw a new demographic of users to VR and have strong user retention.
Flashback to the early 2010s when Facebook, dominant in the social networking space, began to feel competitive pressure from Instagram, WhatsApp, and other nascent social media platforms. Facebook feared that network effects alone would not protect its monopoly during a time of disruption and transition. Namely, Facebook was ill-equipped for the transition of social networking from desktop to mobile that occurred at the same time as the rise of photo sharing. The complaint filed by the FTC alleges that rather than competing with these firms on the merits, Facebook acquired these firms or denied them access to tools in order to stunt their growth. The complaint details ten years of these “buy or bury” tactics. The result of this course of conduct has been the dominance of Meta’s personal networking platforms for fifteen years. This dominance has caused harms to advertisers in the form of low quality and high prices and harms to users in the form of low quality and adverse mental health effects.
A decade later, we are on the cusp of another social networking transition, one in which platforms shift from smartphones to VR. Meta held nearly 85% of the global VR headset market through the first three quarters of 2022. However, Sony recently released the PlayStation VR2, and Apple is expected to launch its own VR headset soon. Once again, Meta’s response to nascent competition in social media is to eliminate the threat through anticompetitive acquisitions. In fact, the court found that Meta’s “primary” motivation for acquiring Within was to prevent Apple from acquiring it and foreclosing VR fitness first. Meta has now acquired the most popular VR fitness app as well as at least nine other VR app studios. These acquisitions are significant because VR app development is a platform-specific process, meaning Sony’s and Apple’s VR systems cannot carry Meta’s apps unless the developer creates versions specific to their systems. In other words, VR apps are not automatically interoperable.
Thus, these developer acquisitions give Meta the ability to foreclose the most popular apps from competitor VR systems. The result will be that Meta will control the next generation of social media as it did the last. Facebook will be the only place for VR pub crawls with friends; Instagram will host all group VR workouts; and VR business meetings will be held exclusively on Meta’s Workplace.
The FTC could have presented this broader context to the court and challenged the Meta-Within merger as another component of Meta’s systematic attempt at social networking monopolization. Specifically, the Meta-Within merger might strengthen the FTC’s existing monopolization and monopoly maintenance complaint against Meta. The FTC could frame Meta’s VR acquisitions as platform annexation: the process by which a digital platform acquires or controls (“annexes”) interoperating tools to limit the viability of competing digital platforms. This framework best describes how Meta’s conduct will allow it to monopolize the next frontier of personal social networking services.
The Monopolization Argument: Platform Annexation
Platforms, particularly social media platforms, experience significant network effects. Once a platform accrues a critical mass of users, adoption of that platform becomes self-reinforcing, and that platform tends to dominate the market. In addition, on a two-sided platform, adoption by users on one side of the platform drives adoption by participants (e.g., sellers) on the other side. As the court found, “high quality and popular VR apps . . . can drive adoption and sales of the specific headsets,” which “in turn, will attract third-party app developers to create more VR content for that system,” creating a “flywheel effect.” Dominant platforms can take advantage of this flywheel effect to maintain monopoly power.
Interoperability can limit the anticompetitive consequences of network and flywheel effects. Interoperability allows users and sellers on one digital platform to connect with the users and sellers on other digital platforms, thus distributing the benefits of a large network to all connected platforms. Interoperability forces the dominant platform to compete on price and quality rather than size. Therefore, large, dominant platforms like Meta have the incentive to reduce interoperability and limit network effects to the boundaries of their platforms.
In the platform annexation framework, dominant platforms may reduce interoperability by acquiring apps that interoperate across platforms or by acquiring multi-homing tools that allow users to access multiple platforms simultaneously. Susan Athey and Fiona Scott Morton explain how a dominant platform—through tying, exclusive contracts, or acquisitions—might take control of interoperating tools and subsequently steer consumers to its platform by reducing interoperability with other platforms.
Reducing interoperability may mean denying access to the other platforms outright. Alternatively, a platform may reduce the quality of a tool’s interface with competing platforms or otherwise disadvantage competing platforms through the tool. Google has been accused of these tactics in the mobile app store market and the digital ad exchange market, respectively.
As a result of its recent acquisitions, Meta has the incentive and ability to deny competitor VR systems access to its VR apps altogether or to limit the apps’ interoperability across systems. While some apps allow “cross-play” (interoperable gameplay) between VR systems, many of the most popular Meta-owned apps, for example Beat Saber, do not allow cross-play with the Sony VR headset.
Meta might also engage in anticompetitive behavior by connecting its VR apps to Facebook and Instagram to facilitate network effects while restricting the same functionality for competitor headsets. As a hypothetical example, on Meta’s system, you might be able to invite your Facebook friends into a VR movie experience hosted by one of Meta’s developers; whereas on Apple’s system, Meta’s developers would not allow you to sync the experience with your iMessage contacts.
Meta is alleged to have done this in the past. Specifically, in 2011, Facebook imposed a new policy that “apps on Facebook may not integrate, link to, promote, distribute, or redirect to any app on any other competing social platform.” This policy prevented competitor platforms from using these third-party apps to improve their platforms and denied users the ability to interoperate across platforms through these apps. Following Facebook’s interoperability restrictions, multiple nascent social media platforms failed to grow sustainably.
Relative to a vertical merger in a classic chain of production, platform annexation creates substantially more harm to consumers and offers fewer efficiencies. When a traditional firm engages in vertical foreclosure and raises its competitors’ costs, its competitors lose some customers, and the remaining customers lose some consumer surplus. When a platform acquires an interoperating tool and reduces interoperability, its competitors lose some customers, and the remaining customers lose additional consumer surplus due to the smaller remaining network. Platform foreclosure thus imposes negative externalities due to network effects. Furthermore, while traditional vertical mergers may lessen a conflict of interest by reducing double marginalization, platform annexation creates a conflict of interest that does not benefit consumers. The platform’s incentive to steer users to itself is discordant with the tool’s original value-add to users: its ability to interoperate across platforms.
Platform annexation should thus be top-of-mind for regulators as the Metaverse continues to develop and as the VR platform market takes further shape. A way to prevent Meta from continuing its long-running, successful strategy of social networking monopolization is for a court to mandate that Meta’s VR apps be interoperable across headsets. Then consumers can shop around for their preferred VR headset, and they will not sacrifice the benefits of Meta’s large network by choosing another headset. Additionally, VR app developers will benefit from interoperability because they will have access to the largest possible set of users.
Virtual reality may very well usher in the next generation of social networking. The VR world is imagined to be an all-encompassing social, gaming, content, and workplace platform. And it may be here soon. Meta CEO Mark Zuckerberg estimates that it might take just five to ten years for the Metaverse to become mainstream. If regulators do not warily monitor Meta’s conduct over the next few years, the next generation of social media may look similar to the last: billions of users’ experiences controlled by a single firm. America’s consumers are relying on regulators to approach this problem aggressively and systematically.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
