How does the purchase of a small virtual reality (VR) workout company serve as a bellwether for America’s overall innovation economy? In the middle of 2022, the Federal Trade Commission, led by Commissioner Lina Khan, sued to block Meta’s acquisition of Within - which has an app for multiple VR experiences, particularly for workouts. Today, a federal judge issued a sealed decision allowing Meta’s purchase of the small startup to proceed.
Unfortunately, without the full decision, it is challenging to offer more robust analysis on how this case will impact future antitrust enforcement. However, this should still be seen as a victory for innovators and startups. Recent data suggests that over 88 percent of VC-backed startups exit via acquisition. Scaling companies and performing administrative functions is a totally different skill set than most founders have which may lead to this high percentage of acquisitions. An acquisition allows founders and other equity-holding employees to access the fruits of their hard work and potentially move on to new projects. For companies seeking to go public, the other main exit strategy, the amount of scrutiny from the FTC on antitrust enforcement may be leading to reduced IPO activity and innovation overall. 2022 was one of the lowest years for IPOs on record. The current FTC’s aggressive scrutiny on mergers and acquisitions is likely negatively impacting the entire innovation landscape and potentially the economy as a whole.
The FTC has become overly politicized recently, and its arguments in this case are particularly suspect. For one, the FTC originally alleged that, since Meta owned the VR game Beat Saber, the Within acquisition was purchasing a competitor. The FTC has since dropped that dubious portion of the complaint in favor of the assertion that the acquisition of Within will reduce future competition in a new market. This is a relatively novel interpretation of antitrust law that would perilously extend the authority of the FTC to scrutinize almost any acquisition or merger. Under this interpretation, the FTC could arbitrarily choose which mergers and acquisitions could be allowed and which could not, as they would represent forestalling competition in some future market. The FTC’s argument in this case weakens further when coupled with the fact that there was only around $1.6 billion in 2022 global VR software revenue. In contrast, there was around $180 billion in overall 2022 global gaming revenue. It's clear that the VR market lacks any dominant players that could exercise significant market power for the foreseeable future. The FTC should return to clear and reasonable enforcement standards and avoid creating deep uncertainty across multiple regulatory fronts and in multiple industries.
In the midst of a national economic slump, robust strategic competition from China, and turmoil in the tech industry, the last thing that Americans need is an FTC running roughshod over innovators seeking to improve their daily lives. NTU will analyze the decision’s details if they become unsealed, and we will continue to update our thoughts on the matter. Regardless, this outcome should give a ray of hope to current and future business owners and job creators in all sectors of the economy as a repudiation of FTC overreach.