WASHINGTON — The Federal Trade Commission on Wednesday filed for an injunction to block Meta, the company formerly known as Facebook, from buying a virtual reality company called Within, potentially limiting the company’s pressure in the so-called metaverse and indicating a shift in how the agency approaches technical deals.
The antitrust case is the first under Lina Khan, the committee chair and a leading progressive critic of corporate concentration, against one of the tech giants. Ms Khan has argued that regulators need to end competition and consumer protection violations when it comes to the latest technology, including virtual and augmented reality, and not just in areas where the companies have already become behemoths.
The FTC’s request for a court order puts Ms. Khan on a collision course with Mark Zuckerberg, the CEO of Meta, who is also named as a defendant in the request. He’s spent billions of dollars building products for virtual and augmented reality, betting that the immersive world of the metaverse is the next technological frontier. The lawsuit could shrink those ambitions.
“Meta could have chosen to try to compete with Within on merit,” the FTC said in its lawsuit, which was filed in the U.S. District Court for the Northern District of California. Instead, it chose to “buy a top company in what the government called a “vital” category.
In a statement, Meta said the FTC’s case was “based on ideology and speculation, not evidence.” It added that the lawsuit was an attack on innovation and that the agency “sent a chilling message to anyone looking to innovate in VR”
Meta had said it would acquire Within, which produces the highly popular fitness app Supernatural, last year for an undisclosed amount. The company has been promoting its virtual reality headsets for fitness and health purposes.
The FTC’s lawsuit is highly unusual and pushes the boundaries of antitrust law. Regulators are focusing on deals between large companies in large markets, rather than their acquisitions of small start-ups in emerging technology areas. Courts were also skeptical about applying antitrust laws to block mergers on the premise that the two companies involved would later become competitors if the deal was blocked.
But critics have said the government’s inaction has allowed Meta and other giants to suck up services that later became formidable. The agency approved Facebook’s 2012 acquisition of Instagram, the photo-sharing app that has since grown to more than a billion regular users. Instagram has helped Meta dominate the social photo sharing market, though other start-ups have sprung up since then.
“It’s a riskier business, but they think it’s worth bringing because if they succeed, it will push the boundaries of enforcement out,” said William E. Kovacic, a former chairman of the FTC. “I think this is a first of its kind.”
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The FTC’s lawsuit is part of a wider wave of actions against Meta and other major tech companies such as Google, Apple and Amazon, which are increasingly under fire for their power and dominance. Under Ms Khan’s predecessor, the FTC has filed a lawsuit against Facebook alleging that the company is halting nascent competition through acquisitions. The Justice Department has also sued Google for abusing a monopoly on online search.
More cases could come. The FTC is investigating whether Amazon has 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. He has pushed Meta away from his social networking roots as his apps, such as Facebook and Instagram, face increased competition amid privacy and content moderation stumbling blocks. Instead, he has bet on the metaverse.
mr. Zuckerberg has transferred employees and appointed a top lieutenant in charge of metaverse efforts. He has also empowered executives to pursue some of the most popular games in the VR space. In 2019, Facebook bought Beat Games, makers of the hit title Beat Saber, one of the top VR games on the Oculus platform. He has also authorized the purchase of about half a dozen other virtual reality or game studios over the past three years.
The FTC filed suit on Wednesday before Meta reported its first quarterly revenue decline since it went public in 2012. The company has recently reduced employee perks and limited spending in uncertain economic conditions. John Newman, the deputy director of the FTC’s Bureau of Competition, said the agency traded the Within deal because Meta was “trying to buy his way to the top.” The company already had a best-selling virtual reality fitness app, he said, but then chose to buy Within’s Supernatural app “to gain market footing.” He said the deal was “an illegal takeover and we will pursue all appropriate assistance”.
The FTC’s vote to approve the filing was split 3 to 2. Christine Wilson, a Republican commissioner at the agency, said she was one of two votes against the lawsuit. She declined to comment on her reasoning.
The FTC said in its request that asking for an injunction was sometimes a prelude to filing a merger complaint, which could put Meta and the agency in a lengthy lawsuit and appeals process. An FTC spokeswoman said the agency had filed no such complaint and declined to comment further on the agency’s strategy.
Ms Khan, 33, who was appointed by President Biden last year to be hailed from the left, has sought to deliver on elaborate promises to curb corporate power. She rose to prominence after she wrote an article in 2017 during her law school criticizing Amazon. As FTC chairman, she has called on regulators to vigorously enforce antitrust laws and said she can create sweeping online privacy regulations that would imply Silicon Valley companies.
The lawsuit was praised by Ms. Khan. Sandeep Vaheesan, the legal director of the Open Markets Institute, a liberal think tank, said in a statement that the lawsuit was a “step toward making build, not buy, the norm for Facebook.”
But allies of the tech industry attacked Ms Khan’s actions. Adam Kovacevich, the 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 getting headlines than results.” He said Meta is “no closer than pickleball or synchronized swimming to the fitness market shutdown.”
Meta said in a blog post that the FTC could not prove that the Within deal would “significantly reduce competition,” which is the bar typically set for blocking a deal under federal antitrust law.
In its lawsuit, the FTC said that if Meta bought Within’s Supernatural, it would no longer have an incentive to improve Beat Saber, the virtual reality fitness game it already owns. But Nikhil Shanbhag, an associate general counsel for Meta, said in the blog post that the games were not competitors.
“Beat Saber is a game that people play to have fun and it has a lot of competitors,” he said. “Supernatural can’t be more different.”
Seamus Hughes research contributed.