WASHINGTON – Early in her tenure as chair of the Federal Trade Commission, Lina Khan announced that she would rein in the influence of the biggest tech companies in an entirely new way.
“We try to look ahead, anticipate problems and take quick action,” Ms Khan said in an interview last month. She promised to focus on “next-generation technologies,” not just on areas where the tech giants were already well established.
This week, Ms Khan took her first step towards stopping future tech monopolies when she filed a lawsuit to prevent a small acquisition by Meta, the company formerly known as Facebook, of virtual reality fitness company Inner. The deal was significant for Meta’s development of the so-called metaverse, a nascent and far from mainstream technology.
By doing so, Khan has upended decades of antitrust standards, potentially leading to a sweeping shift in the way Washington enforces competition across US companies. The crux of the FTC lawsuit lies in the idea that regulators can enforce antitrust law without waiting for the market to mature to the point where it becomes clear which companies have the most power. The Federal Trade Commission (FTC) said such early action was justified because the Meta deal would likely eliminate competition in the young virtual reality market.
Since the late 1970s, most of the federal challenges to mergers have been in large, well-established markets and aimed at preventing already obvious monopolies. Regulators mostly stamped out startup purchases by tech giants, such as Google’s 2006 deal to buy YouTube and Facebook’s acquisition of Instagram in 2012, because these markets were still nascent.
As a result, Ms. Khan faces an uphill climb. Regulators have been reluctant to try to stop companies from consolidating by relying on the theory that competition and consumers will be hurt in the future. The federal government has lost at least two cases that have used this strategy in the past decade, including trying to prevent a $1.9 billion merger in 2015 between providers of X-ray sterilization services that the Federal Trade Commission predicted would harm future competition in regional markets.
William Kovacic, the former head of the agency, said the FTC’s lawsuit against Meta in the emerging virtual reality market is a “deliberate experimental case that seeks to expand the boundaries of merger enforcement.” “It’s definitely more difficult to win cases like this.”
The FTC’s action immediately caused an uproar within antitrust circles and across the tech industry. Silicon Valley tech executives said a move to block a deal in an embryonic region of technology could stifle innovation and scare technologists from making bold leaps into new areas.
“Regulators predicting future markets are a precedent and a very dangerous situation,” said Aaron Levy, CEO of cloud storage company Box. He warned that venture capitalists and entrepreneurs would be wary of going into new markets if regulators cut off the ability of companies like Meta to buy up start-ups.
Adam Kovacevich, president of the Chamber of Commerce trade group, which represents Meta, Amazon and Alphabet, said the lawsuit would have a chilling effect on innovation.
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“This is such an extreme and baseless reaction to a small deal that many tech industry leaders are already concerned about what the FTC’s win might mean for startups,” he said.
For Ms Khan, winning the lawsuit may be less of a priority than showing the possibility of a tech deal being sued while it is still early days. She said regulators had been very cautious in the past about interfering with mergers for fear of hurting innovation, allowing a flurry of deals between tech giants and startups that eventually cemented their dominance.
“What we can see is that inaction after inaction can have huge costs,” she said in an interview with the New York Times and CNBC in January. “And that’s what we’re really trying to reverse.”
Ms Khan declined interview requests for this article, and the Federal Trade Commission declined to comment on Thursday.
Meta said the FTC was improperly applying antitrust law. The lawsuit focuses on how the merger with Inside would remove competition, but Meta said the agency is ignoring the large number of companies that also have health and fitness apps.
“The FTC does not have an answer to the primary question – how could Meta’s acquisition of a single fitness app in a dynamic space with so many current and future players harm the competition?” Nikhil Shanbaj, META Vice President and Associate General Counsel, wrote in a blog post.
The company added that it had not yet decided whether to appeal the lawsuit, which was filed Wednesday in the US District Court for the Northern District of California.
The Federal Trade Commission accused Meta of building a virtual reality “empire”, beginning in 2014 with its purchase of Oculus, the maker of the Quest virtual reality headset. Since then, Meta has acquired around 10 VR app makers, such as the maker of Viking combat game, Asgard’s Wrath, and many other first-person shooting and sports games.
By purchasing the Inside app and the Supernatural virtual reality fitness app, the FTC said, Meta would not build its own app to compete and would scare off potential competitors from trying to build alternative apps. This will hinder competition and consumers, the agency said.
According to the lawsuit, “this acquisition constitutes a reasonable prospect of eliminating current and future competition.” “And Meta will be one step closer to its ultimate goal of owning the entire ‘Metaverse’.”
Rebecca Howe Allensworth, a professor of antitrust law at Vanderbilt University, said the FTC’s arguments would face rigorous scrutiny because Meta and Inside are not in competition with each other and because the virtual reality market has been nascent.
“The way merger analysis has been for at least 40 years relates to the kind of direct competition that this merger takes out of the picture,” she said.
The onus is now on the agency to convince the judge that its predictions about the metaverse and the purchase of the Meta will hurt the competition.
“The onus is on the Federal Trade Commission to show, among other things, the reasonable potential for Meta to enter the VR fitness app market, in the absence of its acquisition of Inside,” said Diana Moss, president of the US Antitrust Institute.
Antitrust experts have warned that if the court rejects the case, Ms Khan may have created a precedent that would make it difficult to pursue emerging competition cases. This could encourage tech giants to make their way into new lines of business.
“This is a precedent system that goes both ways – win or lose – and sends a signal to the market,” Ms Allensworth said.
The Federal Trade Commission is reviewing other tech deals, including Microsoft’s $70 billion acquisition of gaming company Activision, and Amazon’s merger with One Medical, a national chain of primary care clinics, worth $3.9 billion. In addition, the agency has been investigating Amazon over allegations of antitrust violations in its marketplace of third-party sellers.
Ms Khan appears ready to fight long legal battles with the tech giants even if the cases do not end the way the Federal Trade Commission does.
In her previous interview with The Times and CNBC, she said, “Even if it’s not a slam dunk case, even if there’s a risk you might lose, there can be tremendous benefits from taking the risk.”