from the this-is-not-how-antitrust-is-supposed-to-work dept
As you may have heard, a few days ago, the FTC announced that it was seeking to block Meta’s acquisition of Within Unlimited, a maker of a popular VR fitness app. I believe this is the first case in which the Lina Khan-run FTC has stepped in to block an acquisition by one of the big internet companies. In many ways, this seems like a test from all sides.
Since Khan took over the FTC, it seems pretty clear that Google, Amazon, Apple, and Meta/Facebook have been extremely cautious about new acquisitions. While they have continued to acquire companies, the pace (and scope) of such acquisitions appears to have dropped off noticeably. Just by way of example, from 2010 to 2014 (looking back a decade ago, along with two years in either direction), Google averaged over 23 acquisitions a year, with the “slowest” year being 2012’s 12 acquisitions and the biggest being 2014’s 34 acquisitions. In 2021, however, Google acquired just five companies, and has acquired another five this year already.
So the companies are more cautious, and when they’re making these acquisitions, they tend to be not directly connected to their core business, but to ancillary businesses. This is almost certainly done on purpose, as the issue around antitrust law, is whether or not the companies are leveraging a market they’re considered dominant in to gain an unfair advantage in another market.
That’s why even the framing of the FTC’s announcement here seems… odd. When you think of Meta… well… you probably don’t think of Meta. If you do think of the company at all, you probably think of Facebook (or possibly Instagram), but you’re thinking about social media. Yet, here’s how the FTC frames its argument:
The Federal Trade Commission is seeking to block virtual reality giant Meta and its controlling shareholder and CEO Mark Zuckerberg from acquiring Within Unlimited and its popular virtual reality dedicated fitness app, Supernatural. Meta, formerly known as Facebook, is already a key player at each level of the virtual reality sector. The company’s virtual reality empire includes the top-selling device, a leading app store, seven of the most successful developers, and one of the best-selling apps of all time. The agency alleges that Meta and Zuckerberg are planning to expand Meta’s virtual reality empire with this attempt to illegally acquire a dedicated fitness app that proves the value of virtual reality to users.
Virtual reality giant? Virtual reality empire? Yes, we can say that Meta, via Oculus, has a large part of the VR market (stats say about 80% these days), but it’s… a small market. Current estimates say it’s a few billion dollars.
To put it another way: if Oculus were separate from Meta and still had the same marketshare, would the FTC be stepping in to stop this deal? I think most people doubt that very much. This move very much feels like it’s being driven by general animus towards Facebook’s success on the social media side, not some legitimate concern about Meta’s future prospects in VR.
Now, a lot of people are comparing this to when Facebook bought Instagram in 2012. But, that was a very different kind of deal. First, Instagram was a direct competitor to Facebook. Within Unlimited is just one app maker in the space, not really a competitor. Also, at the time, the social media market was an order of magnitude bigger, and way more established with a much larger user base than the VR market today.
So, really, the bigger issue here seems to be that the FTC under Lina Khan is testing out Khan’s belief in changing how antitrust works, away from one that has a fundamental reason for preventing abuse, towards one that is more punitive and focused on punishing big companies for being big. And that has consequences.
The NY Times has a good article noting how this case upends the way most courts and policymakers have viewed antitrust law and enforcement:
Rebecca Haw Allensworth, a professor of antitrust law at Vanderbilt University, said the F.T.C.’s arguments would face tough scrutiny because Meta and Within did not compete with each other and because the virtual-reality market was fledgling.
“The way that merger analysis has stood for at least 40 years is about what kind of head-to-head competition does this merger take out of the picture,” she said.
You can argue that the old standard was no good — and I can see compelling arguments there. But this case still seems like a spectacularly weak one with which to make this point.
We’re talking about a new and nascent market, one which seems pretty dynamic, with lots of different companies exploring and testing the waters. There doesn’t even seem to be an argument that Meta is leveraging its other businesses unfairly here. It’s just… weird to focus on this particular acquisition.
Indeed, it’s so weird that Khan’s own staff advised against going after this merger, and Khan overruled them. That generally doesn’t bode well for showing that you have a strong case.
Federal Trade Commission Chair Lina Khan led her fellow Democrats in the agency’s majority vote to sue Meta Platforms Inc. this week, despite the staff recommending against bringing a case to challenge the company’s acquisition of Within Unlimited Inc., according to three people with knowledge of the decision.
But, to me, the biggest concern here is that this attempt — purportedly to help enable more competition, could actually result in less competition. Box CEO Aaron Levie explained the concern succinctly in a tweet.
I’ve seen a lot of people confused about this point, so it’s worth unpacking a bit. The startup/investor ecosystem is based on investors making huge bets knowing that most won’t pan out. There’s a common refrain that one deal in ten being successful is what’s needed to be a successful VC, though many VCs I’ve spoken to dispute that, and say it’s more of a spectrum. You expect to have a very few massively successful investments, and then a whole bunch of middling success stories, and a few failures.
It’s 15 years old now, but famed venture capitalist Fred Wilson had a post on this way back when, noting that a VC has to shoot for getting 5 to 10x returns on every deal and hope that you’ll get 30% to hit that number, but you also need another 30% or so to “under perform” — and get closer to 2x returns. And those often (not always…) are the ones that are selling out to large companies.
The VC math gets a bit complex, but VC success stories are made on the big unicorn exits. They need those. And when they’re investing, they’re not doing so with the expectation of selling to one of the big guys. I’ve met some VCs who won’t invest in entrepreneurs who say their exit strategy is to sell out to a big company — because that means the entrepreneur isn’t thinking big enough for growth capital. If they’re aiming low, then they’re creating a ceiling for themselves.
That said, having the fallback position of selling out if a company can’t be a unicorn is still super important. A VC may need a few unicorns to be successful, but having a “soft landing” by selling to a larger tech company if that fails is still helpful to keeping a VC in business.
If the FTC is saying that big companies can never buy up startups again, that wipes out much of that middle part of the spectrum for VCs, massively increasing the risk of investing in startups. Now, suddenly, you either need to make sure that more of the companies you invest in are unicorns (if that were possible to do, everyone would be doing it…), or you have to focus on even higher potential returns on each investment, so that when you do get a unicorn, it covers the missing middle of the spectrum.
And, either way, that’s going to massively disincentivize VC investment in lots of startups. The ones that are taking off and appear to be on their way to unicorn land will get more VCs piling in to try to cash in, but then you’ll just have a smaller number of super-funded players, and not a truly competitive market.
So the end result is fewer startups get funded, and there’s less competition in the marketplace, rather than more.
These things work as an ecosystem, and it would be nice if the people making the decisions at the FTC actually understood that.
We do have a real problem in this country where many industries lack true competition. But nascent, dynamic industries don’t really seem to be the areas of concern right now, and the potential consequences of messing with that could be large. Why not focus on large, consolidated industries that aren’t growing and aren’t dynamic?