By Mark Jamison

The Federal Trade Commission’s (FTC) timing could not have been worse: On the same day that Meta released its second quarter financial results, showing a 36 percent decline in net income and a 14 percent drop in ad prices because of rising competition, the FTC filed to block Meta’s acquisition of a fitness app, claiming the purchase would let “behemoth” Meta “expand its empire even further” and control the metaverse. I suspect that Meta’s shareholders wish the FTC’s claims of an “expanding empire” were true, but they are not.

At issue is Meta’s plan to purchase Within Unlimited and its popular virtual reality (VR) fitness app, Supernatural. Supernatural is popular: Greatist ranks it as the best overall VR fitness app and 3D Insider ranks it third, but Live Science doesn’t rank it. The FTC argues that the acquisition would “lessen competition, or tend to create a monopoly” that would result in “less innovation, lower quality, higher prices, less incentive to attract and keep employees, and less consumer choice.”

VR Fitness Apps Have Many Competitors

For the FTC’s view to make any sense, VR fitness apps must comprise a well-defined market that will persist for the foreseeable future. They do not. The FTC assumes that customers are unable to find close substitutes. But Allied Market Research’s (AMR) study of online and virtual fitness services finds that VR apps compete with other fitness services such as fitness videos and apps on smartphones and other wearable devices. AMR also finds that VR is not a dominant format for fitness services: “On-demand streaming type segment dominated the online/virtual fitness market share in 2019, and is expected to continue” through 2027.

Furthermore, the service category is ever changing. Report Ocean and AMR find it expanding at a 22.3–33.1 percent compound annual growth rate through 2027, creating opportunities for new entrants. And there are plenty of entrants: Report Ocean says there are “over 37000 [fitness] apps . . . currently accessible on iOS and Android devices.” Also, the service category has many dimensions, including “streaming type, device type, session type, revenue model, end user, and region.”

Meta Does Not Dominate the Ecosystem at Hand

The FTC argues that Meta has intentionally “become a key player at each level of the VR ecosystem,” including headsets, app stores, and apps. Even if I am wrong that VR competes with other service forms, metaverse expert Matthew Ball explains that the FTC’s claims are based on a badly incomplete set of elements of a VR ecosystem. There are actually several core enablers of VR (and competing) formats including networking, computing power, virtual platforms, interchange tools and standards, and payments. It is unclear whether Meta will be a significant player in any of these.

Regarding headsets, the FTC argues that Meta’s popular Oculus device gives it a competitive advantage. Setting aside the incoherence of the argument that it is bad for a company to grow and then leverage a popular product, AMR finds that Oculus actually competes with many types of devices in the category of online and virtual fitness services, including “smart TVs, smartphones, laptops desktops and tablets, [and] others” that are more ubiquitous than Oculus headsets.

FTC Misfires on Effects of Dominance

Even if the FTC is right that the acquisition would “lessen
competition, or tend to create a monopoly,” the FTC is still wrong that there
would be “less innovation, lower quality . . . less incentive to attract and
keep employees, and less consumer choice.” (I omit the “higher prices” claim as
it would likely be true.)

Let’s begin with innovation and, by extension, consumer choice. As I have explained, decades of economic research have found that the amount of innovation in a given market is unrelated to number of rivals. Why? More rivals might increase the number of ideas brought to market but apparently have no effect on the number of ideas tested—and often have a negative effect on the profitability of innovation.

The effect of monopoly on service quality is also ambiguous:
A monopoly might become slothful and let quality slide, but a monopoly also might
find higher quality more profitable than would a competitive firm, especially
if fixed costs associated with the improvement are significant.

A vital market for acquisitions can make employees better-off by increasing the incentives for innovative entrepreneurs to create new companies. Recent research found that allowing company creators to keep more of their profits (as opposed to taxing them away) benefitted employees. By extension, allowing entrepreneurs higher profits by selling their companies would benefit employees.

What Should Be Done?

Meta’s bad second quarter is not conclusive evidence that competition is growing. Nevertheless, the FTC’s arguments against the merger are sufficiently weak that the agency should refrain from seeking to oversee the dynamic and evolving VR industry.

The post The Federal Trade Commission’s Strange Assertion: Meta Dominates a Market That Doesn’t Exist appeared first on American Enterprise Institute – AEI.