WASHINGTON — Early in her term as chair of the Federal Trade Commission, Lina Khan said she would curtail the power of the biggest tech companies in radically new ways.
“We try to be forward-looking, anticipate problems and act quickly,” Ms Khan said in an interview last month. She promised to focus on “next-gen technologies,” not just areas where tech giants were already well established.
This week, Ms Khan took her first step towards stopping the tech monopolies of the future when she filed a lawsuit to block a small acquisition by Meta, the company formerly known as Facebook, of the start- fitness up in virtual reality Within. The deal was important for Meta’s development of the so-called Metaverse, which is nascent technology and far from mainstream.
In doing so, Ms. Khan has upended decades of antitrust standards, potentially triggering a sea change in how Washington enforces competition in American businesses. At the heart of the FTC lawsuit is the idea that regulators can enforce antitrust law without waiting for a market to mature to the point where it’s clear which companies hold the most power. The FTC said such early action was warranted because Meta’s deal would likely eliminate competition in the young VR market.
Since the late 1970s, most federal merger challenges have involved large, well-established markets and sought to prevent already apparent monopolies. Regulators have mostly approved purchases of start-ups by tech giants, such as Google’s 2006 deal to buy YouTube and Facebook’s 2012 acquisition of Instagram, because those markets were still emerging.
As a result, Ms. Khan faces a difficult climb. Regulators have been reluctant to try to stop corporate mergers based on the theory that competition and consumers will be harmed in the future. The federal government has lost at least two cases that have used this strategy in the past decade, including an attempt to block a $1.9 billion merger in 2015 between X-ray sterilization providers that, according to the FTC, would harm future competition in regional markets.
The FTC’s lawsuit against Meta in the nascent virtual reality market is a “deliberately experimental case that seeks to stretch the boundaries of merger enforcement,” said William Kovacic, the agency’s former president. “Such cases are certainly more difficult to win.”
The FTC’s action immediately caused a ruckus in antitrust circles and throughout the tech industry. Silicon Valley tech executives have said blocking a deal in an embryonic tech field could stifle innovation and prevent technologists from making bold leaps into new areas.
“Regulators predicting future markets is a precedent and a very, very dangerous position,” said Aaron Levie, chief executive of cloud storage company Box. He warned that venture capitalists and entrepreneurs would become reluctant to enter new markets if regulators cut off the ability of companies like Meta to buy start-ups.
Adam Kovacevich, chairman of the Chamber of Progress trade group, which represents Meta, Amazon and Alphabet, also said the lawsuit would have a chilling effect on innovation.
Learn more about Facebook and Meta
“This is such an extreme and unfounded reaction to a small deal that many tech industry leaders are already worried about what an FTC victory would mean for start-ups,” he said. he declares.
For Ms Khan, winning the case may be less of a priority than showing that it is possible to file a case against a tech deal while it is still early days. She said regulators have been too cautious in the past to intervene in mergers for fear of hurting innovation, allowing a wave of deals between tech giants and start-ups that ultimately cemented their dominance.
“What we can see is that inaction after inaction after inaction can have significant 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 FTC declined to comment on Thursday.
Meta said the FTC was misapplying antitrust law. The lawsuit focuses on how the merger with Within would remove competition, but Meta said the agency was unaware of the large number of companies that also had health and fitness apps.
“The FTC has no answer to the most fundamental question – how might Meta’s acquisition of a single fitness app in a dynamic space with many existing and future players harm competition?” Nikhil Shanbhag, vice president and associate general counsel at Meta, wrote in a blog post.
The company added that it has not decided whether to contest the lawsuit, which was filed Wednesday in the U.S. District Court for the Northern District of California.
The FTC has accused Meta of building a virtual reality “empire” starting in 2014 with its purchase of Oculus, the maker of the Quest virtual reality headset. Since then, Meta has acquired a dozen makers of virtual reality apps, such as the maker of a Viking fighting game, Asgard’s Wrath, and several first-person shooters and sports games.
By buying Within and its virtual reality fitness app Supernatural, the FTC said Meta would not create its own app to compete and would scare off potential rivals from trying to create alternative apps. It would hamper competition and consumers, the agency said.
“This acquisition presents a reasonable likelihood of eliminating current and future competition,” according to the lawsuit. “And Meta would be one step closer to its ultimate goal of owning the entire ‘Metaverse’.”
Rebecca Haw Allensworth, a professor of antitrust law at Vanderbilt University, said the FTC’s arguments would come under scrutiny because Meta and Within did not compete with each other and because the virtual reality market was nascent.
“The way the analysis of mergers has stood for at least 40 years is about the kind of direct competition that this merger takes out of the picture,” she said.
It will now be up to the agency to convince a judge that its predictions about the Metaverse and the purchase of Meta would harm competition.
“The onus is on the FTC to show, among other things, a reasonable likelihood that Meta would have entered the VR fitness app market, absent its acquisition of Within,” said Diana Moss, president of the American Antitrust Institute.
If the court dismisses the case, Ms Khan may have set a precedent that would make it harder to prosecute nascent competition cases, antitrust experts have warned. This could then encourage tech giants to forge their way into new business areas.
“It’s a precedent system that goes both ways – whether you win or lose – and sends a signal to the market,” Ms Allensworth said.
The FTC is reviewing other tech deals, including Microsoft’s $70 billion acquisition of gaming company Activision and Amazon’s $3.9 billion merger with One Medical, a national healthcare clinic chain primaries. Additionally, the agency investigated Amazon over allegations of monopoly abuse in its third-party seller marketplace.
Ms. Khan appears to be set for long legal battles with the tech giants, even if the cases end up not going the FTC’s way.
In her previous interview with The Times and CNBC, she said, “Even though it’s not a slam dunk affair, even though there’s a risk that you might lose, there may be d ‘huge benefits to taking that risk.’