Antitrust + Competition Technology Quarterly Update Q2 2022

In July 2022, the FTC brought an enforcement action to enjoin Meta’s acquisition of virtual reality app maker Within.¹ The FTC’s approach in that complaint could have implications for Microsoft’s proposed acquisition of Activision which has some similarities as a combination between a platform and an application developer. 

In addition to those two platform acquisitions of application developers, a few other transactions in the tech space have involved Big Tech companies acquiring new or adjacent business lines, including Google/Mandiant, Broadcom/VMWare, and Amazon/One Medical. The DOJ ended its investigation of Google/Mandiant after a second request, and investigations of the latter two are ongoing.

Platform Acquisitions of App Developers

Meta/Within

On July 27, 2022, the FTC filed a complaint seeking to block Meta’s acquisition of the virtual reality (VR) app maker, Within.⁴ The FTC described Meta as the owner of a “virtual reality empire,”⁵ as it makes the leading virtual reality device, Quest, operates the app store on Quest devices (the Quest Store), owns several of the most successful VR app developers, and sells one of the best-selling VR apps.

Within’s flagship product is a fitness app called Supernatural. Supernatural offers users virtual fitness classes for a monthly subscription fee.⁶ Supernatural is one of the most popular VR fitness apps, and is currently only available on Quest VR devices. Meta does not offer any apps specifically used for fitness, which the FTC’s complaint categorizes as “dedicated fitness apps.”⁷ Meta’s best-selling app, however, is Beat Saber, a game “where you slash the beats of adrenaline-pumping music as they fly towards you.”⁸ And the FTC describes Beat Saber as an “incidental” fitness app, meaning the users do other things, like “slash beats,” and get exercise incidentally.⁹

The FTC’s complaint relies on two theories of harm, both of which are horizontal in nature. The first is that Meta is a potential entrant into the dedicated fitness space. The FTC alleges that Meta has the size, resources, and capabilities to make its own dedicated fitness app, and has seriously considered doing so.¹⁰ It also points to the fact that Meta has already bought a number of successful VR app development studios.¹¹ Essentially, the FTC argues that Meta could have built instead of bought in a reasonable time absent the transaction.

The second horizontal theory of harm is based on the broader VR fitness app market, which includes both dedicated and incidental VR fitness apps. Meta’s Beat Saber and Supernatural are both a part of that market, and the FTC alleges that the transaction will have anticompetitive effects by eliminating competition between the two products. 

Notably, the FTC did not include a vertical theory of harm in its complaint. Given Meta’s strong position in VR devices, Supernatural’s leading fitness app, and the fact that Meta does not offer a dedicated fitness app, the potential for vertical issues stands out—i.e., that Meta could withhold Supernatural or other apps from rival VR platforms or foreclose rival fitness apps from the Quest platform. The fact that Supernatural is currently only available on Quest today may be one reason a vertical case could have been difficult to prove.

Microsoft/Activision

The FTC’s Meta/Within complaint could be a bad sign for Microsoft/Activision. It is easy to draw parallels between the two deals. Like Meta, Microsoft makes Xbox, one of the leading videogame consoles. Similar to Within’s Supernatural app, Activision’s Call of Duty franchise is far and away the first-person shooter category leader. And like Meta, the Activision acquisition follows a number of other Microsoft acquisitions of game developers, including its acquisition in 2014 of the developer of Halo, a popular first-person shooter game that likely competes with Call of Duty. Lastly, while Microsoft may not sell the majority of video game consoles like Meta does in the VR space, it has a strong position in streaming video games, which might have the potential to replace console-based gaming in the near future. 

Soon after the deal was announced in February, Microsoft publicly addressed potential vertical concerns by stating that it would continue to make all Activision titles available on PlayStation. One can speculate that Microsoft is offering that type of commitment to the FTC as a potential remedy. But it’s not clear that the current FTC will be receptive to behavioral remedies, and those commitments do not address horizontal theories of harm analogous to the ones the FTC relied on in Meta/Within, namely that the transaction would eliminate competition between Call of Duty and Microsoft’s current video game portfolio and the incentive for Microsoft to create additional competitive offerings.

Microsoft and Activision received Second Requests from the FTC on March 3, 2022,¹² and the parties reportedly complied with those second requests in mid-July.¹³ If the FTC were to challenge the transaction, it will be interesting to watch the extent to which the parties litigate the challenge. In its agreement with Activision, Microsoft’s obligation to remedy antitrust issues is limited by a materiality clause.¹⁴ But the parties agreed to a 12 month initial outside date that is automatically extended by 6 months if the parties do not have antitrust clearance. Microsoft is also subject to a termination fee that starts at $2 billion if the deal is terminated before a year after signing, which increases to $2.5 billion if the deal is terminated between 12 and 15 months, and again to $3 billion if the deal dies after 15 months.  

Big Tech “Adjacent” Acquisitions

Another type of acquisition that has caught the attention of the antitrust agencies are acquisitions by Big Tech companies in adjacent spaces, including Google’s proposed acquisition of Mandiant, Broadcom’s proposed acquisition of VMWare, and Amazon’s proposed acquisition of One Medical.

Google/Mandiant

Google signed an agreement to acquire cybersecurity company Mandiant in March 2022. As we noted in our last update, the parties received a Second Request despite the lack of any apparent horizontal or vertical relationships. The DOJ ended its investigation of that transaction in July. While the deal’s clearance  was most certainly based on the facts DOJ uncovered during its investigation, the DOJ’s investigation reaffirms that acquisitions by Big Tech companies of new business lines are not immune from scrutiny, while the outcome also makes clear that such acquisitions are by no means dead on arrival.  

Broadcom/VMWare

Microchip maker Broadcom’s proposed acquisition of the software company VMWare is another example of a large technology company looking to acquire a business in an adjacent, but not horizontal or vertical market. This transaction follows two other software acquisitions by Broadcom: its acquisition of CA Technologies in 2018 and Symantec’s enterprise business in 2019, neither of which received a second request. The proposed acquisition of VMWare is getting scrutiny, however, as the FTC issued Second Requests to the parties in early July. The additional scrutiny could be due to the strength of Broadcom’s chips and VMWare’s cloud management software in the broader cloud ecosystem. Or, it may simply be a reflection of a more aggressive antitrust environment, particularly in the technology space. 

Amazon/One Medical

Amazon’s agreement to acquire One Medical, a primary care physician practice group, is another move by a large technology company into a new line of business. While Amazon has made acquisitions in the broader healthcare space, including with its acquisition of mail-order pharmacy PillPak, One Medical would be its first step into the provider segment of healthcare. The profile of this deal is similar to the Google/Mandiant transaction in that it is unlikely that the target, One Medical, has a significant share in a fragmented primary care provider market. The deal has nevertheless drawn calls for scrutiny. So far those calls do not articulate any familiar antitrust theories of harm, so we will continue to monitor the level of resistance, if any, that this deal draws from the antitrust agencies.