Antitrust & Competition Technology Quarterly Update Q3 2022

Two major technology companies, Meta and Microsoft, continue to defend their acquisitions against challenges from antitrust regulators. The FTC dropped one of the two claims underlying its challenge of Meta’s acquisition of Within (Meta/Within), and Meta is pressing forward its efforts to make FTC Chair Khan’s alleged bias an issue in the case. Investigations into Microsoft’s acquisition of Activision appear to be heating up: the FTC is reportedly seeking signed declarations from industry participants, and both the UK Competition and Markets Authority (CMA) and the European Commission (EC) have opened Phase II investigations.

Update on Meta’s proposed acquisition of Within

The FTC filed a complaint in July seeking to block Meta’s acquisition of Within, the virtual reality (VR) app maker.¹  Meta makes Quest, the leading VR device. It also operates the Quest app store and sells several other best-selling VR apps. Within’s flagship product is a fitness VR app called Supernatural, which provides users with virtual fitness classes for a monthly subscription fee.² 

The FTC’s complaint relied on two horizontal theories of harm. The first was a potential competition theory. The FTC alleged that Meta is a potential entrant into the dedicated fitness market (which consists of apps such a Supernatural that are specifically used for fitness) because Meta has the size, resources, and capabilities to make its own dedicated fitness app.³

The FTC’s second theory of harm was based on current competition between Meta and Within in an alleged broader fitness app market that includes both dedicated fitness apps and incidental fitness apps. The latter are apps that encourage users to engage in activities like dancing and to get exercise incidentally. The FTC alleged that Meta’s Beat Saber and Supernatural are both a part of the broader fitness app market and that the transaction would eliminate competition between the two products. 

There have been two notable developments since the FTC filed its complaint in July. First, on October 7, the FTC filed an amended complaint that dropped the second theory of harm.⁴ The FTC did not explain why it dropped this claim. The move came shortly after a September 20 Senate hearing in which Senator Mike Lee (R-Utah) challenged the FTC’s market definition in Meta/Within as contradictory to the FTC’s market definition in its complaint challenging Meta’s acquisitions of Instagram and WhatsApp: 

“The FTC explains in its complaint that ‘other types of internet based services in the US that facilitate the sharing or consumption of content are not adequate substitutes for personal social networking services.’ In other words, it seems to be saying that even though other services have incidental overlapping [sic] with Facebook, that doesn’t mean they are in the same market. And yet in the FTC’s complaint to stop Meta’s acquisition of Within . . . that complaint relies in part on what they refer to as a ‘VR fitness apps market’ definition, and the complaint states ‘the broader market includes both VR dedicated fitness apps and incidental fitness apps.’ So here the FTC seems to be saying products with incidental overlapping uses are in fact competitors. Are these two market definition theories compatible, because it seems to me they are quite wildly inconsistent and indeed mutually exclusive.” ⁵

Another development in the case is Meta’s continued effort to characterize FTC Chair Lina Khan as biased. Shortly before the FTC sued to stop the Meta/Within deal in July, Meta petitioned the FTC to recuse Chair Khan from the matter because her “public statements and writings reflect her belief that the government should block future acquisitions by Meta, regardless of the merits of the transaction.”⁶  Meta’s bias claims will be reviewed by four members of the Commission. According to an October 17 joint filing in the court case, the FTC decided to consider Meta’s petition to disqualify Chair Khan, a process in which Chair Khan will not take part.⁷  The outcome of the Commission’s decision on this issue could have major impacts on a number of merger challenges, including the challenges of Meta’s proposed acquisition of Within, and the long-consummated acquisitions of Instagram, and WhatsApp, as well as other acquisitions by other large tech companies. 

Meta’s efforts to leverage this issue in pending preliminary injunction litigation in the Northern District of California appear to have failed. In its answer, Meta alleged in its defenses that: 
“Chair Khan has made numerous public statements that demonstrate her bias against Meta, and in particular its acquisitions, demonstrating her lack of impartiality with respect to Meta’s proposed acquisition. She is not an impartial, unbiased Commissioner, but rather has prejudged Meta’s conduct, as Meta explained in its Petition for Recusal filed with the FTC on July 25, 2022. Chair Khan’s participation irrevocably taints the FTC’s claim.” ⁸ 

The FTC pushed back on these allegations and moved to strike the defenses in Meta’s answer, arguing that Meta failed to provide a factual basis for those defenses and that they were nonetheless not relevant to the court’s preliminary injunction ruling.⁹  The court agreed with the FTC on the latter reasoning and granted the motion to strike the bias related defenses.¹⁰

These accusations are similar to those raised by Meta in its motion to dismiss the FTC’s case regarding its acquisition of Instagram and WhatsApp, which is currently before the DC District Court.¹¹  In that case, the court denied Meta’s motion holding that Chair Kahn was acting in a prosecutorial role, not a judicial role, in voting to bring the complaint against Meta.¹²  

Update on Microsoft’s proposed acquisition of Activision 

Microsoft’s acquisition of Activision, which was announced in January, cleared one hurdle in early October when the Brazilian competition authority approved the deal without conditions. But the deal is reportedly meeting resistance from the FTC, CMA, and EC. The deal is also under review by authorities in Australia, New Zealand, Japan, and South Korea.

According to reports in early October,¹³ FTC staff investigating the transaction are gathering signed declarations from third-party industry participants. This step suggests that staff may be preparing to recommend that the Commission challenge the deal after the ongoing Second Request investigation.

In the UK, the CMA is conducting a Phase II investigation of the deal. The CMA published its Phase I decision on September 1, finding that the deal could substantially reduce competition in gaming consoles, multi-game subscription services, and cloud gaming services.¹⁴  According to the CMA, evidence it gathered suggests that Activision’s video games—Call of Duty, in particular—have a significant influence on the success of rival gaming platforms.¹⁵  The combined company could therefore harm rivals by refusing or degrading rivals’ access to Activision games. According to the CMA, Microsoft took such an approach following prior acquisitions of video game publishers.¹⁶ 

The EC has also decided to open an in-depth investigation with similar concerns.¹⁷ According to reports, Microsoft had a deadline of October 28 to offer the EC remedies to address competition concerns, but Microsoft did not offer any.¹⁸  

Despite not formally offering remedies to the CMA or EC, Microsoft has publicly committed to making Call of Duty available to its biggest rival, PlayStation, at the same time the game launches on Microsoft platforms. Behavioral fixes like this one have historically been acceptable to antitrust regulators around the world. But in recent years, regulators’ views, including those in the US, UK, and EU, have shifted toward greater skepticism of vertical transactions and the ability of behavioral remedies to alleviate concerns.