Meta and FTC face off in court over virtual reality deal

Tony Avelar/AP Photo

Federal regulators sparred with Meta in a California courtroom Thursday, kicking off a three-week trial that will test the Biden administration's ability to crack down on Big Tech.

The Federal Trade Commission is suing to block Meta’s purchase of Within, the maker of a virtual reality fitness app, as the tech giant pivots toward the metaverse.

“This case is about the harm to competition when one of the world’s largest tech companies decides to buy an innovator rather than competing in the market,” said FTC attorney Abby Dennis at the start of her opening statement.

The case is the first to challenge a consumer tech deal from the FTC under Chair Lina Khan — the influential antitrust thinker who Biden nominated to one of the most powerful corporate watchdog jobs in the federal government. What unfolds over the next three weeks will be a key test of her authority to pursue alleged anticompetitive conduct using aggressive, largely untested legal theories.

Meta has promised to become a leader in the metaverse — hence the name change from Facebook — and wants to buy Within to expand its virtual reality offerings. The FTC argues that the deal will illegally boost Meta’s market power in the nascent virtual reality industry, and that the company is once again looking to buy out the competition rather than compete on the merits.

In its case the FTC is focused on a so-called potential competition theory, meaning Facebook would have attempted to offer its own VR fitness app, but for the acquisition. The agency sued in July to block the deal.

Dennis said Meta and its CEO Mark Zuckerberg began laying the foundation for its foray into virtual reality more than 10 years ago, and buying Supernatural is a key part of that strategy.

Meta could have used its vast resources to build its own fitness product, Dennis said, which would have spurred significant competition in the market. However, when it realized buying Within was an option, it switched gears, she said.

Meta even had a project, code-named “Operation Twinkie,” to partner with fitness equipment maker Peloton and build out its own virtual reality product, Dennis said.

The FTC in a separate case is attempting to unwind Meta’s 2012 and 2014 purchases of Instagram and WhatsApp, and the agency said it is challenging the company’s strategy of buying existing companies, rather than competing. That case was filed during the Trump administration.

Among the witnesses expected to take the stand are Zuckerberg — Meta's founder and top executive — and Andrew Bosworth, the company’s chief technology officer, who has helped spearhead virtual reality operations. Within founder Chris Milk is also expected to testify.

While the FTC says Facebook is using the deal to build a virtual reality empire, the lawsuit is focused on the company’s alleged intent to monopolize the market for virtual reality fitness apps, a category that excludes Pelotons, workout videos and other at-home exercise options.

Facebook spokesperson Chris Sgro said "we are confident the evidence will show that our acquisition of Within will be good for people, developers and the VR space, which is experiencing vibrant competition." An FTC spokesperson declined to comment.

Meta argues that it never actually planned to enter the market on its own. And it is challenging the commission’s decision to go after such a narrow market, arguing that the FTC is ignoring a wider variety of fitness products and services in which it would be harder to prove a monopoly.

“The deal is good for competition, good for everyone in the industry, and good for consumers,” said Facebook lawyer Mark Hansen in his opening statement. “It’s an incredibly competitive space even without Meta’s participation.”

He added that there are “some very serious competitors including ByteDance, Google, and Apple, as well as Sony which is recently out with a new virtual reality headset device.” Witnesses including Milk will testify that the market is much bigger than the FTC says it is, with more than 200 fitness apps in Meta’s Quest virtual reality app store, Hansen said.

And to the FTC’s point that Facebook was planning to compete with Within, Hansen said those plans never rose above discussions with relatively low-level employees.

Within lawyer Charles Loughlin said his client’s product was “Designed to compete with gym memberships that people don’t use, Peloton, [and other connected fitness products including] Mirror and Tonal.” Ironically, “What's backwards is the one company it doesn’t compete with is Meta.”

Other witnesses from companies including Apple, Google parent Alphabet, Lululemon Athletica, Equinox Media, which makes the connected bicycle used by fitness company SoulCycle, Nike, Peloton, Sony and ByteDance are also expected to testify.

The FTC says Meta’s possible Peloton partnership was intended to build out a different game, Beat Saber, an interactive VR music game in which users also physically move around, into a game specifically focused on fitness. The FTC initially said Meta competed with Within prior to the deal because of the fitness aspects of Beat Saber but dropped those claims in October.

Hansen said the Beat Saber founder objected to those plans, thereby killing the project in its infancy. “Meta was not going to make a VR fitness app.”

Meta’s Rade Stojsavljevic, the director of the company’s in-house gaming studio, was the first witness called by the FTC. FTC lawyer Tim Singer pressed Stojsavljevic on Meta’s level of seriousness in developing a partnership with Peloton. While the company did weigh the possibility, Stojsavlievic said it was never taken seriously enough to go through formal deliberations, and Meta never approached Peloton about a possible partnership.

U.S. District Judge Edward Davila is presiding over the case in San Jose, Calif. The current court proceeding is just to pause the deal while the FTC continues its challenge in its in-house administrative court. If the FTC loses round one, it can still bring its case in the administrative court to permanently block the deal.

If the FTC succeeds, beyond blocking the Within deal, it could also seek a ruling making it more onerous for Meta, and Zuckerberg, to buy companies in the future.

Hansen said if the FTC wins this first round, the companies will abandon the deal.

The seven-day federal court trial will be spread out over the next three weeks and is currently set to wrap on Dec. 20.