There’s a new front that’s opened in the years-long battle between the FTC and Facebook. Federal regulators have sued to stop the social media giant’s proposed acquisition of a company named Within which makes a popular virtual reality fitness app called Supernatural. In this episode of Debugger in 10, we talk with Duke University law professor Barak Richman about the merits of the case, and about the larger context of the FTCs legal battles with Facebook / Meta.
Click play here, or click the play button below, to listen. A transcript appears below that.
Bob: Barack, why does the FTC care so much about Facebook’s acquisition of a virtual reality fitness maker?
Barak Richman: So I think there are two reasons. One reason is this is Facebook, and Facebook is a company that controls a really significant platform. And by virtue of being a platform, it means that there are natural efficiencies. That allow it to sustain its dominance in its primary market. I guess that primary market is well, whatever Facebook does. And it also enables Facebook like other platforms to have a natural advantage into other markets as well. So by virtue of Facebook being the defendant, the FTC is especially interested in curtailing what is a very natural position of economic advantage that Facebook has in multiple markets, where there might be competition. I think that’s one reason.
The second reason which, which frankly, I, I think is a little bit more – finds more support in traditional antitrust law – is that the virtual reality market or the market for virtual reality apps and products is a growing market. And who knows how big it’ll be, but it’s a market where there aren’t a whole lot of competitors right now. It’s a market where I think most consumers and policy makers would hope to see lots of vibrant competition. It’s a market where Facebook already has a presence. And Within already has a presence. And there’s concern that joining these two forces together would simply stifle competition in this smaller market.
Bob: One of the things that the FTC said was instead of competing on the merits, Meta — Facebook — is trying to buy its way to the top. Is that.
Barak Richman: It’s not illegal to buy your way to the top. Um, I’m not even sure actually what buying your way to the top really means I, I would, I would characterize that more as press release language, uh, than legal language.
Barak Richman: Now, there is something, uh, problematic with two companies that are competing with each other. To merge or having one company buying its primary competitor. Um, you could, I guess you could call that buying your way to the top or buying your competitor so you can stay at the top. Um, but you know, be whether you’re at the top or the bottom is really kind of irrelevant.
Barak Richman: The point is that it is a problem when competitors in a marketplace, um, especially if those competitors are primary competitors and otherwise concentrated market. Join forces. That is a problem. It is decidedly, not a problem when say a company, uh, that is traditionally successful, but is trying to get into a new market, decides to buy a company instead of building the capabilities themselves.
Barak Richman: I’m sure you are familiar with the pharmaceutical industry and it’s very, very deep history of acquisitions. Where, for example, a Pfizer, um, would buy, uh, a drug or a company that develops an antiviral. Um, instead of developing the drug itself, buy a company that has already developed the drug that we consider to be an important part of the innovation process.
Barak Richman: Um, so. Characterizing this as a big company buying its way to the top, I think is really misleading. We actually want, in some circumstances, large companies to buy small companies because it often means that the small company’s product makes it to the marketplace. Um, but what we don’t want, uh, are acquisitions, that stifle competition, that’s a much more precise way of describing what this action is trying to.
Bob: There are those who say that this acquisition definitely reminds them of Facebook’s acquisitions of Instagram and WhatsApp. Does it remind you of that?
Barak Richman: You know, it, it, it does not in a lot of ways. And in many ways I find this acquisition more troublesome, um, or another way to put it. I, I think I like the FTCs case on the, Within acquisition. I like it more. Then the, then their case against Facebook’s acquisition for Instagram. When Facebook was when Facebook purchased Instagram, it had a terrific platform on desktops that it was trying to transition to mobile devices, and it was having trouble doing that. Um, and when it purchased Instagram, it was an effort really to merge this mobile foundation, mobile platform with its desktop platform. Now the criticism the FTC has made is that, well, Facebook was otherwise going to develop its own mobile platform itself. And that would’ve meant there would be lots of competition and that’s possible. We really don’t know what the alternative universe would’ve looked like if Facebook had not purchased Instagram, but in many ways, the justification behind Facebook purchasing Instagram is a solid justification.. Here’s a good company that’s trying to expand. Um, its its presence into an adjacent market. And instead of building the capacity, it bought a capacity and it built upon that new platform.
This case with Within, you already see Facebook developing virtual reality products. In fact, actually in many ways, it’s already the leader. And it’s a nascent market. It’s a market where lots of other companies might be able to tap in or collaborate with within. you could imagine within developing its own platform. You see much more horizontal overlap between what Facebook offers and what Within offers than what I think, what you saw between Facebook and Instagram. And you also see fewer synergies. You see that it’s hard to imagine how Facebook could really transform Within.. it’s a lot easier to imagine how Facebook would just kind of incorporate within, into the Facebook world and leave consumers with fewer choices.
Bob: Another point, the FTC makes is this, this is more subtle, but the, the mere possibility of Facebook’s entrance, and this is specifically in the virtual reality fitness area, the possibility of its entrance influences competition. And I’ve heard this before. Uh, I VC’s, I’m told will often ask startup founders questions, like, okay, I like your idea, but why wouldn’t Amazon just crush you? Is this something that the FTC can deal with with antitrust law?
Barak Richman: antitrust? It’s a really good question. In many ways, it is the economic policy question. Um, because so much of, you know, you’re right. So much of our innovation economy. So much of Silicon valley is about small companies producing ideas and then selling them to one of the big four or big five platform companies. And there are enormously large, very very profound economic questions over whether that’s a good thing or a bad thing, whether these large companies are buying companies and producing value or whether they’re buying companies and stifling value.
Barak Richman: Look, I think that, the answer to that question has to be a nuanced answer. Some acquisitions are really essential. Some markets would not develop were it not for the support of the large platform companies, but I think it’s also undeniable that some markets are swamped because the large companies either purchase them or kill them.
Barak Richman: So I think that this is an important question. I don’t think that a single decision or single action, a single lawsuit brought by the FTC is going to meaningfully change that innovation ecosystem. But I do think that, on the much more micro level, it is important to consider what the alternative world would look like. What would happen if Within is purchased by Facebook — What would happen if within is not purchased by Facebook? It’s really important to play those scenarios out in a meaningful way, not in a silly way. And to think about what the long term consequence of the economy are.
Bob: And do you have a hunch as to which way the Within acquisition might go?
Barak Richman: You mean as far as the outcome of the case?
Barak Richman: You know, I’m gonna say, I’ll, I’ll give you two predictions for the price of one. I will say that Facebook will defeat the challenge that the FTC has brought on it for its acquisitions, uh, of both Instagram and WhatsApp, but it will in some meaningful way lose that.
Barak Richman: Uh, its ch um, uh, its case against the FTC UN within. I, I think that. Um, first of all, bringing a case at the time of acquisition and not a retrospective one is a much stronger case. And I also think there might be enough concern about this new market, um, and there’s enough data in the complaint to suggest that there’s enough horizontal overlap that means the loss of not just prospective competition, but even the loss of competition right now …where I think it’s a solid case. And I’m gonna say that. I think that if the acquisition isn’t stopped by the FTC, it will be meaningfully altered
Bob: Barack Richman from Duke University. Thank you very much for being here.
Barak Richman: Thanks so much for having me.