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Meta and FTC face off in court over VR deal

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The case is the first to challenge an FTC consumer tech deal under the chairmanship of Lina Khan — the influential antitrust thinker whom Biden appointed to one of the federal government’s most powerful corporate watchdog posts. What will unfold over the next three weeks will be a key test of his authority to prosecute alleged anti-competitive behavior using aggressive and largely untested legal theories.

Meta has promised to become a leader in the metaverse – hence the renaming of Facebook – and wants to buy Within to expand its VR 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 again seeking to buy out the competition rather than compete on the merits.

In its case, the FTC is focusing on a so-called theory of potential competition, which means that Facebook would have tried to offer its own VR fitness app, but for acquisition. The agency filed a lawsuit in July to block the deal.

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

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

Meta even had a plan, called “Operation Twinkie,” to partner with fitness equipment maker Peloton and create its own virtual reality product, Dennis said.

The FTC, in a separate case, is trying to unwind Meta’s purchases of Instagram and WhatsApp in 2012 and 2014, and the agency said it questions the company’s strategy of buying existing businesses , rather than competing with them. This case was filed under the Trump administration.

Among the witnesses expected to take the stand are Zuckerberg – the founder and chief executive of Meta – and Andrew Bosworth, the company’s chief technology officer, who helped run virtual reality operations. Within the 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 focuses on the company’s alleged intent to monopolize the market for virtual reality fitness apps, a category that excludes pelotons , workout videos and other home exercise options. .

Facebook spokesman Chris Sgro said “we are confident that the evidence will show that our acquisition of Within will benefit people, developers and the VR space, which is experiencing fierce competition.” An FTC spokesperson declined to comment.

Meta argues that it never planned to enter the market on its own. And he challenges the commission’s decision to go after such a narrow market, arguing that the FTC ignores 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,” Facebook attorney Mark Hansen said in his opening statement. “It’s an incredibly competitive space even without Meta’s involvement.”

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

And to the FTC’s point that Facebook planned to compete with Within, Hansen said those plans never made it past discussions with relatively low-level employees.

Inside attorney 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 tone. Ironically, “What’s behind is the only 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 bike used by fitness company SoulCycle, Nike, Peloton, Sony and ByteDance are also expected to testify.

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

Hansen said the founder of Beat Saber opposed these plans, thus killing the project in its infancy. “Meta wasn’t going to make a VR fitness app.”

Rade Stojsavljevic of Meta, the director of the company’s in-house game studio, was the first witness called by the FTC. FTC attorney Tim Singer emphasized Meta’s level of seriousness in developing a partnership with Peloton. Although the company evaluated 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 ongoing legal process is simply to suspend the deal while the FTC pursues its challenge in its internal administrative court. If the FTC loses the first round, it can still take its case to administrative court to permanently block the deal.

If the FTC is successful, beyond blocking the Within deal, it could also seek a ruling that makes it more onerous for Meta and Zuckerberg to buy businesses in the future.

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

The seven-day trial in Federal Court will span the next three weeks and is currently scheduled to end on December 20.

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