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Antitrust Enforcers Enter the Metaverse

Posted  March 17, 2022

By Grant Petrosyan

As the metaverse explodes into public consciousness, antitrust enforcers are donning the necessary headsets.

The metaverse is a 3D virtual world where people can engage in a wide range of activities remotely, including meeting and interacting with others, playing games, shopping, holding meetings and conferences, and numerous other social, educational, and professional activities. More and more tech entrepreneurs, Fortune 500 companies, law firms, and celebrities are joining it each day.

Antitrust enforcers are joining this exodus into the metaverse and considering how to protect competition in this new world. Here is our analysis of some of the main antitrust issues raised by the metaverse that government regulators are going to have to confront.

AR/VR Headsets

We’ll begin our analysis at the entry point. To access the metaverse, individuals need to use augmented reality (“AR”) or virtual reality (“VR”) headsets. While certain aspects of the metaverse are available via smartphones and computers, individuals will need to upgrade their hardware to get the full experience).

The market for AR/VR headsets has already become concentrated. The leading company in this space is Oculus, which was acquired by Facebook—now known as Meta Platforms, Inc. (“Meta”)—for $2 billion in 2014. It has been reported that “Oculus captured a record 75% share of global [Extended Reality] shipments in Q1 2021 as compared to 34% in Q1 2020, thanks to the continued success of the Quest 2.” The other leading manufacturers of AR/VR headsets had nominal market shares compared to Oculus. DPVR came in second with 6% and Sony ranked third with 5%. It remains to be seen whether the competition in this market will grow in the coming years.

The Federal Trade Commission (“FTC”) and multiple states are already investigating Meta’s Oculus for potential anticompetitive practices. According to news reports, state and federal antitrust enforcers have been scrutinizing how Meta may have used its market power in the VR space to stifle competition. Reportedly, the antitrust enforcers are “also interested in how the company subsidizes the price of its Quest 2 VR headset to push it on consumers and box out the competition.”

Killer Acquisitions

In recent years, the term “killer acquisition” has gained popularity among antitrust circles. “Killer acquisitions” refer to acquisitions by large companies of innovative, nascent competitors solely (or primarily) to discontinue the competitors’ innovation projects and preempt future competition. But for the “killer acquisition,” the nascent competitor would increase competition and, thus, threaten to reduce the market share and profitability of the larger company.

As we have previously reported here and here, the FTC has filed a lawsuit against Meta, accusing the company of illegally maintaining a monopoly over personal social networking. The Commission’s complaint includes allegations that Meta used its acquisitions of Instagram in 2012 and WhatsApp in 2014 to maintain its monopoly position.

There are now concerns that Meta may be employing the same tactics in the metaverse. In addition to its acquisition of Oculus, Meta has purchased a number of other metaverse-related companies. One day after changing its name from Facebook to Meta, the company announced that it is acquiring Within, which creates products, content, software and tools for virtual and augmented reality. Within’s flagship product—Supernatural—is an immersive VR fitness service. The FTC has already initiated an investigation of Meta’s $400 million acquisition of Within.

Within is not the only metaverse-related company that Meta has set its eyes on. In April 2021, Meta acquired Downpour Interactive, a virtual reality game developer. In June 2021, Meta acquired Unit 2 Games, which is known for Crayta, the collaborative game creation platform, and is integrating Crayta’s tools into Facebook Gaming’s cloud. In the same month, Meta also acquired BigBox VR, which is a startup company focused on online VR multiplayer games. In prior years, Meta also acquired several other VR game developers including Beat Games in November 2019, Sanzaru Games in February 2020, and Ready at Dawn in June 2020.

Naturally, these acquisitions by Meta raise antitrust concerns as they resemble the company’s earlier acquisitions of Instagram and WhatsApp, which helped cement its position as the dominant social media company. As FTC Commissioner Rebecca Slaughter has stated, “I think of serial acquisitions as a Pac-Man strategy. Each individual merger, viewed independently, may not seem to have significant impact. But the collective impact of hundreds of smaller acquisitions can lead to a monopolistic behemoth.”

AR/VR App Stores

Similar to Apple’s App Store and Google’s Play Store, there are AR/VR app stores where developers can offer their apps. For instance, Meta’s Oculus operates an AR/VR app store. Similar to other operators of app stores, Meta charges a 30% fee of any purchases made in the apps. As we have seen, there are significant anticompetitive issues that may potentially arise.

For example, in the well-known case between Epic Games and Apple, Epic Games specifically challenged Apple’s 30% commission as well as restrictions by which Apple prohibited other methods of payment for in-app purchases other than the one offered by its App Store. As this blog has previously discussed, the court rejected Apple’s position that its 30% commission is a competitive rate and found Apple has provided no evidence that the rate it charges bears any quantifiable relation to the services provided,” 30% was “incredibly profitable,” and “there appear[] to be no market forces to . . . motivate change.”

What’s Ahead?

The issues discussed above are just some of the potential antitrust concerns related to the emergence and growing popularity of the metaverse. Federal and state antitrust regulators will likely not turn a blind eye to any anticompetitive conduct. Large technology companies will likely face antitrust scrutiny regarding their conduct in the metaverse. In fact, in its Amended Complaint, the FTC noted that Meta’s anticompetitive practices is “likely” to continue whenever the company faces competition from new technologies and cited the “metaverse” as an example.

Across the pond, competition regulators are also closely following this space. Margrethe Vestager, the former European Commissioner for Competition and currently the Executive Vice President of the European Commission for a Europe Fit for the Digital Age, recently stated, “The metaverse will present new markets and a range of different businesses. There will be a marketplace where someone may have a dominant position. Things are happening that we need to be able to follow.”

Written by Grant Petrosyan

Edited by Gary J. Malone