WASHINGTON — Early in her tenure as chair of the Federal Trade Commission, Lina Khan declared that she would rein in the power of the biggest tech companies in a dramatically new way.
“We’re trying to look ahead, anticipate problems and take quick action,” Ms. Khan said in an interview last month. He promised to focus on “next-generation technologies” and not just areas where the tech giants were already well established.
This week, Ms Khan took her first step towards stopping the tech monopolies of the future when she sued to block a small acquisition by Meta, the company formerly known as Facebook, of the virtual reality fitness start-up Within. The deal was significant for Meta’s development of the so-called metaverse, which is a nascent technology far from the mainstream.
In doing so, Ms. Khan changed decades of antitrust standards, which could lead to a wholesale change in the way Washington enforces competition on American businesses. At the heart of the FTC’s suit is the idea that regulators can enforce antitrust law without waiting for a market to mature to the point where it’s clear which companies have the most power. The FTC said this early action was justified because the Meta deal would likely eliminate competition in the young VR market.
Since the late 1970s, most federal challenges to mergers have been in large, well-established markets and are aimed at avoiding clear-cut monopolies. Regulators have primarily flagged purchases of new companies by tech giants, such as Google’s 2006 deal to buy YouTube and Facebook’s 2012 acquisition of Instagram, because those markets were still emerging.
As a result, Ms Khan faces an uphill climb. Regulators have been reluctant to try to stop corporate mergers on the theory that competition and consumers will be harmed in the future. The federal government lost at least two cases that used this strategy in the past decade, including an attempt to block a $1.9 billion merger in 2015 between X-ray sterilization providers that the FTC had predicted would harm competition future in regional markets.
The FTC’s lawsuit against Meta in the nascent virtual reality market is a “deliberately experimental case that seeks to push the boundaries of merger enforcement,” said William Kovacic, the agency’s former chairman. “These cases are certainly more difficult to win.”
The FTC’s action immediately caused an uproar in antitrust circles and the technology industry. Silicon Valley tech executives said moving to block a deal in an embryonic area of technology could stifle innovation and scare technologists from making bold leaps into new areas.
“Regulators predicting future markets is a very, very dangerous precedent and position,” said Aaron Levie, chief executive of cloud storage company Box. He warned that venture capitalists and entrepreneurs would be wary of entering new markets if regulators cut off the ability of companies like Meta to buy new businesses.
Adam Kovacevich, president of the Chamber of Progress trade group, which represents Meta, Amazon and Alphabet, also said the lawsuit would have a chilling effect on innovation.
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“This is such an extreme and unfounded reaction to a small settlement that many tech industry leaders are already worried about what an FTC win would mean for startups,” he said.
For Ms. Khan, winning the lawsuit may be less of a priority than proving it’s possible to file a technology deal while it’s still early. He has said regulators have been too cautious in the past to intervene in mergers for fear of damaging innovation, allowing a wave of deals between tech giants and startups that eventually cemented their dominance.
“What we can see is that inaction after inaction can have serious costs,” he said in an interview with The New York Times and CNBC in January. “And that’s what we’re really trying to reverse.”
Ms. Khan declined interview requests for this article, and the FTC declined to comment Thursday.
Meta said the FTC was applying antitrust law incorrectly. The lawsuit focuses on how the merger with Within would eliminate competition, but Meta said the agency was ignoring the large number of companies that also had health and fitness apps.
“The FTC has no answer to the most basic question: How might Meta’s acquisition of a single fitness app hurt competition in a dynamic space with many existing and future players?” Nikhil Shanbhag, vice president and associate general counsel at Meta, wrote in a blog post.
The company added that it had not decided whether to contest the lawsuit, which was filed Wednesday in the U.S. District Court for the Northern District of California.
The FTC accused Meta of building a virtual reality “empire,” starting in 2014 with the purchase of Oculus, the maker of the Quest virtual reality headset. Since then, Meta has acquired about 10 VR app makers, including the creator of a Viking combat game, Asgard’s Wrath, and several first-person shooters and sports.
By buying Within and its virtual reality fitness app Supernatural, the FTC said, Meta would not create its own app to compete and would scare away potential rivals from trying to create alternative apps. That would make it harder for competition and consumers, the agency said.
“This acquisition has a reasonable likelihood of eliminating both present and future competition,” according to the lawsuit. “And Meta would be one step closer to his ultimate goal of owning the entire ‘Metaverse’.”
Rebecca Haw Allensworth, a professor of antitrust law at Vanderbilt University, said the FTC’s arguments will face tough scrutiny because Meta and Within did not compete with each other and because the virtual reality market was nascent.
“The way merger analysis has been for at least 40 years is about what kind of head-to-head competition does that merger take out of the picture,” he said.
It will now be up to the agency to convince a judge that its predictions about the metaverse and the purchase of Meta would harm competition.
“The burden is on the FTC to show, among other things, a reasonable likelihood that Meta would have entered the VR-focused fitness app market, absent its acquisition of Within,” said Diana Moss, president of the American Antitrust Institute.
If the court dismisses the case, Ms. Khan may have set a precedent that would make it difficult to pursue nascent competition cases, antitrust experts warned. This could then encourage tech giants to move into new lines of business.
“This is a precedent system that goes both ways, whether you win or lose, and it sends a signal to the market,” said Ms. Allensworth.
The FTC is reviewing other tech deals, including Microsoft’s $70 billion acquisition of gaming company Activision and Amazon’s $3.9 billion merger with One Medical, a national chain of primary care clinics primary In addition, the agency has been investigating Amazon over claims of monopoly abuse in its third-party seller marketplace.
Ms. Khan appears set for lengthy legal battles with the tech giants, even if the cases don’t end up going the FTC’s way.
In his previous interview with The Times and CNBC, he said: “Even if it’s not a slam-dunk case, even if there’s a risk that you can lose, there can be huge benefits in taking that risk.” .