Virtual Reality and the Relevant-Market Fallacy

The relevant-market fallacy is defining that relevant market so narrowly that it makes a company look more dominant than it really is.

Photo Credit: Getty

Facebook’s parent company, Meta, is at a crossroads. Its main social-media platform is declining under heavy competition and faces twin federal and state antitrust lawsuits. Now, Meta’s pivot to the virtual-reality-centered Metaverse is facing its own problem. The Federal Trade Commission (FTC) is seeking to block Meta’s acquisition of the virtual reality (VR) software company Within Unlimited. Both of Meta’s legal obstacles share a common theme: the relevant-market fallacy.

In competition policy, it is not enough to say that a company has a monopoly. One must ask: a monopoly over what? Defining a company’s relevant market is a core question in every antitrust case. The relevant-market fallacy is defining that relevant market so narrowly that it makes a company look more dominant than it really is.

Any market is a monopoly if you define it narrowly enough. Antitrust enforcers have an incentive to push market definitions in this direction as far as they think they can get away with. It makes their case look stronger, even if that strength is only semantic.

Meta’s earlier antitrust lawsuits, which are still in the discovery phase, say that Facebook monopolizes the “personal social network services” market. The FTC and state attorneys general’s complaints define this market in a way that conveniently excludes Facebook’s biggest competitors, such as TikTok, Twitter, and YouTube. This credulity-straining definition got the first complaint thrown out by a judge. The revised complaint left this definition mostly unchanged and will likely also face an uphill battle.

The FTC’s new move to block the Meta/Within Unlimited acquisition also relies on the relevant-market fallacy. The key product in the deal is Within Unlimited’s VR workout app, Supernatural. The FTC argues that the deal would give Meta illegal market power in the “virtual reality dedicated fitness app market.” Now that’s a narrow market!

Most fitness is neither VR- nor app-based. Home fitness equipment is a $4 billion industry. Amazon just announced that it will begin selling the popular exercise-bike platform, Peloton, which offers subscriptions to live classes and other video products along with its bikes. VR fitness apps also compete against free jogs around the neighborhood, free workout videos on YouTube, gym memberships, and local sports leagues.

The FTC complaint also forces the terms “dedicated” and “fitness” into an awkward embrace. Some VR apps are dedicated to fitness. Other apps are just incidentally about fitness. Incidental fitness apps include “rhythm and active sports games” like Beat Saber and the boxing simulator Thrill of the Fight. It just so happens that the Supernatural app’s two central workouts also involve rhythm and boxing.

There are many more numerous other apps that fit this category. Nintendo paved the way for fitness gaming when it released Wii Fit in 2007, which sold over 22 million units. Its more recent Ring Fit Adventure has sold over 14 million copies. There are also fitness apps available on iOS and Android that are marketed with both free and subscription-based options. The Virtual Reality Institute of Health and Exercise says that many of these incidental rhythm and sports games burn as many calories a minute as playing tennis.

VR products by Meta, Sony, Valve, HTC, Microsoft, and Steam can substitute for traditional fitness subscriptions, however, there’s still a long way to go, as virtual reality remains a nascent technology. For comparison, the size of the total VR market, of which fitness is only a small part, is estimated at $12 billion. The brick-and-mortar fitness- and gym-club industry alone is valued at over $35 billion.

The FTC is also revising its merger and acquisition guidelines. Its attempt to block the Meta/Within Unlimited deal might be signaling FTC chair Lina Khan’s intention to revive a discredited doctrine called incipiency — basically, this is the antitrust equivalent of Precrime from the dystopian film Minority Report.

Read the full article at National Review.