The FTC’s Challenge To Meta’s Acquisition Of A VR Fitness Company Hurts Innovation And Competition

Earlier this week, Lina Khan’s FTC demonstrated just how little they understand about innovation and competition. In court, the agency argued that Meta’s acquisition of Within Unlimited, the maker of virtual reality fitness software, would create a monopoly by eliminating competition for virtual reality fitness applications. In the FTC’s words the acquisition may “yield multiple harmful outcomes, including less innovation, lower quality, higher prices, less incentive to attract and keep employees, and less consumer choice.” Only bureaucrats who have never worked in or invested in a startup could come to such a conclusion.

The truth is, this acquisition is likely to prompt more competition and encourage more entrants into the space. Simply stated, building a company that people want to acquire is a major motivator for investors and entrepreneurs, yet somehow that fact is one that central planning bureaucrats seem to not understand.

Within was founded in 2015 when they raised a Seed round, then in 2016 they raised a $12.6 million Series A round and in 2017 raised a $40 million Series B round. That funding allowed the company to build a world-class team, develop a product people loved, and build a customer base. Unlike government’s so-called “investments,” those real investments came at a cost. Investors expect a return through a liquidity event, something that can come about in one of two ways, going public or being acquired.

Lina Khan’s war on Big Tech in general and her team’s specific actions in this case — if successful — will close one of those paths by making it difficult for startups to exit through acquisition. The FTC pretends to be concerned with future competitiveness. Yet, it is their blocking of this acquisition that would be the single biggest barrier to competition. With fewer acquisition opportunities, certain types of startups may become unfundable, and we will see less innovation and fewer market participants.

Acquisition creates incentives. It is an outcome that most founders expect and frequently aim for. According to Silicon Valley Bank’s 2020 Global Startup Outlook “While headlines both trumpet and criticize recent IPOs, the fact is most entrepreneurs never expect to reach a public market exit (except in China, where an IPO is typically the top goal).”

The FTC’s complaint attempts to paint acquisitions as a bad thing when they are in fact great for innovation. Beyond the stated incentives above, the employees of acquired companies often go on to found new innovative companies (even if the acquisition did not make them wealthy — their experience is valued by the market), and if the acquisition was financially lucrative for investors, those funds are reinvested in new companies.

Consumers also benefit from acquisitions. Meta’s purchase of Within will help that team make their product better, as Within CEO Chris Milk and Head of Fitness Leanne Pedante wrote at the time of the acquisition announcement, “We are excited because our partnership with Meta means we will have more resources to expand and bring you even more music, more creative ways to workout, more features and more social experiences for VR. And of course, we will still be launching new workouts every single day.”

Most importantly, acquisitions of startups prompts more innovators to enter a space. So in the case of Within, does Meta’s acquisition mean that competitors and new entrants into the VR fitness space will be scared off? Certainly not. But don’t tell the FTC that as they do not seem to understand how business works. They write, “The Acquisition would eliminate [the] incentive for market participants to compete, again in contravention of the antitrust laws.”

The truth is the exact opposite, if Meta is poised to take a leading position by acquiring a startup, other startups and investors will recognize that Meta’s competitors (in tech, fitness and media, three massive industries) will need to either build or buy their own solutions. That’s the exact type of marketplace an entrepreneur will want to enter and compete in. If allowed to proceed, Meta’s early acquisition of Within will fuel competition, not stifle it as Meta’s competitors will need to get into the game with similar tech.

The FTC needs to understand that an acquisition is a positive, competition inducing signal to investors because it means there is a marketplace for the product an entrepreneur creates — it is simply the farthest thing from anti-competitive. The Within acquisition will encourage more innovators to enter the space in the hopes of an exit through acquisition and the fact that acquisitions are possible (not blocked by the FTC) means the funding will be there for them. The deal is the exact type that should be allowed to proceed unfettered. If it isn’t allowed to proceed, future competitiveness is likely to decrease, not because of M&A but instead because of Lina Khan and her anti-innovation bureaucrats.