Saturday, February 4, 2023

Meta-Within court ruling based on issues unrelated to FTC's Microsoft-ActivisionBlizzard case, but detrimental to FTC's and Sony's lawyers' credibility

Now that the public redacted version (PDF) of Judge Edward J. Davila's order denying the Federal Trade Commission's motion for a preliminary injunction against Meta's acquisition of virtual reality (VR) software and content maker Within has been released, it's easy to tell what bearing has--and does not have--on the FTC's politically motivated efforts to torpedo Microsoft's purchase of Activision Blizzard.

The issues are not merely distinguishable, but downright disparate:

  • The first step in antitrust is always market definition. About half of Judge Davila's order is dedicated to that question, and I agree with his adoption of the FTC's proposed market definition of "VR dedicated fitness apps" in terms of VR apps that are "designed so users can exercise through a structured physical workout in a virtual setting anywhere they choose to use their highly portable VR headset." Meta's counterproposal was ridiculously overbroad--it would even have included home-fitness equipment like Peloton.

    By contrast, the FTC uses some market (excluding Nintendo, and focusing on a payment structure--subscription--rather than products) and product category ("AAA games") definitions that I immediately called "gerrymandered" (as did Activision Blizzard two weeks later). Once the FTC pursues a PI against Microsoft-ActivisionBlizzard, it will have a hard time persuading a federal judge of its market and product category definitions.

  • Based on the FTC's market definition, Judge Davila of the United States District Court for the Northern District of California "Court finds that—regardless of the metrics used—every one of these ratios reflect a market concentration well above what the Merger Guidelines have designated as 'highly concentrated.'"

    That is not going to happen with respect to the extremely fragmented games business. Brazil's CADE looked at the Herfindahl-Hirschman Index (HHI) and rightly found no issues of market concentration.

  • Meta has a 90% market share in VR headsets; Microsoft is only the #3 videogame console maker, even after the Activision Blizzard deal its market share in games is closer to 10% than 90%, and Microsoft's Game Pass has a very low market share in the overall game distribution market (even if one adopted the FTC's gerrymandered market definition, it wouldn't be anywhere near Meta's 90%). It was leaked that even Sony is not worried about Xbox Game Pass.

  • The key question that proved fatal to the FTC's PI motion in the Meta-Within case was about whether Meta would have entered that particular market ("VR dedicated fitness apps") anyway, and would have had to make its own products if it can't just buy Within. There is nothing comparable in connection with Microsoft-ActivisionBlizzard.

I think the FTC's Microsoft-ActivisionBlizzard case is even weaker than the Meta-Within case, but the only common element is that the FTC brings weak cases against Big Tech that are detrimental to its reputation. And, maybe, that the FTC likes to make arguments about "nascent" markets, but that is a non-issue in Microsoft-ActivisionBlizzard once the FTC's market definition of "Multi-Game Content Library Subscription Services" is rejected. In that regard, the closest case I know (and immediately brought up when I commented on the FTC's complaint) is Pistacchio v. Apple, where a different judge of the same district court rejected the "iOS Subscription-Based Mobile Gaming Services Market" and dismissed a class-action complaint. I'm surprised that I appear to be the only commentator so far to have connected those dots, while so many people talk about Meta-Within.

The real question is now one that I've raised before: when will the FTC get tired of losing?

It is so funny that Sony's lawyer in both cases (Meta-Within and Activision-Blizzard) encourages the FTC to keep on losing.

After the basic outcome of the Meta-Within case became known, Bloomberg Law quoted Bruce Hoffmann of Cleary Gottlieb--a former FTC official who is actually representing Sony as a third-party complainer in both cases (see this post on a recent Sony filing)--as follows:

"The FTC has a long history of not being deterred by major litigation losses," he said. "If you look at major issues like the state action doctrine where the FTC has prevailed, it had a lot of losses and eventually won."

Of course he will say that. The FTC is free to keep listening to him. But it's a recipe to keep on losing.