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Konvoy Ventures is a thesis driven venture capital firm focused on the video gaming industry. We invest in infrastructure technology, tools, and platforms.

FTC Scrutiny of Supernatural is Misguided

The FTC’s scrutiny of Meta’s Within acquisition is inconsistent with the FTC’s track record we have seen within gaming

FTC Scrutiny of Supernatural is Misguided

In October 2021, Meta announced their intent to acquire Within, the developer of the top selling VR fitness application, Supernatural. This deal is rumored to be worth more than $400m (The Information). Last week, the Federal Trade Commission (FTC) announced that they will be seeking to block this acquisition in an effort to protect competition. The FTC’s allegations center around three key points (FTC):

  1. Meta has the resources to enter the VR dedicated fitness app through building (vs buying), which would substantially deconcentrate and increase competition in the market.
  2. Meta’s presence as the parent of two of the strongest VR Dedicated Fitness applications discourages competition of new entrants.
  3. Beat Saber and Supernatural are competitors, which has historically been beneficial to users as each has pushed the other to improve their respective feature sets. Consolidation of the top two strongest players under the same parent company reduces this competitive pressure and dampens further innovation.

This week, we will be highlighting tech acquisitions in the Fitness, Health, and Wellness sector by other tech players, Meta’s acquisition activity in the space thus far, and why the FTC’s scrutiny of this acquisition is misguided.

M&A by Tech Companies

Participation of tech giants in the Fitness, Health, and Wellness space has not historically stifled competition or slowed down venture capital funding and consolidation. (HealthcareITNews). Below are examples of where the FTC had no issue with similar acquisitions by Google, Amazon, and gaming in general.

Google: Large acquisitions in the Fitness, Health, and Wellness space have accelerated in recent years. Most notably, Google’s $2.1b acquisition of Fitbit completed in 2021. Fitbit(founded in 2007) was the market pioneer for fitness trackers and, as of early 2021, had amassed over 28m users (Athlete News) and commanded 10% of the global wearables market. Since initial announcement in November 2019, this deal has been under antitrust scrutiny (not anti-competition) due to Fitbit’s data on how users exercise, sleep, and travel. The European Commission approved the deal in late 2020 after the companies promised not to use Fitbit data for ad targeting or restrict access to Android (The Information). The deal is still under active scrutiny in the US due to data privacy concerns, but has not come under FTC scrutiny for anti-competition.

Amazon: Amazon has also actively pursued the health and fitness markets. In addition to internal development (Amazon Care, Amazon Diagnostics), Amazon acquired PillPack for ~$750m in 2018 and has since introduced Amazon Pharmacy so users can fill their prescriptions through Amazon with 2-day shipping (TechCrunch). Amazon also built a wrist-worn health and fitness tracker, a mobile app, and a subscription service called Halo. The wearable monitors standard metrics around physical activity, heart rate, and sleep but also emotional health, stability, posture, mobility, and caloric intake. Additionally, through their VC arm (The Alexa Fund), Amazon has made investments in fitness companies Zwift, Tonal, and Aaptive. None of the above activity from Amazon came under anti-competition scrutiny from the FTC.

Gaming: lastly, large gaming acquisitions by these tech companies have also evaded scrutiny by the FTC. Microsoft (Xbox, Xbox/PC Game Pass, Xbox Games Store), has participated in two of the top five most expensive gaming acquisitions with Activision Blizzard ($68.7b) and ZeniMax Media ($7.5b). These have avoided the anti-competition inquiries of the FTC.

Meta’s VR Gaming and Fitness Activity

An acquisition of Within would not be too dissimilar from Meta’s historical VR and fitness acquisition activity, which is yet another reason why the FTC’s pushback is unprecedented and unwarranted. The month after Meta’s acquisition of Oculus in March 2014, they acquired ProtoGeo, the developer of the mobile motion-tracking app, Moves (Silicon Republic). In September 2019, Meta acquired CTRL-labs, which develops a wristband that translates neuromuscular signals into machine-interpretable commands. While not directly related to fitness, this technology gives Meta and its affiliated studios a technological moat.

In late 2019, Meta kicked off the first of its slew of studio acquisitions with Beat Games. Over the next two years, Meta acquired four more studios - Sanzaru Games (Asgard’s Wrath, an adventure game), Ready at Dawn (Lone Echo, an adventure game), Downpour Interactive (Onward, a tactical shooter game), and BigBox VR (Population: One, a first-person-shooter). A key thing to highlight here is that Meta has acquired studios within the same genre before (both Sanzaru Games and Ready at Dawn develop adventure games and Downpour Interactive and BigBox VR develop shooter games). All of these studios are currently operated independently and did not come under FTC scrutiny (despite each one being dominant in their genre).

More broadly, there has always been healthy competition within gaming; acquisitions of studios that develop games within the same genre have not historically been an issue for the FTC (and it should definitely not start now). For example, Zynga (which was itself acquired this year by Take-Two Interactive for $12.7b) acquired both Gram Games ($250m) and Small Giant (~$1b) in 2018 before adding Peak Games ($1.8b) to its portfolio in 2020, all three of which were strong incumbents in the casual mobile puzzle games space. These acquisitions have not discouraged studios from building games that are competitive to this portfolio.

Like the gaming market, the tech fitness market is similarly competitive and the market includes both incumbents from other areas of fitness (Nike Training Club, Peloton, Apple Fitness+) and new entrants (MyFitnessPal, Strava, Future, JeFit, Whoop, Fitbit).

Our Perspective: The FTC’s scrutiny of Meta’s Within acquisition is inconsistent with the FTC’s track record and view of other acquisitions we have seen within gaming. Ultimately, Within is a studio that is developing games within the Fitness genre. This content is both a small portion of the overall gaming market and of the overall fitness market. It would be a mistake for the FTC to evaluate Within as anti-competitive just because of a limited number of VR fitness apps. The market size is much larger than their current assessment implies (to be frank; this a weak analysis by the FTC at best).

While there is an argument that Supernatural has strong positioning in VR Fitness on the Oculus, we believe that a Meta monopoly over the fitness market on the Oculus store would be due to its position as the operator of the store for their market leading headset, not because of its ownership of two strong studios within the VR genre.

Supernatural does not yet have any presence on any other VR marketplace, however, we do believe that if further antitrust and anti competition legislation passes, Within and Beat Games will have a head start in the VR fitness market. That being said, we do not believe that Meta is best positioned to offer a holistic XR fitness solution given there are other fitness and tech players that could create better experiences for Mixed Reality and Augmented Reality (Peloton, Apple, Google/Fitbit).

In conclusion, we believe that the FTC’s scrutiny of the Within (Supernatural) acquisition is misguided, misinformed, and should be quickly dismissed.