January puts fitness at the forefront of many people’s minds, as they make (and often abandon) New Year’s resolutions to get in shape. This plan could include anything from gym memberships and home workouts to any combination of fitness activities. However, a recent lawsuit by the Federal Trade Commission (FTC) suggests a far more rigid fitness industry than that broad variety. In the agency’s complaint against Meta, the FTC argues for such a minute market definition that it completely ignores actual consumer behavior. In real life, it’s easy to observe that consumers are able to substitute different types of fitness tools beyond virtual reality.
The FTC’s complaint against Meta alleges that the company violated Section 7 of the Clayton Act, which states that mergers and acquisitions are unlawful if their effect “may be substantially to lessen competition, or to tend to create a monopoly.” The complaint applies to Meta’s proposed acquisition of the company Within Unlimited, which makes the virtual reality fitness app Supernatural.
Supernatural is one of many virtual reality fitness-based games. One of Supernatural’s rivals is a brand called Beat Saber, which Meta already owns. However, even with Meta’s venture into virtual reality and its ownership of one fitness game, this represents a small portion of virtual reality games or fitness-based games in general.
Perhaps that’s why the FTC has taken a different approach. Rather than identifying the relevant markets as virtual reality games or fitness, the agency has decided to restrict the definition to virtual reality fitness games or games with a fitness benefit. This market definition ignores both the competition that exists between gaming consoles and between different fitness services.
The Oculus headset, which Meta owns, is compatible with both a PC and an Xbox One. Consumers have additional options for other virtual reality headsets compatible with alternative gaming consoles, such as Playstation or even mobile devices. Compatibility with gaming consoles creates a synergy that expands competition beyond virtual reality games and includes all the games and entertainment offered on compatible devices.
The console market isn’t limited to one system per gamer. In fact, a plurality of gamers reported owning more than one system. The Oculus isn’t only striving to capture attention away from other PC and Xbox entertainment, but potentially from other consoles, such as Wii or Nintendo, that offer their own fitness game alternatives.
In the fitness realm, virtual reality competes with industry classics such as gym memberships, fitness classes and even at-home workouts. According to an article in the International Journal of Environmental Research and Public Health, the use of a fitness app doesn’t change the behavior or likelihood to maintain a membership at a traditional fitness center. Fitness services are not either-or — consumers can utilize different offerings simultaneously. The fact that a consumer uses Oculus’s virtual reality workouts doesn’t mean Meta isn’t still competing to draw attention away from fitness substitutes.
This feature of substitutability is essential to market definition. The FTC itself says, “In the most general terms, a product market in an antitrust investigation consists of all goods or services that buyers view as close substitutes.” Based on this understanding, the market definition for the products Beat Saber and Supernatural offer should at least be expanded to all fitness games, if not even further by including at-home fitness services such as Peloton or even traditional fitness centers.
By narrowing the market definition so severely, the FTC has effectively made it easier to suggest an increased market concentration. The standard measure of market concentration is the Herfindahl–Hirschman Index. This index is calculated by summing the square of the market shares of relevant companies. Historically, if the HHI increases by more than 200 points as a result of a merger, it could suggest a significant increase in market concentration and warrant the attention of agencies, like the FTC.
However, this index is only a tool and will only work if the market is logically defined. Reducing the number of competitors used in the index will dramatically increase the appearance of concentration. While a clear motive would be challenging to prove, narrowing the relevant market to virtual reality fitness games will clearly aid the FTC in demonstrating increased competition.
Enforcing antitrust is well within the purview of the FTC. However, the agency should do so in a fair manner, part of which includes delineating reasonable definitions of relevant markets. The current focus on virtual reality fitness games not only ignores competition between consoles and competition within the fitness sector, but also completely negates how these two spheres interact with each other.