A federal judge denied the Federal Trade Commission’s request for a preliminary injunction against Meta to stop their $400 million acquisition of Within, a virtual reality startup that developed Supernatural, a VR fitness game, reports The New York Times.

In a sealed order issued Tuesday, Judge Edward J. Davila of the U.S. District Court for the Northern District of California rejected the FTC’s claim, allowing the Meta deal to move forward. However, to give the FTC time to decide whether or not to appeal, the judge imposed a restraining order to prevent closure of the deal through February 7, The New York Times says. This will give the FTC time to decide if they want to appeal the ruling.

History of FTC’s attempt to block the deal

The proposed acquisition of the virtual reality startup was initially announced in October 2021, and Meta has been fighting the FTC ever since. In July 2022, the FTC filed a complaint to block the acquisition of Within, alleging it was an illegal attempt to expand Meta’s virtual reality empire. In their complaint, the FTC said that Meta already owns a virtual reality fitness app, and buying Within was allegedly an illegal acquisition designed to purchase a competitor.

“Instead of competing on the merits, Meta is trying to buy its way to the top,” said FTC Bureau of Competition Deputy Director John Newman in a July 27, 2022 news release. “Meta already owns a best-selling virtual reality fitness app, and it had the capabilities to compete even more closely with Within’s popular Supernatural app. But Meta chose to buy market position instead of earning it on the merits.  This is an illegal acquisition, and we will pursue all appropriate relief.”

Postponing the close of the virtual reality company’s acquisition until August 1, 2022, Meta quickly argued that the FTC is wrong about the facts and the law. Nikhil Shanbhag, vice president and general counsel of competition and regulatory for Meta, said this about the FTC’s case:

“The FTC’s case is based on ideology and speculation, not evidence. The idea that this acquisition would lead to anticompetitive outcomes in a dynamic space with as much entry and growth as online and connected fitness is simply not credible. By attacking this deal in a 3-2 vote, the FTC is sending a chilling message to anyone who wishes to innovate in VR. We are confident that our acquisition of Within will be good for people, developers and the VR space,” wrote Shanbhag.

In October, the FTC amended their complaint, removing the allegation of “likely anticompetitive effects in the VR Fitness App market” and related allegations. Meta argued against that too, saying the amended complaint did not fix the deficiencies of the original complaint.

“The FTC’s fictional market ignores the competitive reality: Facebook competes vigorously with TikTok, iMessage, Twitter, Snapchat, LinkedIn, YouTube, and countless others to help people share, connect, communicate or simply be entertained. The FTC cannot credibly claim Facebook has monopoly power because no such power exists. We continuously innovate and improve our products and services to earn people’s time and attention because we have to in order to compete with rivals like TikTok which recently announced it reached 1 billion monthly active users,” Meta wrote.

Ten days later, Meta filed a motion to dismiss the FTC’s amended complaint.

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Fourth-quarter and full-year 2022 financials

The news that the virtual reality deal might close came the day before Meta announced its quarterly and full-year financial results. Highlights from the report include the following:

• Meta finished the quarter with $32.2 billion in revenue, a 4% decrease year-over-year. For the full year, Meta reported total revenue of $116.6 billion, a 1% decrease over 2021.
• For the fourth quarter, Meta had $6.4 billion in operating income with an operating margin of 20%, compared to operating income of $12.6 billion and an operating margin of 37% in the fourth quarter of 2021.
• For the full year, Meta had $28.9 billion in operating income with an operating margin of 25%, compared to operating income of $46.8 billion and an operating margin of 40% in the fourth quarter of 2021.
• Fourth-quarter net income was $4.7 billion, a 55% decrease year-over-year. Diluted earnings per share were $1.76, a 52% decrease year-over-year.
• Full-year net income was $23.2 billion, a 41% decrease year-over-year. Diluted earnings per share were $8.59, a 38% decrease year-over-year.
• Employee headcount as of December 31, 2022 was 86,482, a 20% increase over 2021. This count includes the 11,000 who will be laid off in 2023. Future headcounts will reflect those layoffs.
• At year end, Facebook had 2.96 billion daily active users, a 2% increase year-over-year.
• In December, Facebook averaged 2.0 billion daily active years, a 4% increase year-over-year.

“Our community continues to grow and I’m pleased with the strong engagement across our apps. Facebook just reached the milestone of 2 billion daily actives,” said Mark Zuckerberg, Meta founder and CEO, in a February 1 news release. “The progress we’re making on our AI discovery engine and Reels are major drivers of this. Beyond this, our management theme for 2023 is the ‘Year of Efficiency’ and we’re focused on becoming a stronger and more nimble organization.”

In the news release Meta also commented on their restructuring.

“During the quarter ended December 31, 2022, we took several measures to pursue greater efficiency and to realign our business and strategic priorities. This includes a facilities consolidation strategy to sublease, early terminate, or abandon several office buildings under operating leases, a layoff of approximately 11,000 of our employees across the FoA and RL segments, and a pivot towards a next generation data center design, including cancellation of multiple data center projects,” said Meta.

Meta stock

Since the financial report was given late Wednesday, Meta stock inched up slightly.

Insider Take

This is a very interesting development. In this case, Meta did not back down, noting the holes in the FTC’s argument. This is a notch in Meta’s virtual reality belt, and a blow to the FTC who has been stepping up their enforcement of antitrust rules and regulations. Based on the fact that the FTC amended its own complaint, removing allegations they couldn’t prove or that were invalid, it seems unlikely that the FTC will file an appeal. It appears as if the tech behemoth has won this round.

Takeaway for subscription companies: We’ll turn to Kenny Rogers’ advice from The Gambleron this one: “You got to know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run.” Meta knew when to hold their cards and, in this case, the FTC needs to know when to walk away.

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