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The Federal Trade Commission (FTC), alongside multiple state attorney generals (AG), are investigating Meta’s virtual reality (VR) unit, Oculus, for potentially “using its market power in the VR space to stifle competition,” according to a recent report by Bloomberg. The VR market is a relatively young market with rapidly changing conditions and multiple competitors trying to establish their name. First-mover advantages of innovators can erroneously be perceived as evidence of “market tipping,” whereas, in fact, we see market formation. Prematurely intervening in this market would penalize those who achieve early success, deterring future investment and innovation, ultimately leaving consumers worse off.
The regulators are scrutinizing Meta’s sales strategy and how the prices of their devices undercut competitors, and the potential discrimination against third-party apps competing against Oculus’ own software. This is a similar line of scrutiny to the one faced by companies such as Apple or Google, where they have been accused of stifling online innovation by leveraging their access to app store information to build competing apps or integrating the functions of popular third-party apps into their operating system, a practice known as “Sherlocking.” Another similar point of scrutiny is Oculus’ alleged self-preferencing practices, where app store moderators supposedly use their moderating and ranking power to favor their own apps to the detriment of competing third-party apps.
While most of these actions are touted as anticompetitive, they are signs of a competitive and dynamic market. Oculus’ strategy of selling the device at a low price and sacrificing profitability to have a broader market appeal is common in the gaming industry. During the legal proceedings between Epic Games and Apple, Microsoft admitted they sell their Xbox consoles at a loss to have a bigger adoption rate, placing a higher reliance on revenues from their app store and in-studio games. As Lori Wright, the company head of business development, said herself: “The console gaming business is traditionally a hardware subsidy model. Game companies sell consoles at a loss to attract new customers. Profits are generated in game sales and online service subscriptions.”
Looking into the Oculus Store’s “most popular” rankings, the claim that Oculus’ role as both a developer and distributor undermines the success of third-party apps does not seem to materialize. Applications such as Rec Room or VR Chat, direct competitors to Meta’s Horizon Worlds, continuously appear among the platform’s most downloaded applications. The alleged harms due to “Sherlocking” do not seem to be reflected as well. Virtual Desktop, an application that allows Oculus users to connect their Quest devices to their personal computers, remains one of the store’s top-selling apps despite users having access to the Oculus Link function as a feature of the Quest’s operating system. Instead of stifling competition, “Sherlocking” benefits consumers by broadening their choices, having access to paid and unpaid features and applications, pressuring developers to provide a higher quality service that incentivizes users to pay a premium.
The size and maturity of the market in question should also be considered. It is important to note that the VR market is relatively young, particularly the VR headset market. Most of the current market-leading companies in the space were established in the early 2010s, with most of their devices releasing halfway through the decade. In a 2018 survey by Jabil Inc, over 54 percent of companies surveyed at the time stated that they believed it would take between 4 and 10 years for AR/VR technology to become mainstream, and the other 29 percent believed it would take between 1 and 3 years. A recent survey by YouGov highlighted that the popularity of the technology, while still growing, remains low. Amongst Millennials and Gen Z population – the technology’s target demographic—only 21 percent and 18 percent of the respondents manifested an interest in acquiring a headset, respectively. The same report highlights that user demand concentrates in the $200 to $400 price range, a price range only currently covered by Meta’s Quest 2. Thus, it is expected that competitors will follow suit with a similar sales strategy. These are all indicators that this market has yet to mature and is ripe for disruption and innovation.
Policymakers should not rush to intervene in a nascent market that will present rapidly changing conditions. While Meta benefits from being the first mover in the relatively affordable, standalone VR headset market with its Quest 2, there is little reason to believe that other competitors will not replicate their approach.
By intervening prematurely according to a logic borrowing from the precautionary principle, policymakers are introducing prohibitive regulatory risks, which is likely to deter investment and innovation, as companies will be reluctant to invest in a market in which success is penalized. As Joseph Schumpeter argued, “perfectly free entry into a new field may make it impossible to enter at all.” In other words, to erase all entrepreneurial rents in the AR/VR field because this market has allegedly already “tipped” destroys the very entrepreneurial incentives to innovate and enter that market in the first place. Such chilling effect will ultimately harm consumers who will have reduced access to quality goods and innovative technologies, ultimately hampering the market and depriving consumers of the multiple benefits of VR technology.