Lina Khan picked an odd target for her first major assault on Big Tech. Will it come back to haunt her?

Thirteen months into her reign, she finally broke out the sharp ax.

In a risky move with potentially far-reaching consequences for the tech industry and Khan’s standing in Washington, the FTC on Wednesday sued Meta to stop its acquisition of Within, a virtual reality company best known for developing the fitness app Supernatural. FTC officials argue Meta’s planned purchase would substantially lessen competition or tend to create a monopoly in the VR fitness app space, a claim that Meta executives dismissed as “based on ideology and speculation, not evidence.”

The lawsuit, Khan’s first case that attempts to stop an acquisition by a tech giant, makes good on her pledge to change perceptions of the FTC as a doormat over the past 15 years—even if it means losing a case or two. Meta, Amazon, Alphabet, and other tech behemoths amassed enormous power during that stretch, often by spending billions to acquire companies with little resistance from the FTC.

“I think what we can see is that inaction after inaction after inaction can have severe costs,” Khan told CNBC and The New York Times in January.  “And that’s what we’re really trying to reverse.”

Khan’s decision to begin her crusade with the Meta-Within acquisition will certainly earn kudos from antitrust advocates. Her choice of Meta as an early target also provides her some leeway, given its history of swallowing up potential rivals Instagram, WhatsApp, and Oculus. (Meta CEO Mark Zuckerberg also infamously wrote in 2008 that “it is better to buy than compete.”)

Still, Khan stands to lose significant political capital if her attack on Meta falls flat—which, after seeing the FTC’s complaint, feels wholly plausible.

From a legal standpoint, the FTC’s case against Meta and Within rests on some strangely unconvincing arguments, feeding a perception that Khan’s FTC is exacting revenge for the company’s past sins.

For example, the FTC claims that the merger would “cause anticompetitive effects by eliminating potential competition.” Yet the augmented and virtual reality ecosystem isn’t anywhere near mature, with Apple, Alphabet, and other companies expected to debut their hardware in the next few years. With those products on the market, developers will have new incentive to create competing fitness apps.

The FTC also makes an odd argument that buying Within would stop Meta from developing its own popular fitness app, Beat Saber. The problem: Beat Saber is a so-called rhythm game that involves striking targets—not a dedicated fitness app. Even the FTC’s lawyers acknowledge this, describing Beat Saber as part of the “incidental fitness category.”

From a political and practical standpoint, the case remains similarly slight.

While the Khan’s campaign inevitably has to begin somewhere, the Meta-Within merger is a peculiar starting point. Meta’s acquisition is relatively small potatoes in the world of Big Tech M&A (reportedly worth $400 million), and there’s no guarantee that the company’s investment in the nascent virtual reality sector will prove profitable. By comparison, Microsoft plans to spend a whopping $68.7 billion to acquire video game developer Activision Blizzard, a move certain to somewhat stunt competition in a very mature market.

The lawsuit also threatens to chill a wide range of acquisitions, given the less-than-ironclad case made against Meta and Within. If a $400 million deal in a largely undeveloped market can’t pass regulatory muster, corporate executives and venture capitalists across multiple industries will surely start howling at their elected representatives. 

Then there’s the basic question of free-market intervention. After several years of forecasts about VR’s imminent arrival in the mainstream, it remains on the tech industry periphery. If Meta, which posted a $2.8 billion quarterly loss Wednesday on its augmented and virtual reality division, wants to blow another $400 million on a still-speculative splurge, do consumers want the federal government nosing in?

The strategy employed by Khan and her team of lawyers might ultimately be proven right. Just as Meta’s acquisition of Instagram for a relative pittance eventually created some monopolistic conditions in the social media space, so might its purchase of Within in the VR realm.

If she’s wrong, Khan at least made clear Wednesday that she’s going down swinging.

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Jacob Carpenter

NEWSWORTHY

A first for everything. Meta posted its first-ever decline in year-over-year quarterly revenue Wednesday, as a broad slowdown in digital ad spending and continued competition from TikTok hit the Facebook and Instagram parent’s bottom line, The Wall Street Journal reported. Meta sales totaled $28.8 billion for the second quarter, a 1% drop from the prior year and barely off analysts’ revenue estimates of $28.9 billion. The company’s stock price fell 6% in mid-day trading Thursday after executives issued a worse-than-expected outlook for the second half of the year.

Going in reverse. Upstart electric automaker Rivian is trimming its workforce by 6% in response to high inflation, rising interest rates, and an increase in parts prices, Bloomberg reported Wednesday. The announcement follows several months of manufacturing setbacks at Rivian, which has struggled to meet production targets in its bid to catch up to Tesla and other auto companies. Rivian shares rose by 3% in mid-day trading Thursday, though they’re still down 68% year-to-date.

A semi-downturn. Qualcomm shares tumbled 5% in mid-day trading Thursday after the chipmaker’s forecast for the current quarter fell short of Wall Street predictions, CNBC reported. An inflation-driven global slowdown in smartphone sales, particularly among lower-priced devices, is expected to weigh on Qualcomm’s fiscal fourth-quarter revenue. Qualcomm topped earnings and revenue estimates for the prior quarter, with sales up 37% year-over-year. 

Not changing its feathers. Peacock’s paid subscriber count remained flat for the second quarter, a result that executives in Comcast’s NBCUniversal predicted after a strong start to 2022, TechCrunch reported Thursday. About 13 million customers paid for Peacock as of the end of June, roughly equal to the service’s number of subscribers at the end of March, according to Comcast’s latest earnings report. Comcast officials said they expect that several high-profile movies and the return of fall sports will lead to an increase in subscribers later this year.

FOOD FOR THOUGHT

Short-circuiting the celebration. The CHIPS revelry lasted barely 24 hours before Sen. Joe Manchin, D-W.V., crashed the party. As Fortune’s Nicholas Gordon reported, a landmark spending and tax deal unexpectedly reached Wednesday afternoon between Manchin and Senate Majority Leader Chuck Schumer could cause collateral damage to the so-called CHIPS-plus bill, which includes $52 billion in federal subsidies for semiconductor manufacturing. While the CHIPS legislation passed the Senate on Tuesday by a 64-33 margin, with 17 Republicans in favor, the House GOP leadership could look to scuttle the bill as retaliation for the Democrats’ support of the Manchin-Schumer package.

From the article:

Manchin’s change of heart on Wednesday appears to have angered Republican leaders who felt like they got the raw end of the deal. Late on Wednesday, House Republican leadership urged their members to vote against the Chips Act in retaliation to Manchin’s announcement, according to a memo seen by The Hill.

That may limit the number of Republicans willing to vote for the Chips Act—and the number of Democrats who could vote against the bill and still have it pass. U.S. Commerce Secretary Gina Raimondo will meet the Congressional Progressive Caucus on Thursday in an effort to convince undecided Democratic lawmakers to support the measure.

IN CASE YOU MISSED IT

Bitcoin and Ethereum up over 10% amid recession fears, by Taylor Locke

Mark Zuckerberg ignores objections, says Instagram will show twice as much AI recommended content by end of 2023, by Chris Morris

‘We absolutely have too many people’: Ford ready to wield the axe as U.S. economy slips into technical recession, by Christiaan Hetzner

Falling morale, staff departures, and a struggling ad business—insiders say ‘rudderless’ Twitter facing increased tensions amid Musk takeover saga, by Sophie Mellor

VC fund Variant raises $450M, doubles down on Web3 amid ‘crypto winter’, by Taylor Locke

If you thought Kylie Jenner’s 17-minute flight was outrageously short, Elon Musk’s jet frequently takes 5-minute flights, says plane-tracking teen, by Alice Hearing

Apple hires Lamborghini exec to help lead design of its self-driving EV, by Mark Gurman and Bloomberg

BEFORE YOU GO

Picture perfect. We primarily deal with words in this space, but every now and then, an appreciation of images is in order. So a hearty tip of the cap to illustrator Annelise Capossela, who crafted a brilliantly basic design for an Axios story about Meta’s morose earnings report. (For those too stubborn to click through: it’s a frowny face that uses Meta’s infinity-symbol logo as the eyes.) I can’t fully explain why, but that one just tickled me today. Is it as intricate as her other much-lauded work, including this month’s “Cat Sneezing Into A Tissue”? Certainly not. But sometimes, simple is better.