Travelling to the metaverse
As we’ve talked about in previous posts, VR (virtual reality) headsets are the tool used to travel into the metaverse. Providers are as numerous as the possibilities in this digital world itself. If you want to enter the largest of the metaverses, Mark Zuckerberg's Metaverse, however, you will need a VR headset from Oculus. Alongside some smaller or larger providers (e.g. Microsoft, Sony, ByteDance, HTC or even Apple (in development), this Meta subsidiary is the undisputed market leader for VR headsets for consumers.
Since the introduction of the Meta Quest 2, which works standalone, Oculus' estimated market share in a global market for VR and AR (augmented reality) headsets has catapulted within two years from 30% to 75% and has now reached as high as 90%. At the same time, sales of corresponding headsets are expected to have increased by more than 26% worldwide in 2022.
Anyone who has wanted to buy the Meta Quest 2 in Germany, though, has had to get creative. For quite a while now, the German website of the Oculus Store has announced: "Product not available in your area." German consumers could only purchase these headsets via third-party providers or online from other European countries.
Is Germany just not a relevant market for Meta or is it more than that? We want to get to the competition law bottom of this question below.
In 2012, Oculus, a young start-up launched the first prototype of a mass-market VR headset on Kickstarter as part of a very successful campaign: the Oculus Rift. These goggles, clunky compared to today's models, were the joint product of a few students from California. Although Oculus had never launched anything more than a prototype version at that point, Meta (then Facebook, Inc.) bought the company in March 2015 for a total of USD 2 billion.
In the years following, Meta indirectly or directly bought up other companies involved in VR technology and launched some more sophisticated successors to the Oculus Rift. In September 2020, the Oculus Quest 2, which is still available today, was released, as was the Meta Quests Pro in November 2022. In the course of the rebranding to Meta, the VR headset was also renamed "Meta Quest 2" and the "Oculus Store" became the "Quest Store". As a result, the Oculus brand will soon completely disappear.
Something else out of the ordinary happened in 2020: Meta stipulated that a Facebook account is required to use a Quest headset. The company, however, did not foresee the reaction of the German Federal Cartel Office (FCO) to this.
Meta vs. FCO
Shortly thereafter, the FCO initiated an investigation against Meta on the basis of Sec. 19 German Competition Act ("ARC") and Art. 102 TFEU, alleging that the company was abusing a dominant position. The allegation was that Meta was improperly linking Facebook's product with that of Oculus'. Why would this be an issue under competition law?
While Meta with the Oculus headsets was not yet dominant in the market for VR headsets at that time (which has changed by now), Facebook's market share for social networks though, was (and is) gigantic (95% in 2018). Meta now wanted to leverage its market position with Facebook to combine the two products and merge the resulting data collections. The FCO feared that this would create a pull effect at the expense of other VR headsets providers without a big data collection. After all, the metaverse, as a social meeting place, also has considerable network effects, which Meta wanted to transfer from Facebook to the Oculus headsets.
The investigation in 2020 was only another proceeding in the FCO´s bundle of competition law measures against Meta. Already at the beginning of 2019 the FCO prohibited Meta from merging data from other sources, such as third party websites or apps or other services of the Meta group (e.g. WhatsApp or Instagram) with the users´ Facebook accounts. The FCO considered this an exploitative abuse of a dominant position, since it was of the opinion that the users did not give a valed consent to such data merging under the General Data Protection Regulation (GDPR). The Federal Court of Justice later considered this as an abusive practice in the form of a kind of bundling (we will deal with this in a later article). In addition, the FCO considered this behaviour an exclusionary abuse towards Meta´s competitors due to the data advantage Meta gained from this. In both the Facebook and the Oculus proceedings, the FCO referred to Sec. 19 ARC. This provision prohibits dominant companies inter alia from exploiting their customers and from impeding other undertakings in an unfair manner.
In the Oculus investigation, an objective justification was deemed out of the question. After all, the Oculus product has no objective connection with the Facebook social network. The hardware functions completely independently of a Facebook account.
At the beginning of 2021, the FCO went one step further: It expanded its Oculus investigation with a view to the newly enacted Sec. 19a ARC. In May 2022, the FCO determined that Meta is a company of paramount significance for competition across markets. Since Meta did not challenge this decision, it has become legally binding. As a consequence, the FCO may impose various obligations on Meta. It may prohibit Meta, for example, from impeding competitors on market where Meta can rapidly expand its position even without being dominant [Oculus] by making a product provided by Meta conditional on the use of another product [Facebook] provided by the undertaking. We will go into detail on this in a later article.
The reaction of Meta
Even before the FCO opened the proceedings in 2020, Meta stopped selling the Meta Quest 2 as a precaution, but only in Germany. In all other countries, the company continued to sell its headsets continuously. Moreover, it was relatively easy to purchase the VR headset over the internet in Germany as well. There were also no technical difficulties, as long as the user logged in to the headset with his/her Facebook account. In this respect, it is doubtful whether the FCO had actually scored a victory.
After negotiations between the company and the FCO, Meta announced in August 2022 that in the future it will be possible to create a separate Meta account, independent of Facebook or Instagram, which will also make logging in possible. The FCO is celebrating this move as a victory over Meta. However, it also stands to reason that Meta would like to strengthen the Quest brand in order to make the Metaverse the fourth pillar of the “Meta-Universe” alongside Facebook, Instagram and WhatsApp. A new headset for private consumers with further technical innovations has already been announced for 2023.
It is evident that there is no way around Meta in the VR headset market for the time being. It will be exciting to see whether ByteDance from China (known via TikTok) manages to maintain a certain market position. The company designed with its Pico 4 headset a direct competitor for the Meta Quest. Apple should also have a chance at it if it launches its own headset on the market within a few years. Apple´s xrOS (operating system) has the potential to become the iPhone of virtual reality.
We will continue to watch the hardware trends and see how the Federal Cartel Office, the European Commission and other authorities regulate the digital world in order to safeguard open access to the metaverse. In any case, the authorities are keeping a very close eye on the issue and will remain active in the future.