Facebook Goes Virtual

Edited by Vani Rao

Facebook next $2 billion acquisition

FB pic 1.1Facebook Inc.’s (NASDAQ:FB) CEO Mark Zuckerberg said that he was “done for a while” at the Mobile World Congress last month, right after agreeing to pay $19 billion for mobile texting company WhatsApp. Facebook was at it again after it announced on Tuesday, March 25, 2014, that it has agreed to buy Oculus VR, a developer of virtual reality glasses, for $2 billion.

The acquisition marks the third time that Facebook has paid a billion dollars or more for a company with little or no revenue, with plans for the newly acquired company to operate independently (Oculus has sold 75,000 pre-orders for development kits, which cost $350 a piece, giving it an income of approximately $26 million.)

For the Oculus acquisition, Facebook will pay $400 million in cash, with 23.1 million shares of Facebook common stock valued at $1.6 billion, the company said. In addition, the deal includes a $300-million earn-out in cash and stock.

Oculus started its journey on crowdfunding site Kickstarter, where it raised $2.4 million in 2012. Since then, other VCs have invested in the company. Most recently, Oculus raised $75 million in a round led by Adreessen Horowitz, who is also a Facebook board member. Horowitz earlier tweeted that he has recused himself from acquisition talks between Facebook and Oculus VR.

According to a Facebook post from Zuckerberg, he views the Oculus Rift headset as a communication platform. Moreover, Oculus VR and its 75 employees will operate independently from Facebook and continue to develop platforms for virtual reality games.

Oculus does not make any consumer product yet, but its headset called the Oculus Rift for video game developers has completely changed the way many feel about video games. The question is how would Facebook benefit from buying a video game hardware company?

Facebook pic 1Zuckerberg stated: After games, we’re going to make Oculus a platform for many other experiences. Imagine enjoying a court side seat at a game, studying in a classroom of students and teachers from all over the world or consulting with a doctor face-to-face, just by putting on goggles in your home.

Zuckerberg explained more about this acquisition in a conference call following the announcement, saying that he believes virtual reality will be the next big computing platform after mobile devices like smartphones and tablets. “History suggests that there will be more platforms to come,” Zuckerberg said, adding that the person who controls that major computing platform could change the dynamics of the technology sector.

“Today’s acquisition is a long-term bet on the future of computing,” Zuckerberg said. “We are excited to work with Mark and the Facebook team to deliver the very best virtual reality platform in the world,” said Brendan Iribe, Co-founder and CEO of Oculus VR. “We believe that virtual reality will be heavily defined by social experiences that connect people in magical, new ways. It is a transformative and disruptive technology, that enables the world to experience the impossible, and it’s only just the beginning.”

In short, Facebook is giving Oculus Rift the opportunity to become more than a niche gaming device and truly revolutionize, or at least the possibility, how we play games and interact with each other. I am not sure if we will now have boardroom meetings wearing Oculus VR headsets, but I surely believe that we will play games, experience sports, or watch movies in a way we never thought possible.

For better or worse, the future of virtual reality itself and that of the world’s biggest social network are now surprisingly, inextricably entwined. According to Zuckerberg, virtual reality really is what’s next—we just didn’t realize how closely he was paying attention. “Mobile is the platform of today, and now we’re also getting ready for the platforms of tomorrow,” Zuckerberg said. “Oculus has the chance to create the most social platform ever, and change the way we work, play, and communicate.”

Oculus will remain headquartered in Irvine, California. The Facebook-Oculus VR deal is expected to close in the second quarter of 2014. For Oculus, the move could thwart the threat from Sony Corp. (ADR) (NYSE:SNE), which announced its own Oculus Rift competitor for the PlayStation 4 last week. For Facebook, imagining a future in which instead of idling “liking” one another’s virtual minutiae, we’re actually fully, virtually present—360 degrees of present—well, that’s something we’ll have to wrap our heads around.

In for the Long Haul

FB pic 3Facebook’s acquisition of Oculus VR is part of a long-term plan that aims to connect the global population, ideally, within the next 10 years. When discussing the development of the Oculus VR, including gaming, Zuckerberg stated that he views virtual reality as a 5-10 year initiative. This means that Facebook isn’t in a rush to generate profits from the hardware; it’s in a rush to fund development today to get results further down the road.

Although Zuckerberg made it clear that the Oculus VR acquisition can serve Facebook’s business outside of gaming, he also said that the company was valuated at $2 billion “solely” for its gaming business alone, and that it is the “clearest opportunity” for its device. Time, Facebook money, and its belief in virtual reality gaming equals a brighter future for the medium.

With Facebook’s Funds, Oculus VR Could Improve Rift Faster Than Before

If Facebook throws in more money for research and development, and if it isn’t in a rush to turn a profit on the Oculus acquisition, and it respects the Rift’s value as a gaming platform, why should this acquisition negatively impact the future of virtual reality gaming? We know that the Rift will also be leveraged for non-gaming purposes that tie into Facebook’s advertising network, but that doesn’t mean gaming will as well.

Zuckerberg says that Facebook will “focus on helping Oculus build their product and develop partnerships to support more games.” But he makes it clear that after Oculus sees through its gaming ambitions, Facebook will expand the product into new territory. Zuckerberg equates Oculus to “a new communication platform” and clearly has a vision that extends far beyond the gaming focus that helped Oculus become a smashing kickstarter success.

The acquisition of Oculus seemingly comes out of nowhere: the company just demoed its most recent version of the Oculus Rift development kit at GDC 2014 to much fanfare. Oculus has been steadily moving towards a consumer product, and Facebook’s resources can only help to push that mission along.

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