What Will Facebook Do With Oculus?

Why did the social networking giant buy a virtual reality frontrunner? Hint: It has nothing to do with immersive Farmville games.

Mar 26, 2014 at 12:30PM

Oculus Rift

Source: Oculus

Facebook (NASDAQ:FB) has added another acquisition to its coffers. The social networking giant announced Tuesday the approximately $2 billion purchase of virtual reality company Oculus VR. The announcement inspired outrage among gamers, led to the withdrawal of a version of Minecraft on Oculus, and raised eyebrows as to what Facebook planned to do with the company. Will Facebook force its old ways onto Oculus, essentially turning it into a higher-tech ad display and Zynga (NASDAQ:ZNGA) port? Or is Facebook simply trying to stay ahead of competitors such as Sony (NYSE:SNE) in an emerging market? 

The acquisition terms have Facebook paying out $400 million in cash plus 23.1 million in common shares. An extra $300 million in cash and stock could come later via milestone payments. Oculus will maintain its headquarters and continue to work on its lead product, the Oculus Rift virtual reality headset. The acquisition should finalize during the second quarter.

Facebook's Oculus buy comes in the wake of its staggering $19 billion purchase of mobile texting application WhatsApp, which improved the company's reach overseas. But Facebook had a different reason for buying Oculus.

What is Oculus VR?
Oculus VR is building next-generation virtual reality headsets that allow for a more immersive experience through tracking technologies that allow users to look around in a natural, 360-degree environment. The Oculus Rift headset serves as the company's lead project.

The Rift has a busy backstory that includes a 2012 Kickstarter campaign that crowd-funded $2.4 million toward the project, and the early support of Doom developer John Carmack, who later became Oculus' chief technology officer. Development models of the Rift have been made available in stages and proved popular enough to fuel more than 75,000 orders. A consumer version of the headsets should come to market in the near future.

It's easy to see why the gaming industry would swarm around Rift's immersive technologies. But Facebook makes for an odd pairing.  

Why would Facebook want Oculus?
Facebook fell far behind in mobile games. The company doesn't have its own mobile system in the same way as Google, Apple, or Microsoft. So Facebook was forced to focus on creating a mobile application that it could monetize.

It took the company a few years to get the application right, but now advertising is showing signs of strength. In the fourth quarter, 53% of the company's advertising earnings -- which accounted for 90% of overall revenue -- came from the mobile platform. But that doesn't change the fact that Facebook was a late-comer to mobile and benefits from the platform less than the operating system and device manufacturers. 

With the Oculus purchase, Facebook has a chance to get ahead of an emerging technology. Sony recently unveiled its own VR headset, Project Morpheus, which will work with the PlayStation 4 console that's currently fast-outselling Microsoft's Xbox One. So it's not as if Facebook took a wild shot in the dark in pursuing virtual reality.

Gaming remains one of the most obvious uses for Oculus VR's technology, but there's a bevy of additional ways that Facebook could use its new acquisition. In his announcement post, Mark Zuckerberg mentioned patients meeting with doctors, and students with educators, as examples. And any of these applications offers more ways for Facebook to collect data on potential users -- and perhaps to use that data in targeted advertising.

Will Facebook ruin Oculus?
The definition of "ruin" here will vary between people, and Facebook has drummed up a good deal of ill will in certain circles. But it's in Facebook's best interests to leave Oculus as close to the original vision as possible, or else there's no real point in trying to stay ahead of an emerging technology. 

Will Facebook force-feed Zynga games through Rift headsets? I doubt anyone really wants to get that up close and personal with the rather cartoonish Farmville titles. And Zynga itself may move in a new direction with its recent acquisition of mobile gaming company NaturalMotion. 

So it's doubtful that Facebook will try to force visual reminders of its current platform into the Oculus Rift. 

Foolish final thoughts
Facebook and Oculus make for odd bedfellows, but that was bound to happen if Facebook wanted in early on a market. The Oculus price is a bargain compared to the WhatsApp acquisition. And while Facebook has rightly earned skepticism, the company's better off leaving Oculus as close to the original plan as possible. 

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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