Facebook Buys Virtual Reality Maker Oculus

The virtual reality company has a popular idea but virtually no revenue so it fits in with Facebook's other recent acquisitions.

Mar 26, 2014 at 11:41AM

Facebook's (NASDAQ:FB) shopping spree continues.

The social network, which pad $19 billion for messaging service WhatsApp in February, has made a deal to buy virtual reality game company Oculus for $2 billion. The deal is for $400 million in cash and 23.1 million shares of Facebook common stock valued at $1.6 billion. Oculus' owners can also earn an additional $300 million in cash and stock based on the achievement of certain milestones.

The start-up has received more than 75,000 orders for development kits for the company's virtual reality headset, the Oculus Rift, Facebook said in a press release. The company plans to use the Oculus technology in industries beyond gaming, including communications, media, entertainment, and education.

"Mobile is the platform of today, and now we're also getting ready for the platforms of tomorrow," said Facebook founder and CEO Mark Zuckerberg. "Oculus has the chance to create the most social platform ever, and change the way we work, play, and communicate."

Oculus will maintain its headquarters in Irvine, Calif., and will continue development of the Oculus Rift, its virtual reality platform that was originally launched with a $2.4 million campaign on the crowdfunding site Kickstarter.

Why did Facebook buy Oculus?

As Facebook showed with its purchase of WhatsApp Zuckerberg is not afraid of buying companies based on their future potential. The company does sell its virtual reality development kit for $350 but it does not yet sell a product in the mass market. 75,000 development kits sold at $350 shows there is huge interest in the technology, but it's only $5.95 million in revenue. (The private company does not release revenue figures.)

It's safe to say Facebook is buying the company for its potential not its revenue.

"Virtual reality technology is a strong candidate to emerge as the next social and communications platform," Facebook's release said.

Oculus CEO Brendan Iribe believes the company is more than a gaming play and that virtual reality is not as far removed from Facebook's social experience as it would appear on the surface.

"We believe 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," he said in the deal press release.

Facebook is hedging its bets

Between its 2012 purchase of Instagram for $1 billion, the $19 billion WhatsApp deal, and now the $2 billion Oculus acquisition, Facebook has committed over $22 billion to companies with essentially no revenue. That on the surface seems a little (or a lot) foolish, but what Zuckerberg is doing is hedging his bet. 

Facebook has defied the odds and stayed at the top of the social network heap and made the transition to mobile (which for a while seemed unlikely). With $2.85 billion in free cash flow in 2013 on $7.87 billion in revenue Facebook has a tremendous business, but the public has been notoriously fickle when it comes to social networks. 

Zuckerberg is smart enough to know that his platform -- while it will evolve -- is vulnerable to competition and changes in consumer desires. MySpace, Friendster, GoeCities, and others were once dominant players and now GeoCities is gone and the other two barely exist. (Look it up -- Friendster does exist and MySpace is some sort of music community with Justin Timberlake as a co-owner.)

WhatsApp gives Facebook an already huge service with a user base that's over 450 million and growing. At the time of the WhatsApp deal, The Guardian pointed out that with the purchase Facebook owns four of the world's most popular smartphone apps: Facebook itself, Instagram, WhatsApp, and Facebook Messenger.

The Oculus deal simply extends the Facebook empire, giving it another strong foothold in a potentially huge market. 

Facebook buys up potential threats

With each of these purchases Facebook not only removed a potential rival from the board, it bought a service that can operate on its own and potentially integrate with Facebook. Zuckerberg has shown that he knows how to monetize, and there is no reason to believe he can't monetize virtual reality.

Oculus' technology could become a stand-alone hit, the building block for a new Facebook experience, or both. The company could integrate with WhatsApp or even Instagram and the Facebook team should be able to figure out how to make money in the process.

Facebook can afford to take a few shots on promising but unproven ideas and it can afford for some of them to fail. 

Zuckerberg is buying up smart people running companies based on concepts that resonate with large numbers of people. Having 75,000 developers interested in working on your platform shows there is enormous potential in virtual reality -- specifically Oculus' brand of it. This deal -- while it seems expensive -- is merely another educated guess as to what technology will power social media (and other untold areas) tomorrow. 

The challenge for Zuckerberg and his team is finding ways to integrate all of these disparate brands and to know when they should remain independent platforms. That's a problem that has tripped up others before (think Yahoo buying Broadcast.com and that site falling off the map) but Facebook has the ability to make some -- if not all -- of these purchases pay off. 

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