There's No Question About This Facebook Inc Acquisition

Legitimate questions were raised when Facebook (NASDAQ: FB  ) shelled out a whopping $19 billion for cross-platform, mobile messaging king WhatsApp. For what is essentially a non-monetized service, with plans to stay that way according to both WhatsApp and Facebook execs, bringing WhatsApp in-house left many investors scratching their heads. Of course, with the run Facebook has been on the last year, Facebook CEO Mark Zuckerberg and team have earned the benefit of the doubt, at least for now.

With that said, there should be no questions -- though, of course there are -- about Facebook's decision to invest $2 billion in virtual reality headgear manufacturer Oculus. The potential for Facebook of incorporating virtual reality applications are enormous, and the deal for Oculus could prove to be a game-changer as the social media king continues pushing for more, and more diverse, revenue streams.

Who are these guys?
Oculus builds and sells a virtual reality headset called Rift, and it just recently celebrated its one-year anniversary of its first dev kit for Rift. The relative infancy of Oculus and its technology -- the company itself is only two years old -- is why some analysts have questioned the price Facebook paid. Of course, near-term thinking is what analysts get paid for.

Oculus has already received over 75,000 orders for its Rift dev kit, most of which are used by gamers, which dovetails perfectly with Facebook's push to generate more game revenue. But the Oculus acquisition doesn't start and end with games. Facebook said it envisions Oculus technology being used "to extend Oculus' existing advantage in gaming to new verticals, including communications, media and entertainment, education and other areas."

Facebook's gone so far as to suggest that Oculus and its virtual technology are "strong candidates" to emerge as the next social media and communications platform. Is Zuckerberg talking about changing social media as we know it by the end of the week? Of course not. While the potential impact on Facebook gamers is evident, incorporating virtual reality into day-to-day Facebook usage is years down the line, and Zuckerberg's opted to get ahead of the curve, just as he should.

Not surprisingly, the notion that virtual reality is a good five years from really having an impact on social communications in general, and Facebook in particular, is another issue brought up by naysayers. But as too many IT companies slow to transition to mobile can attest, waiting for a burgeoning technology to go mainstream before getting on board can be a disaster.

The deal
Of the $2 billion Facebook is ponying up for Oculus, about $1.6 billion is in stock -- 23.1 million shares with an average trading price of $69.35 a share for the 20 trading days leading up to March 21 -- and the remaining $400 million in cash. With $11.45 billion in cash and equivalents at the end of last quarter, Facebook can certainly afford it.

The deal also includes the potential for another $300 million payout of cash and stock for Oculus, based on reaching "certain milestones." 

The upsides
Zuckerberg hit the Oculus acquisition on the head by saying, "Mobile is the platform of today, and now we're also getting ready for the platforms of tomorrow." Regarding the impact of virtual reality on Facebook game revenue, "tomorrow" could be here before you know it. As alluded to in a recent article, Facebook is going full-throttle to generate more game revenue, and the Oculus deal fits perfectly.

Increasing game revenues are great, and reason enough to acquire Oculus, as are potential advertising opportunities. Picture product placements, much like in big-budget movies, littered throughout a gamers experience. The possibilities are endless.

Revenue opportunities aren't the only upside to the Oculus deal. Preparing for the next-generation social platform today, rather than a couple years from now, speaks volumes about Facebook and how it's positioning itself in the market. Leaders dominate markets, not followers, and the Oculus acquisition makes it clear which side of the fence Facebook has decided on.

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Read/Post Comments (5) | Recommend This Article (3)

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  • Report this Comment On March 26, 2014, at 3:28 PM, jho8 wrote:

    I disagree with this article primarily because I do not believe that VR goggles will become anywhere near mainstream for at least a few decades, if ever. People have been comparing the Oculus Rift to smartphones and other technologies that have become ubiquitous over the past few years, but this is a very poor analogy. Smartphones and certain apps, like WhatsApp, become popular because in the case of the former, everybody needs a phone anyway so getting a smartphone is an incremental change, and in the case of the latter, again everyone has a smartphone already so this doesn't cost them anything extra. The Rift is a peripheral device, like a keyboard or a mouse, or a wii-mote or the microsoft Kinect. One thing that video game companies have realized over the past few years is that if a device doesn't come with a peripheral, it's almost impossible to get people to buy it, which sets off a viscious cycle because nobody will develop software for hardware that is uncommon, and then even fewer people will buy the hardware. There is also the geek-factor to consider. A handful of hardcore gamers who are financially stable might buy a Rift, but it will be generations (if ever) before you see more than 1% of females buying such a device because it will be too nerdy or uncool, and even most males will avoid it for fear of seeming like videogame-obsessed man-children. And finally, Sony is already FURTHER in development with their own version of this same technology, and are much better connected in the gaming and tech-hardware world, and their product (Morpheus) is supposed to be better than the Rift anyway.

    For all of these reasons, I think the Rift has less than a 5% chance of ever become popular enough to be profitable. The rationale of "it can be used for education, etc" are pretty much worthless because this is not substantially better than recorded lectures or live webinars that already exist, so the pricetag of the Rift will be unjustifiable. I think facebook just wasted $2B.

  • Report this Comment On March 26, 2014, at 3:33 PM, jho8 wrote:

    And as an addition to my last comment, Oculus just upset the vast majority of their former fans, pushing most potential buyers towards Sony's Morpheus instead. Just go to any entertainment/tech news site, such as ign.com, or go to reddit.com, and read what people are saying. Almost everyone that was planning on purchasing a Rift is now set against it since it was purchased by Facebook. And again, without a huge user base, it will be impossible for software developers to sell enough copies of rift-specific software for them to be profitable, so they won't even bother after the first few guinea pigs figure it out the hard way.

  • Report this Comment On March 26, 2014, at 3:51 PM, Booban wrote:

    When I was growing up people where shelling up thousands of dollars to upgrade their PCs every two years to keep up with the latest game specs. Money isn't the problem if the gaming experience delivers, and according to gamers, it does deliver.

    I've heard Sony isn't better than Rift. Morpheus has gaps on the edges so as to not freak out the user too much. If they really go along with that, Sony doesn't get it.

    "Fans" are whimsical. They'll come around if the product is good enough.

    I believe VR wasn't ready before. It is now. At least for games and FB can support the multiplayer experience. Once games leads the VR experience, there will be a new "Second Life" VR world created to support player interaction and it will take off from there.

    The only problem may be that FB is currently a bad partner. Nobody is going to use VR with Facebook as it is now.

  • Report this Comment On March 27, 2014, at 12:52 AM, Vismxr wrote:

    I've been an Oculus developer for over a year. If you've not worn a VR pair then it's hard to really see the future. The render engines in gaming with Unreal & Unity are able to provide real time reflections so are able to have photo real experiences. I would never bet against the following people: Zuckerberg, Bezos or Musk. As Jonathan Swift one wrote "Vision is seeing what others cannot" In 20 years Mark will be Bezo's age today and what will we be on the front burner? It's a small bet for Zuck and a big dividend for connecting the world. Minecraft might be out but I know 1000 gamers who are in... The 2016 $60 call LEAPS look rosy to me.

  • Report this Comment On March 28, 2014, at 3:02 PM, Stymie67 wrote:

    Vismxr...agree and thanks. I have not used one yet, but my sense is that the wider applications of the OR beyond gaming are where the real uptake will be found. These applications - from virtual tourism to technical/medical training and a host of others - needed a platform for communicating what they are and why its relevant, and an everyday place where they can be provided for everyday people....enter FB. I was keen before on INVN because of their supplying the OC. I couldnt think of a more ideal buyer of the Rift than FB to be honest.

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