Why Facebook Is Buying Oculus VR

Lately, Facebook (NASDAQ: FB  ) has been looking for a variety of ways to go beyond its traditional advertising business. Following its $19 billion acquisition of WhatsApp, the company recently bought Oculus VR for $2 billion. Now, it seems like this new acquisition could potentially move Facebook ahead of competitors like Google  (NASDAQ: GOOG  ) (NASDAQ: GOOG  ) and Twitter (NYSE: TWTR  )

Oculus is well-known for designing a virtual-reality headset, the Oculus Rift. The company raised a total of $91 million for its development, with $2.4 million coming through crowdfunding site Kickstarter. People who have had the privilege of using the headset claim that it provides a very real experience, whether it is used for video games or real-life simulations.

The recent move triggers curiosity about whether Facebook is venturing into the video game industry, the hardware business, or just thinking outside the box to provide a better quality service in the future. If successful, the move can impact the way in which communication and networking is perceived.

Facebook's growing success
Facebook has delivered impressive growth in the past five years, evidenced by its growing top and bottom lines. In its most recent quarter, Facebook produced revenue of $2.59 billion, up 63%. Its net income increased to $523 million from $64 million a year before. The company is currently the leading social network with 1.2 billion users.

Despite its outstanding growth, Facebook isn't well-diversified, as it generates most of its revenue from advertising. The company recently made $2.34 billion in total advertising revenue, up 76% from the year prior. However, it needs to diversify its revenue. This may be one of the reasons why Facebook is acquiring so many companies lately.

A new differentiation feature
Mark Zuckerberg said that Facebook's latest acquisition is intended to promote the company's mission of making the world more open and connected. He added that Oculus, which hopes to enable the world to "experience the impossible" through virtual reality, can provide a rich communication experience for users.

Facebook could be visualizing a future in which people connect with each other through virtual reality, and preparing itself to offer the service in that possible scenario. If the company's move is successful, the impact of this acquisition can put Facebook far ahead of other tech giants.

Potential for monetization
The initiative of merging Facebook and Oculus is rather innovative. The company could generate more revenue through the sales of the headset, or by creatively advertising in that medium. 

This move could have the potential to increase Facebook's user base and engagement. Moreover, it provides a new means of monetization. Because of its large user base, Facebook has a long reach for the promotion of future moves related to Oculus.

Impact on competitors
As a company that generates most of its revenue from advertising, Facebook is a competitor to tech giant Google. The search king produces substantial revenue from AdWords. Moreover, it continues growing revenue, despite being founded more than 10 years ago. In 2013, its revenue was $15.7 billion, up 22% from 2012. In addition, it reports consistent profit. In its most recent quarter, Google reported net income of $3.38 billion, up 17% from the prior year. As the owner of Android, the leading mobile operating system, Google could continue to benefit greatly from app sales and advertising in the growing mobile market.

Twitter is also a competitor worth watching, as it has 241 million users. Twitter's performance has been weak since its IPO in November 2011, as it faces issues in regard to user base growth and retention. The company is aware of this and has been making an effort to address the problem. However, recent moves have been somewhat uncomfortable for its longtime fans. Twitter has plans to go mainstream, yet in attempting to do so, it may be losing its valuable niche.

Foolish bottom line
Facebook's latest acquisition has huge potential. The Oculus Rift can help Facebook further differentiate its social network. Facebook may have plans to provide a much richer communication experience with the virtual-reality headset. Moreover, Oculus can also provide a new means of monetization since it is an attractive product that can produce unit sales, and a possible medium for creative advertising. In addition, the acquisition could help Facebook maintain its leading market position over Google+ and Twitter.

The bottom line is that Facebook's latest $2 billion move could help increase future user growth and revenue over the long haul.

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Alvaro Campos

Fascinated with stock and investment, especially in tech companies. A daily reader of Fool, recent economic events, and future business trends.

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