Is the Facebook Inc Deal for Oculus in Trouble?

The social media king must face the possibility it will miss out on its acquisition of Oculus and its virtual reality headset, Rift.

May 3, 2014 at 1:00PM

A few eye brows were raised in the past month or so following a string of acquisitions by Facebook (NASDAQ:FB). The shopping spree started with the $19 billion deal to bring mobile messenger WhatsApp into the fold. The WhatsApp acquisition made sense from a practical perspective, as it instantly enhanced a core Facebook business: user's mobile experience.

Shortly after WhatsApp came the $2 billion acquisition of virtual reality (VR) headset manufacturer, Oculus. The Oculus deal was then followed by drone-maker Ascenta, and more recently, fitness and motion tracking app Moves. But of all the deals Facebook has announced since March, the most intriguing was Oculus and its VR headset, Oculus Rift. Oculus' technology provides an obvious means of generating revenue, initially via its gaming applications. Now, according to a recent report in The Wall Street Journal, the Oculus transaction is facing some legal issues that could end Facebook's VR dreams.

The potential
There are a couple of reasons King Entertainment (NYSE:KING) is a $5.42 billion publicly traded company: Facebook, and the addictive nature of gamers. If you haven't been asked to play Candy Crush from a Facebook friend yet, give it time, you will. King hasn't returned much to investors to date, meandering well below its IPO price of $22.50 a share, but that's certainly not from a lack of gamers. Now, imagine how many obsessed Candy Crush players there would be if they could step inside those candy coated puzzles virtually using an Oculus Rift VR set?

In just two short years, the Oculus Rift has become a hit with diehard gamers. Still in the early stages of development, Oculus has already received over 75,000 orders for its Rift dev kit. Not bad for a two-year-old startup. And VR games are just the beginning according to Zuckerberg.

In his open letter following news of the Oculus acquisition, Zuckerberg made it clear gamers weren't the only users that will benefit from the immersive technology. Facebook intends to adapt Oculus' technology into a multi-use, communications platform. A few examples cited by Zuckerberg were, "enjoying a court side seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face -- just by putting on goggles in your home."

Unlike WhatsApp, which will certainly add to Facebook's massive amounts of user data to better target ads, thereby charging advertisers even more, the opportunities to monetize Rift are nearly endless. That potential is what puts Oculus head-and-shoulders above Facebook's numerous other acquisitions. Of course, potential isn't worth a dime if the Oculus deal doesn't close, which it is scheduled to do this quarter.

There's just one little problem
Last August, Oculus hired a former developer for videogame manufacturer ZeniMax Media named John Carmack. According to ZeniMax and its lawyers, who recently sent a couple of letters to both Oculus and Facebook, Rift is based on intellectual property owned by ZeniMax . And, according to the ZeniMax legal team, was used by Carmack to jump-start Rift. How else, says ZeniMax, could Oculus go from what amounts to a garage operation to a $2 billion company in just two years?

It's too early to determine if the legal wrangling slows the Oculus closing process, or worse still, makes the deal null and void. But if Oculus' response is any indication, ZeniMax's claims shouldn't be a problem. An Oculus spokesperson didn't pull any punches, saying "It's unfortunate, but when there's this type of transaction, people come out of the woodwork with ridiculous and absurd claims." That's a strong statement that leaves little doubt where Oculus stands.

Final Foolish thoughts
As the recently completed F8 dev conference confirms, Facebook is getting serious about becoming a significant player in the app download arena. The emphasis of F8, as discussed in a recent article, was to get app developers comfortable with the notion that Facebook is a legitimate alternative to Google Play and the Apple App store. You can bet games will play a big part in the success of Facebook's app dev plans.

Oculus isn't Facebook's only means of taking a larger share of Google's and Apple's app revenues. The reason for the F8 conference was to let developers know Facebook is making it easier, and more profitable, for app developers. But imagine what game developers could do with an Oculus platform as a starting point? Hopefully, we'll find out before too long, if the lawyers don't get in the way.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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