Facebook (NASDAQ:FB) has started taking virtual reality (VR) very seriously over the last few years. The company isn't just making headsets anymore; it has become one of the biggest developers in the industry after acquiring the most successful VR studios around. Facebook hopes VR can be its next growth platform despite having a relatively small base of a few million users.

What's not yet clear is whether or not being a VR platform and a content developer will be the best strategy in the long term. Here's how VR is playing out for the social media giant and how Facebook is hoping to create the dominant VR platform.

Person playing games on the Oculus Quest 2.

Image source: Oculus

Beginnings with Oculus

Facebook got into VR when it acquired Oculus in 2014. The $3 billion deal was followed by the launch of the Rift headset in 2016, but sales were relatively meager until the stand-alone Oculus Quest was launched in 2019. 

The Quest doesn't require a computer to operate and can be run nearly anywhere. The Quest 2 sold an estimated 1 million devices in the fourth quarter of 2020, becoming the most successful headset by volume capturing, about 87% of the market, according to SuperData. 

Facebook's VR spending spree

It isn't just the headset that Facebook is selling. Games and other content are sold through the Oculus Store. And content is where Facebook could make its money. In theory, making sure the best content is on the Oculus platform and not on competing platforms like Steam or at VR arcades will make Oculus more attractive. To that end, Oculus has acquired the biggest content studios in the business:

  • In 2019, Facebook started its content buying spree by acquiring Beat Games, the maker of the popular Beat Saber
  • In February 2020, Facebook acquired Sanzaru Games, which created Asgard's Wrath
  • In June 2020, Facebook acquired Ready at Dawn, which made Lone Echo.
  • In April 2021, Downpour Interactive, which created Onward, was acquired.
  • Last month, Facebook said it was buying BigBox VR, which made Smashbox Arena and the more recent Population: One, which is a Fortnite-like VR game.

The content made by these companies isn't entirely exclusive to Oculus yet, but Facebook is beginning to wall off competitors. After acquisition, commercial content licenses are quickly pulled from VR arcades, pushing customers to buy headsets rather than use them in commercial spaces. And that's not all Facebook is doing to monetize and wall off its VR experience from competing tech companies

The Facebookification of VR

About a year ago, Facebook started requiring a Facebook account to log into an Oculus headset. This got a lot of pushback from users who wanted to be anonymous or didn't have Facebook accounts. But the company persisted in forcing Facebook into VR.

The next step is advertising. Oculus is already testing advertising within VR experiences, and it's likely the number of ads will grow. Again, this ties together everything Facebook knows about users logged into their accounts and its wide advertising network.

Facebook is also developing a social experience, which it hopes people will use for group gatherings and even business meetings, called Facebook Horizon. This is a product Oculus wants users to "explore, play and create in extraordinary ways", building both virtual spaces and a social network within VR. Horizon is still in Beta, but Facebook has high hopes on this being a big product as more headsets are sold. 

What's clear is there's a Facebookification of Oculus taking place right now. It's trying to leverage everything Facebook knows about users, advertisers, and its financial strength to dominate VR. 

Platforms vs. integration

Facebook could take its current strategy in a number of directions in VR. It could try to create a platform like Microsoft did with its Windows operating system. Microsoft wanted third-party developers to not only build products for its platform, but also to succeed. If content was great on Windows PCs, it would be a win for Microsoft long-term because it was the Windows platform that was the biggest value in PCs. Bill Gates once said: "A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it's a platform." In that sense, Facebook isn't really a platform because it's selling its own hardware, its own content, and it owns the app store. But it could be a platform as Gates defined it.

Oculus could also go the direction of Apple, creating a proprietary operating system for its own hardware and including key software that makes the device more attractive than competitors for free. This looks a lot like the company's plans right now, except Oculus is still charging for owned content. The VR app store also looks similar to Apple's, so Facebook may be trying to replicate some of what Apple did with its smartphone. 

What's a little odd is it appears Facebook is taking more of an Android pricing strategy. Android makes very little or no revenue in hopes of getting more people on the platform, ultimately generating revenue from search browsing, maps, and other tools. Oculus may even be selling its latest headsets at a loss to attract more users. Once there, Facebook can monetize through the app store or ads in content. The overall system looks like a combination of Apple's hardware strategy (integrated hardware and software) with Android or Facebook's monetization strategy (ads).

Competitors are coming

I also think that Facebook and Oculus are in a bit of a strange strategic position. Oculus is the clear leader in VR today, but it doesn't really have any competition yet. As competitors emerge, the company will have to decide if it wants to be a platform that's the best place for content developers, an exclusive walled-off ecosystem, or an ad-supported game device. Right now, it's a little of each, which seems to leave open a lot of weaknesses for competitors who offer more privacy (Apple) or better business services (HTC Vive). 

As Facebook rolls out its VR strategy, competitors are building their own ecosystems. Apple has reportedly been working on both virtual reality and augmented reality headsets for years with a launch rumored for 2022. HTC and Valve have also released new headsets recently that are more advanced (and higher priced) than the Oculus Quest, although most still need a computer to function. Both companies are building their strategies around high-end gamers or business customers who want operational flexibility without the Facebook lock-in.

All three companies are well behind Facebook in headsets sold, but they have a clear strategy. And if Apple, in particular, comes out with an attractive headset for consumers it could quickly become the preferred device for developers and business customers. 

Facebook wants to own VR, but can it? 

As Facebook buys up more of the VR ecosystem, it's clear the company wants to do everything from sell headsets to build a social experience, and even serve up ads. Here's a list of what it wants to do in VR: 

  • Sell the headset
  • Own the store developers sell content on
  • Own the biggest content studios and sell their content (potentially exclusively) on Oculus
  • Build a Facebook social/meeting platform
  • Require users to log into Facebook accounts 
  • Serve ads to VR users

Facebook wants to own almost every valuable part of the VR industry. If it succeeds, the company could be dominant in the industry for a decade, which could be worth a lot of money. Estimates of the industry size diverge wildly, but Grand View Research estimates the global VR market was valued at $15.8 billion in 2020 and will grow 18% compounded annually through 2028. With about an 80% market share in new headsets, that's a big opportunity for Facebook. 

But the company is also leaving some strategic openings for users, developers, and businesses who want more privacy, more flexible content and distribution, or different headset features like accessories and higher resolution. It's not yet clear what strategy will win out, but Facebook is laying the groundwork to dominate the industry and we'll see if any of the other tech companies interested in VR respond. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.