Facebook (NASDAQ:FB) has high hopes for its $2 billion acquisition of Oculus VR. The highly speculative purchase turned more than a few heads when it was announced in March. The pair had seemingly little in common, but Mark Zuckerberg has grand plans to turn virtual reality into the next big social network. It turns out that his strategy may simultaneously resemble both Amazon.com's (NASDAQ:AMZN) and Tesla Motors (NASDAQ:TSLA).
Amazon.com loves being a loss leader, selling hardware at cost so that it can find alternative ways to monetize platform usage. This has proven quite effective in the realm of tablets, where Amazon.com led the way in the low-end with the original Kindle Fire. Meanwhile, Tesla has started off tackling the high-end of the auto market with the Model S and plans to move downmarket with its Gen. III model, targeting a $30,000 to $35,000 price point.
It may sound counterintuitive to pursue a low-end and high-end strategy at the same time. Here's how Facebook will do it.
The Tesla strategy
In a recent interview with Ars Technica, Oculus VR Chief Executive Officer Brendan Iribe described the company's plans for mainstream adoption, and how the strategy has changed in the wake of the Facebook acquisition.
Virtual reality headsets don't have a strong historical track record with adoption. That's why Oculus originally had such low expectations for unit sales. Compared to traditional consoles, VR headsets don't have the scale to attract developers to make content. Content is key in bringing mainstream consumers on board. For the first consumer model, which has yet to be released, the primary objective is to get enthusiasts and early adopters on the platform, which will hopefully catalyze developers to begin making content.
The second consumer model of Rift, which would likely be released a year or two after the first consumer model and be more affordable, is when Oculus and Facebook will shoot for broader adoption. By then, the platform will have more use cases and content availability. VR really needs a killer app to sell the technology to the average consumer. Only then can mainstream adoption be possible.
Going after the high-end niche before addressing the mainstream is the same approach that Tesla is using.
The Amazon.com strategy
Originally, Oculus had planned on generating upfront margins on hardware sales. As a stand-alone company, Oculus would have had more pressure to become profitable. Once Facebook came into the picture, it opened up the possibility of selling Rift at cost -- which is what Zuckerberg wants to do.
Having Facebook's financial backing is crucial here. As is the fact that Oculus will effectively become a side business compared to Facebook's core advertising business. That provides Oculus with flexibility, and also lets it emphasize long-term platform viability over short-term profitability. Offering a low consumer price point will spur adoption and allow the platform to grow to scale. It's at that point that Facebook can tackle monetization.
Selling hardware at cost in order to grow the platform is precisely how Amazon.com made a dent in the tablet market. Amazon.com's strategy has always been to make money when customers use its devices, not when they buy them.
That's the angle that Facebook will take with Oculus, and it's similar to its approach with WhatsApp. Facebook is content to figure out WhatsApp and Oculus monetization later on, after the platforms have achieved critical mass.
A tale of two ramps
When Facebook originally announced its $1 billion Instagram acquisition in 2012, investors scoffed. The social network was paying a hefty price tag for a company with no revenue and only a handful of employees. At the time, Instagram had fewer than 22 million monthly active users, or MAUs. The whole thing sounded crazy at the time.
Today, Instagram has over 200 million MAUs. Ads launched on the photo sharing platform late last year, and Instagram could generate an estimated $250 million to $400 million in revenue this year. Talk about a ramp.
Next, consider Facebook's mobile ad business over the past 2 years. At the beginning of 2012, Facebook's mobile ad revenue was exactly $0. Last quarter, that figure was $1.3 billion. Mobile now comprises 59% of ad sales. Talk about a ramp.
At this point, if there's one thing that investors should have confidence in, it's Facebook's ability to ramp a monetization engine once a platform reaches scale. There are still many hurdles before Oculus VR can reach the mainstream, but Facebook has taken lessons from Amazon.com and Tesla to maximize its odds of success.
Evan Niu, CFA owns shares of Apple and Tesla Motors. Evan Niu, CFA has the following options: short January 2015 $60 puts on Facebook and long January 2015 $35 puts on Facebook. The Motley Fool recommends Amazon.com, Apple, Facebook, and Tesla Motors. The Motley Fool owns shares of Amazon.com, Apple, Facebook, and Tesla Motors. 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.