Many investors were baffled when Facebook(NASDAQ:FB)announced its $2 billion acquisition of Oculus VR last year -- virtual reality headsets seemed like an odd strategic fit for the core advertising business of a social network.
Virtual reality is usually considered a next-generation gaming platform. Samsung, for example, recently partnered with Oculus to transform its Galaxy Note 4 into a "light" version of the Oculus Rift known as the Gear VR. However, it turns out Oculus Rift could also be a lucrative opportunity for filmmakers looking to fully immerse viewers in their movie experience.
That is why Oculus recently launched Oculus Story Studio, an internal team dedicated to creating VR movies. The debut film for the Oculus Crescent Bay prototype headset is Lost, an animated feature by former Pixar animator Saschka Unseld. The film runs for roughly five minutes, but the length can be shorter or longer depending on the user and their actions. That is just the beginning -- Oculus plans to release four additional movies this year.
The Story Studio team only has about 10 members, and Oculus has yet to release the Rift commercially. But when the Rift finally launches, the studio could give Facebook a firm foothold in a new market for virtual reality films.
The business of VR films
At the Sundance Film Festival in 2012, Nonny de la Peña's Hunger in Los Angeles used an early head-mounted display to put a viewer in the middle of a food line outside a church. The success of Hunger encouraged the project developer, Palmer Luckey, to develop the Oculus Rift.
Several other VR films arrived at Sundance this year. Birdly turns the viewer into a bird flying above San Francisco. Project Syria puts the viewer in the middle of a terrifying rocket attack. Perspective: Chapter I: The Party is a harrowing experiment that lets a viewer see through the eyes of a man and a woman during a sexual assault.
Hollywood studios are also becoming interested in VR films. Annapurna Pictures, the producer of Her and Zero Dark Thirty, recently created a VR division. 21st Century Fox plans to release several VR experiences this year through its Fox Innovation Lab.
Market growth potential
Research firm KZero projects that annual sales of consumer-facing VR hardware and software will rise from nearly nothing today to $2.3 billion and $2.8 billion, respectively, by 2018. Active VR users are also expected to more than triple from 15.7 million in 2015 to 47.6 million in 2018. By comparison, Netflix reported 57.4 million subscribers and $1.3 billion in revenue for its most recent quarter.
If Facebook and Oculus were to launch their own VR streaming service for Rift owners, the social network could generate significant revenue as VR adoption grows. Oculus Rift sales, at the estimated launch price of $200 to $400, could generate billions more. Overall, Wall Street expects Facebook to post $17 billion in revenue in fiscal 2015.
How VR movies could evolve
There are admittedly major challenges to producing VR films for the mainstream market. The first would be length -- current VR films only last a few minutes. Making a full-length VR film could be much more expensive than producing a regular film, since it would require the creation of a full 360-degree virtual environment.
A movie would also be different for every user, since the experience is private rather than shared. However, movies would be much more rewatchable. If Facebook integrates its social networking features into films, remote viewers might even be able to simultaneously experience a single VR film from different perspectives.
A long-term investment
Facebook acquisitions have often had investors scratching their heads until the big idea emerged years later. When Facebook bought Instagram for $1 billion in 2012, the market wondered why it would acquire a photo sharing service with 30 million users and no revenue. Today, that same service has over 300 million users, and Citigroup analyst Mark May believes it could generate $2 billion in annual revenue when monetized.
Oculus is shaping up to be a similar long-term investment. Today, VR headsets seem like niche gadgets for hardcore gamers. But they also have incredible potential applications in filmmaking, which could be fully realized as Oculus Story Studio, Annapurna, Fox, and other studios develop more VR content.
Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook and Netflix. The Motley Fool owns shares of Citigroup Inc, Facebook, and Netflix. 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.