Facebook's (NASDAQ:FB) mammoth $19 billion acquisition of the world's largest messaging service WhatsApp garnered much attention last year, as did CEO Mark Zuckerberg's deal for solar-powered drones to further his Internet.org initiative. On a relative basis however, the "minor" $2 billion spent on Oculus may end up providing Facebook shareholders with the best return on investment.
Make no mistake, WhatsApp will eventually become a significant source of both revenue and for what Facebook does best: amass and utilize reams of user data to better target its digital ads. And testing has already begun on beaming Internet access to the world's underserved Internet connectivity masses, which will go a long way toward continuing Facebook's quest of growing its monthly average users (MAUs).
But according to new data, Oculus' virtual reality (VR) headset Rift, along with competitors like Microsoft's (NASDAQ:MSFT) augmented-reality (AR) solution HoloLens, are poised to lead the way in what is expected to be an exploding industry. Better still, Zuckerberg made it clear when he first announced the deal for Oculus that gaming -- the obvious driver of VR growth -- is only the beginning.
What's the difference?
Though the line is fairly thin, there is a distinction between virtual and augment reality solutions. Oculus' Rift VR is able to transport a user into another, virtual, world entirely. Which makes Samsung's (NASDAQOTH: SSNLF) mobile VR device, Gear Innovator, a bit questionable in that users can't actually wander down the street while immersed in a virtual world -- at least, not without fear of walking into traffic.
Interestingly, Oculus is largely responsible for Samsung's mobile solution, and the potential accidents aside, there are certainly applications for mobile VR. Gamers on the go -- be it a bus, the back seat of a car, or even an airplane -- are just a few of many possibilities.
Microsoft's HoloLens AR technology provides users with a slightly different experience. Rather than diving straight into the deep end of the virtual reality pool, AR users are still aware of the (real) world around them, but its augmented to include a 3D, semi-virtual experience.
Just how bit is big?
Consulting firm Digi-Capital recently released a report suggesting that the VR and augmented-reality market will grow to a whopping $150 billion in just the next five years. As Digi-Capital described it, VR and AR, "feels a bit like the smartphone market before the iPhone." Needless to say, that's an awfully powerful statement, but it's not hard to imagine it coming to fruition. One look at a gamer that's lost in another world for hours on end is a testament to that.
Digi-Capital goes on to suggest that AR will actually take the lion's share of the overall market. The $120 billion of the $150 billion total revenues by 2020 falling on the AR side of the fence may be a stretch, but either way both markets are positioned for outstanding growth. And Zuckerberg has grander plans for Oculus than gaming. As he described it, "We're going to make Oculus a platform for many other experiences." Maybe a VR-AR hybrid? Now that would really be an intriguing notion.
Oculus Rift, coming to a store near you
While investors shouldn't rely too much on the ever-present rumor mill, word has it Facebook will release its Oculus Rift to the masses by the end of this year. Some industry pundits have implied Oculus should introduce its Rift VR solution even if it's not "perfect." But if we know anything about Facebook, it's that it won't rush it -- no matter the revenue potential -- until it's ready. One look at the just recently unveiled, and long-awaited, video ads and the continued testing of spots on Instagram attest to that.
And for long-term investors, Facebook's decision to get Oculus Rift right the first time is just fine. Already an industry favorite, Oculus' VR solution is primed to lead this exploding market -- unless it drops the ball and releases an underwhelming device. As the Digi-Capital's study makes clear, there's too much at stake for Facebook to drop the VR ball. But when it is ready, and it's getting close, Oculus Rift is primed to be a virtual home run for Facebook, and by extension its shareholders.