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Facebook's Oculus Rift Won't be the iPhone of Virtual Reality

By Sam Mattera - May 1, 2016 at 11:43AM

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CEO Mark Zuckerberg insists his company's infatuation with hardware is a necessary, albeit temporary step, on the way to building the next great computing platform.

Game available on Oculus Rift. Source: Facebook.

Facebook's (META -0.76%) time as a hardware manufacturer may be short lived.

In March, the social networking giant launched its first piece of hardware: the virtual reality headset Oculus Rift. Although the Oculus Rift won't generate much revenue for Facebook in 2016, it still represents something of a surprising shift in Facebook's core business model. Until last month, Facebook had confined itself to software and services.

More hardware is coming, though. Facebook will launch new controllers for the Oculus Rift later this year, and second- and third-generation models of the headset may eventually follow.

Yet investors shouldn't expect hardware to ever generate more than a modest portion of Facebook's revenue.

Specializing in software
Back in February, Facebook CEO Mark Zuckerberg sat for an interview with Germany's Axel Springer (via Business Insider). Zuckerberg touched on a wide range of subjects, but, at least for Facebook investors, his most pertinent comments may have centered around virtual reality, and his hopes for Facebook's long-term participation and possible business model.

We are betting that Virtual Reality is going to be an important technology. I am pretty confident about this...I honestly don't long it will take to build this ecosystem...My guess is that it will be at least 10 [years]...We're mostly interested in the software. But there is a time early on in the development of any new platform where you really need to do the hardware and the software at the same time. Only later does specialization become valuable. So you get a company that is really good at the hardware, and one that is really good at software. Everything is changing quickly enough that you kind of want the iteration to be linked. Which is why we also take care of the hardware; although our long-term role will be in the field of software.

Facebook is building the Oculus Rift headset itself because virtual reality remains in its infancy. But eventually, like other computing platforms, it will mature. At that point, Facebook won't be interested in providing headsets -- it wants to own the software that powers them.

Going for massive market share
That stands in notable contrast to the computing model Apple (AAPL 1.62%) has long championed. Since its inception, the Cupertino tech giant has steadfastly embraced an integrated hardware-software approach throughout its entire product portfolio. Apple designs the iPhone and Mac, and also develops the software that powers them. That approach has allowed it to consistently deliver top-notch user experiences -- ones its competitors have had a difficult time replicating.

Google and Microsoft have embraced a different model, developing operating systems (Android and Windows, respectively) but relying on a procession of hardware partners to build the actual devices. Apple's approach has made it fantastically profitable, but its share of the smartphone and PC markets has long trailed that of its rivals. Apple captured just 15.3% of the worldwide smartphone market last quarter according to research firm IDC -- Android accounted for almost all of the remaining 84.7%. Among traditional PCs, Windows is even more dominant.

Going for an integrated approach could perhaps net Facebook Apple-like hardware profits if the Oculus Rift is a success, but would contrast with the company's core objective -- connecting the world. After nearly a decade, Apple is about to sell its billionth iPhone, but Facebook has more than 1.65 billion people checking its website each day (not to mention Messenger, Instagram, and WhatsApp, which collectively add about another 2.3 billion).

Not material in 2016
Facebook's management has been clear: Oculus Rift won't be material to the company's financials anytime soon. But for long-term shareholders, Facebook's interest in virtual reality is certainly worth watching. Zuckerberg is a big believer, and thinks it could become the next major computing platform after the smartphone and PC. Through Facebook's dual class stock structure, Zuckerberg has commanding control of the company, and at the age of 31, he isn't going anywhere anytime soon.

If Facebook is successful, Oculus could one day be the Android or Windows of the virtual reality market, powering hundreds of millions of headsets throughout the globe.

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