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Facebook Oculus Rift

Facebook takes another step towards future-proofing itself with Oculus deal

By Andrew Moss

March 27, 2014 | 6 min read

Facebook’s been on a buying spree again. Just weeks after buying messaging service WhatsApp for $19bn, it has put its hands into its very deep pockets once more and on Tuesday bought the virtual reality (VR) technology firm Oculus VR for $2bn [£1.2bn].

The Oculus Rift in action

As with the WhatsApp deal, this latest acquisition took everyone by complete surprise. Facebook paid $400m in cash and the rest in more than 23m shares, at the time of writing worth about $1.6bn [£970m], plus an additional $300m pegged to Oculus’ future performance.

In an unusually detailed company statement (perhaps designed to reassure nervy shareholders anxious about almost $21bn being spent within a month), Facebook said it had recognised how Oculus – founded by 21-year-old college drop-out Palmer Luckey, and best-known for its Oculus Rift VR headset which raised $2m of crowd funding on Kickstarter in 2012 – had built a solid following among game developers (60,000 developer versions have already been sold and dozens of games already support the technology), but that virtual reality technology would expand to other industries from communications and entertainment to education and media.

"Mobile is the platform of today, and now we're also getting ready for the platforms of tomorrow," said Facebook founder and CEO, Mark Zuckerberg in the statement. "Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate."

So, what is Facebook up to, and why did Zuckerberg and co. spend almost $2bn? Among gaming buffs, Oculus’ high-quality VR capability was seen as the future of gaming – a tool that allowed almost complete immersion in a gaming world.

However, while VR has long been coveted by gamers, tech geeks and sci-fi buffs, it is a very long way from enjoying universal acceptance. Facebook, with its billion-plus strong user-base, could popularise it and take it to a mass audience. But what it’s really about is Facebook ensuring it survives into the future.

As we saw with the WhatsApp deal, Facebook understands that users could soon tire of the basic social network and go elsewhere for ways of hooking up with friends and family and sharing selfies and videos – to grow, it needs to be a kind of hub around which users organise their lives, play games, send messages, buy stuff and make payments. Oculus could make communicating feel more “real”, but there has to be more than a kind of 3D timeline or a hyper-real Skype to make it worth $2bn.

What I think Facebook is betting on is that VR will be the next big thing: first the internet, then the world wide web, then mobile, next up, VR. With this acquisition Facebook has gained some cutting-edge tech (Oculus has just announced the Dev Kit 2 version of the Rift headset, which has a high definition display and better head-tracking hardware. The company says it has also eliminated motion blur and judder, which should significantly reduce motion sickness in users – a vital element in ensuring wider consumer take-up) and some very, very smart people.

Oculus will remain in its base at Irvine in California while the transaction closes in the second quarter of the year, and will presumably be left to its own devices for a while. What Luckey, his co-founder Brendan Iribe and the team will get is undreamed-of amounts of funding. With Facebook’s resources the technology will get ever more sophisticated, ever more quickly. It’s probably great news for VR as a tech.

But what of the rest of us? That’s more difficult to predict. As you might expect, almost as soon as the news broke on Tuesday, the web was awash with much wailing and gnashing of teeth. Gamers and games developers are a passionate and purist lot, and many of them see themselves as frontiersmen, untainted by corporatism; the idea that their favourite tech and their most beloved games being overrun with advertising is anathema. And of course, among this community, Facebook is widely mistrusted. Sure, it may have made Zynga and King (creators of the hugely successful Farmville and Candy Crush Saga games) household names, and run many games within its site, but up until now it has only catered for casual gamers, not the hardcore.

So, as with WhatsApp, Facebook needs to tread extremely carefully – plastering both platforms with marketing messages might bring in revenue in the short term but could prove fatally destructive in the longer term. It also needs to work hard to counter the suspicion that it is just there to collect huge amounts of data on users which it will then seek to monetise.

What I suspect that Oculus will be used for is to create new opportunities for Facebook – such as (off the top of my head, I think you’ll be able to come up with more) remote learning, meetings, house viewings or broadcasts of sporting events. It is, quite simply, Facebook planting its flag on Mount VR. What it will do next is anyone’s guess, but as long as there are no clumsy attempts to turn VR or gaming into a marcomms channel, or to farm data, this could be a real – excuse the pun – game-changer.

In 1968 the Chinese revolutionary Zhou Enlai is supposed to have said “it is too soon to tell” when asked about the significance of the 1789 French Revolution. What is the significance of Facebook’s acquisition of Oculus? I’m going to take Mr Zhou’s line on that one.

Andrew Moss is a partner at Green Square, corporate finance advisors to the media and marketing sector.

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