There’s no doubting the fact that virtual reality headsets are exciting and that the Oculus Rift is at the front of the pack in the VR space — despite the headlines Sony (SNE) recently received with its Project Morpheus VR headset for the Playstation 4.
If you’re going to buy your way into VR, then Oculus VR is it. The news that Facebook (FB) was the company that pulled the trigger and bought Oculus VR caught me off-guard. Like many industry watchers, I would have pegged Microsoft (MSFT) to be the most likely suitor. It has the cash, and with Sony’s VR move on the PS4, MSFT could use a response for the Xbox One.
Even Valve would make sense — it’s the company that helped develop the Oculus Rift prototype, after all. And it has a vested interest in making its Steam Machine PC gaming in the living room platform initiative more attractive to console gamers.
Commercial virtual reality headsets have been firmly focused on the video game industry. The Oculus Rift headset, in particular, has made its name with mind-blowing VR-enabled video game demos.
FB does casual games like Zynga’s (ZNGA) Farmville 2, but a sci-fi first person shooter like Half-Life (one of the titles optimized for Oculus Rift)? Not so much.
Does Facebook expect that its users will don Oculus Rift VR headsets for an even more immersive personal sharing of their family photos, Likes and favorite Internet memes? Given the difficulty Google (GOOG) has had in gaining public acceptance of its Glass augmented eyewear, I can’t imagine FB is going to have much luck convincing people to don headgear the size of a scuba mask.
So why did FB buy Oculus VR? Here are three possible reasons:
Oculus VR: A Bet on Future VR Integration With Social Media
In its corporate blog post about the FB deal, the Oculus VR team wrote about Facebook staff visiting their office, experiencing the Oculus Rift and sharing a “vision of creating a new platform for interaction that allows billions of people to connect in a way never before possible.”
That sounds a lot like a future Facebook where virtual reality lets you not just see the photos of your high school friend’s new kitchen renovation, but actual experience the glory of the new cabinets, granite countertops and smart appliances through VR.
Even if it does require silly-looking headgear.
Oculus VR: A Counter to Those “Facebook Users are Getting Old” Complaints
Every day, we hear warnings that Facebook users are getting old and that young people are abandoning the platform. This can make investors nervous that FB may face a collapse on the same scale as MySpace, where the cool kids leave first and only a few oldsters reluctant to change are left to turn the lights off.
Whether this scenario is likely or not, FB would obviously prefer to be a hub for the younger demographic, too. Hardcore video game players tend to skew young, and the Oculus Rift is highly regarded by gamers and the tech industry in general.
As the owner of Oculus Rift, FB regains some hip cred. Maybe even a method to draw these gamers onto the social media platform. How about automatic posting of high scores or dramatic game video captures to a Facebook account for sharing with the gaming community?
But the problem is, this crowd tends to be suspicious.
The first evidence of backlash to the deal took only hours. The creator of Minecraft — one of the most popular games out there and a title in line for an Oculus Rift version — has pulled the plug, tweeting that “Facebook creeps me out.”
That’s bad news for Oculus VR and for FB stock.
Oculus VR: Oculus Rift Means Diversification for FB
Microsoft did it. Google is doing it in a big way. One strategy to counter the threat of slowing (or declining) Facebook membership is to diversify into hardware.
It helps if that hardware drives users to your software services (like Google’s Android devices contribute to its search ad revenue), but even hardware on its own can help to take the sting out of a bad quarter and calm fears that your company is a one-trick pony.
Facebook CEO Mark Zuckerberg is also talking about expanding Oculus VR technology beyond gaming into education and other markets, so this deal could be about eventual FB services diversification beyond its core social media platform as well.
Even after shelling out $4 billion in cash as part of its $19 billion acquisition of WhatsApp, Facebook still has plenty of cash on hand ($11.5 billion at the end of Q4 2013 minus that Whats App buy).
By acquiring Oculus VR and the Oculus Rift, FB diversifies just a little bit with a foray into hardware, has the best VR equipment and minds out there to work on making social media even more sticky. And it even gets a shot at drawing a younger demographic — and hardcore gamers — into the Facebook web.
The Oculus Rift bet could eventually pay off in a big way for FB stock.
And even if it doesn’t, $2 billion (only $400 million of which is cash) represents a relatively minor expenditure in today’s tech world — especially for a company the size of Facebook.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.