Home >companies >Facebook makes $2 billion bet on virtual reality with Oculus

San Francisco: Facebook Inc. is making a $2 billion bet that a virtual-reality headset will one day become the center of its users’ social lives.

The world’s largest social network on Tuesday said it is buying Oculus VR Inc., pushing into wearable hardware for the first time and stepping into a race with Google Inc. Oculus, based in Irvine, California, makes a ski-goggles-like device called Rift that people can wear to play games and that may eventually let them feel like they are watching sports courtside.

Facebook chief executive officer (CEO) Mark Zuckerberg is following Google in seeking new growth beyond smartphones and tablets. While Apple Inc.’s iPhone and Google’s Android mobile devices dominate today, developers are looking for new gadgets to showcase their wares and are focusing on the more lifelike experiences that Oculus provides, Zuckerberg said in a blog post.

“Mobile is the platform of today, and now we’re also getting ready for the platforms of tomorrow," Zuckerberg said. “Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate."

Buying Spree

Facebook agreed to pay $400 million in cash and 23.1 million shares for Oculus, as well as an additional $300 million if the start-up achieves certain milestones, the Menlo Park, California-based company said in a statement on Tuesday.

The deal follows a spate of acquisitions that Facebook has used to build up its mobile business. Last month, the company agreed to purchase messaging application WhatsApp Inc. for $19 billion. In 2012, Facebook bought mobile photo-sharing programme Instagram for about $700 million.

The 10-year-old social network, which held an initial public offering (IPO) in 2012, has completed or announced more than 40 acquisitions valued at a total of more than $21 billion, including WhatsApp, Oculus and a $550 million deal for a Microsoft Corp. portfolio of patents, according to data compiled by Bloomberg. Facebook had $11.4 billion in cash and investments at the end of 2013.

Facebook shares rose less than 1% to the equivalent of $65.03 in German trading at 9:04 am Frankfurt time. They added 1.2% to $64.89 at the close in New York before the acquisition was announced and have gained 19% this year.

Real Potential?

Facebook’s claim about virtual reality’s potential is hard to prove or disprove, said Mark Mahaney, an analyst at RBC Capital Markets.

“What we do know is that Facebook was late to adopting the mobile platform, though it certainly caught up with this platform shift and is now arguably one of the shift’s leaders," said Mahaney, who has the equivalent of a buy rating on the shares. “The question this time is whether Facebook is too early or simply betting on the wrong platform."

Oculus will be competing in a crowded wearable-technology market. Google is rolling out Glass, which are spectacles with smartphone capabilities, and earlier this week teamed up with Luxottica Group SpA, which owns eyewear brands such as Ray-Ban, to help the product go mainstream. Samsung Electronics Co. has introduced smartwatches. Intel Corp. on Tuesday said it acquired closely held Basis Science Inc., the maker of a wristwatch-like device, website and app that help users track exercise and sleep.

Services, Advertising

Zuckerberg said on a conference call that he doesn’t expect the Oculus devices to be profitable. Facebook plans to make money through software and services or advertising instead, he said.

“We still have a lot of work to do on mobile but at this point we feel strong enough in our position that strategically we also want to start focusing on building the next major computing platform that will come after mobile," the CEO said on the call. “We’re making the long-term bet that immersive, virtual and augmented reality will become a part of people’s daily lives."

Facebook considered building its own virtual-reality platform, yet didn’t have the technology or engineers that Oculus had, Zuckerberg said. The CEO said he wants to make Oculus’s product “ubiquitous" and bring it to market as soon as possible.

Zuckerberg said Facebook can foster acquired technology by citing Instagram, which had about 30 million users in 2012 before its purchase and now has has 200 million.

Rift is available to some developers, though not yet to consumers. More than 75,000 software development kits have been ordered by those who want to build programmes for the device, Oculus said.

Oculus’s Beginnings

Oculus was founded by entrepreneur Palmer Luckey, a self-described hardware geek, and is run by CEO Brendan Iribe. The company has raised more than $91 million, including a $75 million round led by Andreessen Horowitz in December and $2.5 million of preorders from a campaign on crowdfunding website Kickstarter in 2012. Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.

Most of Oculus’s 100 employees work near the John Wayne Airport in Orange County, California, in an office park that’s festooned with old game controllers and models of alien creatures.

The Oculus team met with Facebook executives including Zuckerberg a few months ago in Southern California, the start-up said in a blog post. Discussions evolved into “an even deeper vision of creating a new platform for interaction that allows billions of people to connect in a way never before possible," Oculus said.

No bankers were involved in the deal, according to a Facebook outside representative.

Shared Vision

“A few months ago when Mark and his team came down to visit our offices, it was immediately clear that the two teams share a passion for building a new world-changing communications platform," Oculus CEO Iribe said on the conference call. “This is a team that’s used to making bold bets for the future."

Facebook will help Oculus recruit, pursue partnerships and provide marketing and infrastructure, Iribe said.

Antonio Rodriguez, an Oculus board member who is a partner at Matrix Partners, said the start-up has been an object of interest for other acquirers.

“I’m happy for Facebook because this is not a company that has lacked for suitors along the way," Rodriguez said in an interview. “Facebook just did a much better job talking to the team." Bloomberg

Brad Stone in San Francisco and Alex Sherman in New York also contributed to this story.

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