The Oculus Development Kit 2.

MARCH 26, 2014 • In a major surprise, Facebook Inc. has acquired Oculus VR Inc. for $400 million in cash and $1.6 billion in stock. The latter is the virtual reality technology company founded by 21-year-old Palmer Luckey who was an engineer at USC’s Institute for Creative Technologies, and built early interest in his product proposal through online forum chats. After id Software founder John Carmack took an interest, the publicity that followed helped Luckey take his idea to Kickstarter in August of 2012 where he raised $2.4 million. Additional investment in the amount of $90 million was raised afterward. The Oculus Rift VR headset is still in development, and the start-up has received orders for 75,000 of its $350 development kits. No release date target has been disclosed for the final consumer product. If Oculus meets performance goals set by Facebook, an additional $300 million in cash and stock will be paid to Oculus. Facebook’s stated reason for the acquisition is to have an ownership interest in new entertainment platforms.

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Impact: As we said last week in regards to Sony’s Morpheus VR unveiling, we are not sure a large number of consumers are interested in owning virtual reality headsets. So this is an intriguing purchase for Facebook. Prior acquisitions such as WhatsApp and Instagram were much more closely aligned with the social network’s core business. Yet Facebook chief executive Mark Zuckerberg has a strong feeling consumers would rather watch the Super Bowl via Oculus Rift on their deck rather than on the couch in front of a 60-inch HDTV. The disconnect we see with that assumption is that the major new disruptive entertainment platforms since 2000 have been portable in nature – shrinking technology into a quickly accessible form factor that can be taken anywhere. Oculus Rift is not a mobile platform, however. At present, the device is not even wireless, although the final consumer product may indeed shed its wire connections.

Programmer John Carmack.

We understand how VR devices completely immerse the user into media, and why that is attractive. Yet the successful mainstream platform trends we have seen during the last 20 years have been geared toward increased convenience, and we don’t see VR headsets as inherently convenient devices. Then there is the issue of motion sickness when wearing VR headsets. All that said Facebook is making a significant bet that augmented reality is going to be popular with consumers in a big way. The investment in programming, marketing and licensing necessary to make VR succeed will undoubtedly be huge. Finally we think that the Facebook purchase will likely mean Oculus Rift shifts its focus away from games.  Markus Persson, creator of Minecraft, was quick to go to Twitter to announce he was canceling plans to bring the game to Oculus because Facebook “creeps” him out.  Even if other developers do not feel the same, we think that Facebook is mainly looking for VR applications outside games.