March 26, 2014 6:17 am

Facebook plays platform catch-up with $2bn Oculus deal

FILE - In this Jan. 7, 2014 file photo, show attendees play a video game wearing Oculus Rift virtual reality headsets at the Intel booth at the International Consumer Electronics Show(CES), in Las Vegas. Facebook said Tuesday, March 25, 2014, it has agreed to buy Oculus for $2 billion, betting that its virtual reality may be a new way for people to communicate, learn or be entertained. (AP Photo/Jae C. Hong, File)©AP

What is Facebook? To many of its 1.2bn regular users, it is a place to share photos and chat with friends.

To its founder Mark Zuckerberg, it is a virtual world where members could eventually spend most of their daily lives. That is the vision behind Mr Zuckerberg’s $2bn acquisition of Oculus VR, a pioneer in the long-promised but newly resurgent realm of virtual reality. 

“Every 10 or 15 years there’s a major new computing platform,” said Mr Zuckerberg on Tuesday.

“To me, by far the most exciting platform is around vision . . . It’s different from anything I’ve ever experienced in my life.” Whoever builds and defines the next generation’s technology platform would benefit financially and strategically, he added.

In the current mobile era, Facebook missed out on creating its own platform, leaving Apple and Google, which developed the iOS and Android smartphone operating systems respectively, to dominate.

Mr Zuckerberg said Oculus would boost Facebook's goals of “connecting everyone”, “understanding the world” and “building the knowledge economy”.

In the short term . . .

At last week’s Game Developers Conference in San Francisco, Oculus and its new rival from Sony PlayStation, dubbed Project Morpheus, stole the show. Developers were abuzz with excitement about the potential of the new technology. 

Not so many years ago, Facebook itself was in that position, as games makers such as Zynga were propelled to huge riches through its viral distribution platform. Now, although more than 375m people still log into games through Facebook every month, it is a distant priority for developers behind Apple’s App Store and Google Play for Android devices. Even Zynga is trying to loosen its ties with Facebook.

“The world is moving mobile,” said the chief executive of one games company that works closely with the social network. “Facebook is part of the ecosystem, rather than the platform.”

In the realm of Apple and Google, Facebook is just another app.

Owning Oculus puts Facebook back into focus for games developers. Oculus’s chief technology officer is John Carmack, who as founder of id Software created pioneering 3D PC games such as Doom and Quake in the 1990s.

“It does give them an opportunity to explore what the next level of gaming might be,” said James McQuivey, analyst at Forrester Research. 

However, he believes that Facebook could have achieved that through a simple partnership, “without having to spend a dollar”. That could have brought “some data and some evidence it was worth buying”, he added.

Rather than buying developers’ affections, the deal risks scaring them off both platforms. Many in the games community were alarmed that their darling had sold to Facebook, posting hundreds of angry messages on Oculus’s website. Several backers of Oculus’s Kickstarter campaign, which raised $2.4m in 2012, are also upset, according to posts on that site.

Nonetheless, Facebook might have another near-term aim for the deal. In the hyper-competitive recruitment market of Silicon Valley, building a virtual world could prove more tempting to prospective employees than working for Google, Pinterest or Twitter – even if Facebook cannot deliver it for many years.

In the long term . . . 

Mr Zuckerberg is fond of calling Facebook a “utility” that should be viewed more like electricity than a flash-in-the-pan fad of a social network. Until he bought Oculus, some thought that was a convenient way of explaining why it had fallen out of favour with teenagers.

But the $2bn deal shows something else: the kernel of a virtual world created entirely by Facebook – where users can visit their doctor on Facebook, attend lessons in a classroom on the other side of the world using Facebook and yes, shop in a Facebook megastore.

That may sound like a nightmare for privacy campaigners, who have long criticised the company, or regulators, who are already struggling to apply the law to the internet on computers and smartphones.

But those were all examples Mr Zuckerberg gave of how Oculus could be used in the longer term. Calling it the “most social platform ever”, he said Oculus had the potential to be the technology platform of the future.

“Ensuring that Facebook can evolve as new platforms evolve makes sense to us,” said Brian Wieser of Pivotal Research.

Yet Mr Wieser is worried that $2bn “seems like a significant amount of money for a problem that has yet to emerge”. Assuming that developers paid Oculus at least $300 for each of the 75,000 headsets it has sold to date, Mr Zuckerberg is paying a hefty 90 times its revenues for the company.

Virtual reality could become the next stage of Silicon Valley’s transformation of other industries, from transport to fashion. If Facebook can actually own the platform of the future, $2bn – more than three-quarters of which is paid in its high-flying stock – might come to look like a bargain.

“It is a bold bet,” said Debbie Williamson, a social media analyst at research group eMarketer.

“It is hard to imagine a world in which people regularly interact in a digital 3D environment but by the same token if you asked me before smartphones became popular, did I imagine I would be standing in line in Starbucks scanning Facebook and using my phone to pay? I wouldn’t have been able to.”

As this world Mr Zuckerberg envisages is probably at least a decade off, he held back from explaining exactly how Facebook would profit from it. “There might be advertising in the [virtual] world but we’ll have to figure that out down the line,” he ventured, among other possible moneymaking opportunities. 

Ms Williamson says many marketers poured money into virtual worlds such as Second Life in the years when social networking was taking off. In the mid-2000s, companies such as IBM and American Apparel created giant virtual pavilions where Second Life users could interact. The experience had a “lot of limitations”, she said.

Other analysts note the technical challenges facing virtual reality. Many users of Oculus’s prototype experience feelings of nausea and questions are already being raised about the longer-term health effects of prolonged exposure to screens resting just inches from the eyes.

VR advocates might argue that similar concerns were once raised about television and cell phones. For now, people who want to live in Facebook full-time must do so by staring at glowing rectangles held at arm’s length from their faces.

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