In a deal that seems to be universally hated from Wall Street to tech forums around the internet, Facebook (NYSE:FB) bought virtual reality company Oculus VR for $2 billion last week. Many still wonder why Facebook bought Oculus.
Even as the Oculus VR founder and key employees receive death threats from passionate fans of its virtual reality hardware, the Oculus Rift, the founder remains confident in the deal.
“A lot of people are upset, and I get that,” wrote Oculus founder Palmer Luckey on Reddit. “If yo u feel the same way a year from now, I would be very surprised.”
The big question we have to answer is why Facebook CEO Mark Zuckerberg would spend $2 billion on a virtual reality company that has yet to produce a consumer product.
For starters, what is Facebook’s risk?
The company paid $2 billion for Oculus VR but only $400 million of it was in cash. The remainder of the purchase was made with shares of Facebook.
$400 million in cash might seem like a lot…but it’s not.
At the end of last year Facebook had almost $11.5 billion in cash. When Facebook recently purchased WhatsApp for $19.5 billion the acquisition only cost $4 billion in cash.
With around $7.5 billion in cash on hand, what’s $400 million to acquire technology that could be the future of user interface?
What happens if the Oculus deal turns out to be a big mistake?
Not much. Doubtful that Mark Zuckerberg will feel embarrassed considering that he built Facebook from the ground up. The $400 million Facebook spent on Oculus will quickly be replaced with new earnings and the remaining $1.6 billion in stock is a drop in the bucket, relatively speaking.
Facebook’s risk is low. But it’s potential gain is high.
With a visual experience that has been called “mind-blowing,” Oculus Rift is a virtual reality Head-Mounted Display, or HMD. The device made its debut at the 2012 Electronic Entertainment Expo and, after making a huge impression on attendees, Oculus VR was born.
Oculus Rift was envisioned as a gaming device, a way to deliver an immersive and visually stimulating gaming experience. The gaming community rallied around it when the company sought to raise a mere $250,000 on crowdfunding site Kickstarter. The response was overwhelming, with the Oculus campaign raising over $2.4 million.
While social gaming is certainly a large component of Facebook, I don’t think Mark Zuckerberg had Zynga’s (NASDAQ:ZNGA) Farmville or King’s (NYSE:KING) Candy Crush in mind when he purchased Oculus.
No, I think this is what Zuckerberg had in mind.
Imagine that you put on your Facebook Oculus goggles. The screen lights up and fills your gaze with images that your friends posted to Facebook. You turn and see your Instagram feed. Turn again and you see updates from your favorite businesses, maybe even a promotion or coupon you can redeem through an online marketplace run by Facebook.
This is a new way of viewing the internet and viewing your social web.
Facebook didn’t buy Oculus because gamers think it’s cool. Facebook bought Oculus because Zuckerberg doesn’t think we’ll enjoy staring at computer screens in the future.
I’m inclined to agree with him.
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