Oculus VR: Where Did Facebook See The Billions?

Late in April, Facebook acquisition of Oculus VR got greenlighted by the US FTC, for around $2B in cash and stocks.

What did Mark Zuckerberg see in this company to justify the hefty sum? According to him, he saw the future.

For those unfamiliar with the topic, Oculus VR is a small hardware company, bootstrapped via the popular crowdfunding platform Kickstarter. A first hint of their value is that they delivered on the promise of virtual reality for the masses, where others either failed to propose a satisfying experience, or required a DARPA scale budget to purchase!

People who got to try the product, called "the Rift", all went on a stream of elogious comments: "3D gaming done right", "truly immersive experience", "Oh.My.God." And by tackling the challenge at the right time, they managed to get it this done with now commoditized components, bringing the cost to produce in the lower hundreds.

OK. So now you can feel like you are actually in the plane, or in the middle of the battlefield. So what?

I certainly am not in Zuck's mind (or I would be CEO of a famous company) but there are a few assumptions which can be made. And let's dare to suggest far fetched ideas, because one have to be bold when thinking about the future of a 1B+ social network.

First things first: gaming.

That is where Oculus VR is rooted, and the company seems to be on a very promising track. They snatched John Carmack, the creator of "historical" first 3D games (Wolfenstein 3D, Doom, Quake) as their CTO, and entered partnerships with top-tiers game engines (Unity, Unreal) to integrate Oculus VR into their SDK (software development kit) available on PC, Mac, Linux. Nothing is done yet, but the stage is set to address the hardcore gamers crowd - and then, being already adopted by the big games publishers will make Oculus a fast track choice for console makers to bring VR to their customers. Out of the 34M US core gamers playing over 22h a week (which represent the die-hard community of games in the USA) let's assume 30% buy a Drift at $399. 
That's already a $4B first-purchase market, and I have left aside both the rest of the world, the wider gaming community, and of course the renewal market.

With the financial soundness of acquisition in mind, it is now time to comfortably drift ;) towards more far-fetched considerations (or are they?)

A relatively cheap device to bring immersive virtual reality can be very convenient for a lot of use cases, like in flight entertainment, or e-learning. But coupled with the network effect Facebook brings, with over 1.23 billion monthly active users, possibilities become tremendous. Think of advertising, Facebook's bread and butter. 2013 saw a 55% percent bump, to $7.9B in sales, at an average cost per click of 45 cents.

Now, imagine Facebook enables these same advertisers to set shops on the network (yes, they already do) with the possibility for Oculus owners to actually visit the shop, see and "touch" products and make purchases. Other pieces of hardare would be required, but it would make Facebook move from a cost per click to a cost per transaction, which has a lot of value for retailers, and drives higher revenue per unit for Facebook, who would own the virtual ecosystem and likely the payment process. Yes, this already exists too, the best known instance is called Second Life. (Smartphones existed before iPhone, too ...)

Then again, what is important here is that is the first time scale (1B+) meets satisfying experience (Second Life is still screen ridden). These elements would justify Facebook claiming a revenue share comparable to Apple's on each sale, i.e. 30%. With the f-commerce already big and growing, expected to surpass Amazon in 5 years, it would be another hit for Facebook, potentially over $10B yearly.

Closer from now: Facebook is already the leading global communication network. You already get news from the pal next door and your friends expatriated the other side of the world. What if you could sit in the same room with them and comment the rugby match you're watching? With a twist, it could also bring a revolution in telepresence, with a cheaper cost of equipment and a more immersive experience.

Let's get a little crazy now (if not, where is the fun?) You must have read or seen at least one (and likely a dozen) of books and movies depicting a distant future where we would be living most of our lives in a virtual world, difficult to distinguish from reality? Yes, the likes of The Matrix, Surrogates, Ready Player One, eXistenZ (I'm sure I have forgotten your favorite one). What if Oculus acquisition by Facebook was the fundation of such a world? What if that very world was to come upon us sooner than we expect, just without all the drama?

Of course there are a lot of "ifs", you can bet Oculus will not stay alone in the space for long, and this will be commoditized very soon. But grabbing a slice of the future has a price.

Mark Zuckerberg figured it would be $2B, and it might be a steal.


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