Facebook Inc. Market Cap (28/03/2014): $153.01bn
One month ago one social-media user reported on Reddit that he had just seen Mark Zuckerberg on the elevators of a building at 19800 MacArthur Blvd, Irvin (CA), getting off at Oculus VR’s floor. Was the 30 years old billionaire just dropping by, or was he planning Facebook’s second blockbuster acquisition of the year?
After the recent $19bn investment in Whatsapp, on March 25th Facebook Inc. has announced its $2bn acquisition of Oculus VR, the California-based tech startup and a pioneer in virtual reality (VR) development, the next big thing in technology. The agreement includes $400m in cash and around 23 million Facebook shares to buy the company, which has already been defined Kickstarter’s most successful venture of all time. The transaction is still subject to regulatory approval and will be probably concluded by the third quarter of 2014.
Oculus VR was launched in 2012 by gaming enthusiast Palmer Luckey as the builder of an ambitious VR gaming headset. After gaining the backing of several videogame industry gurus its ideas have been financed both by venture capitalists and by Kickstarter’s users: now it can be defined the crowfunding platform’s most successful project ever and a company ready to leverage on Facebook’s global footprint in order to stay at the cutting edge of technological innovation. Especially in the US, venture capitalists are becoming increasingly important as source of credit for fast-growing tech startups. Having provided around $19mm each, Spark Capital, which also owns a stake in Twitter and Tumblr, and Matrix Partners, an early investor of Apple Inc., made a 2000% return on their initial investment in Oculus VR after the company was acquired by the social media giant and now they can boast around $400m each. On the other side exactly 9,522 Kickstarter users – the “backers” – who have pledged the money to develop and launch the beta version of Oculus Rift, an head-mounted VR display and Oculus VR’s main product, have received just one free device and a t-shirt attesting the startup’s gratitude towards them, as the money they pledged to the project does not give them any equity ownership stake in Oculus.
Even though the acquisition is not expected to result in any kind of short term synergies or integration between acquirer and target, the rationale of the deal can be identified as a pre-emptive strategic move by Facebook, a land grab in the no man’s land that is the virtual reality space today. Nowadays the buzzword in the tech community is wearable technologies (smartwatches, Google Glass, etc.), which represent the first truly new consumer tech platform since the advent of mobile a handful of years ago. Virtual reality may well be the next buzzword, and Facebook is looking not to be late to the party, as it did with mobile monetization, whose lack weighted down its stock price due to late implementation. While VR is still in its infancy and widespread consumer adoption, let alone monetization, is a long way off, Facebook is not the only tech giant in the game. Google is ready to bring a retail ready version of its augmented reality visor Google Glass to the mass market, and this week Microsoft has quietly acquired a trove of intellectual property from VR specialist Osterhout Design Group for $150mm.
All in all, Facebook’s acquisition of Oculus VR may well mark the turning point in its long term strategy, its Google moment, so to speak: after a couple of years of acquisitions in its core social media space (Instagram, Whatsapp, etc.) with an eye to increasing and maintaining user engagement, Facebook has now turned to a more ambitious vision of empowering people to share and communicate across the world. Virtual reality fits this horizon together with the recent announcement of its plans to provide Internet across the world via drones, satellites and lasers through its Connectivity Lab initiative. The only other tech company that has committed itself to such ambitious projects for some time is Google, which leads the field with its Internet distribution Project Loon, its self-driving car, and also more futuristic robotics, artificial intelligence and even anti-aging ventures. Such a duopoly in large-scale future technology investment puts Facebook and Google in a competition to devise the ultimate tech platform that will encompass all the aspects of our daily life in the not-too-distant future. It remains to be seen which of the investments will also end up creating shareholder value in the long term.
The two companies will continue to operate separately: Oculus will further develop its gaming headset Oculus Rift, which allows users to experience the impossible, being truly integrated in game through virtual reality. Anyway Facebook’s plans go further: they want to include virtual reality in the user experience of their own social media, which can create truly immersive scenarios and possibilities in the virtual world.
Our view is that Mark Zuckerberg has bought in something that once was only science fiction, and he has bought in cheap as Oculus could possibly guarantee a long-term advantage with respect not only to Facebook’s peers, but also with respect to giants of the computing industry as Google and Apple.