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When a big company is still controlled by its founders, its greatest strength is that it has the resources and the freedom to do almost anything, regardless of the shortsighted fears of investors. That’s also its greatest weakness. Case in point, Facebook.
I can rationalize reasons why Oculus VR is a good fit for Facebook, but I think the official explanation for the deal is pretty thin. To me, it says more about Facebook’s ego than it does about a coherent long-term strategy. Deals like this between dissimilar companies have a long history of failure in Silicon Valley; to make it work, Facebook will need to be skilled in some areas where it has little experience. The company is also creating important new competitors to itself, in ways that echo Google’s Motorola acquisition. I’m a huge fan of Oculus Rift, so I hope the deal ends better than the Motorola one. But history makes me skeptical.
Why Facebook wanted OculusFacebook’s explanation is that virtual reality is a new platform that, like mobile, could revolutionize social interaction. Facebook says it wants to be at the leading edge of that 3D social revolution, rather than trailing it the way it did mobile. That makes sense superficially, but the more you think about it, the shakier it sounds as the reasoning for this particular deal.
First of all, if you believe VR is a new platform, it’s not clear why you need to buy a hardware goggles company. It’s not like Oculus Rift is the only pair of 3D goggles in development. With Facebook’s market strength, it could have set a set a software standard and easily gotten it adopted by all the 3D vision companies. A small minority investment in Oculus would have been enough to secure their support. If you wanted a play in social VR, why not snap up SecondLife? Linden Lab has invested more than a decade in building software infrastructure for social VR, and would have cost a lot less than $2 billion.
Maybe you feel that the hardware and software have to be developed together. That’s a very Apple-like attitude, and therefore trendy in Silicon Valley. There have been persistent rumors that Facebook was working on its own phone. Maybe Facebook decided that it was too late to join the phone business, but it could get a jump on everyone else 3D.
But if hardware-software integration is the key, you’d want to drive deep integration between Oculus and Facebook’s software. You wouldn’t promise to run Oculus as a separate company, which is what Facebook claims it’ll do.
I think the real reason not to buy something like SecondLife is that it’s no longer trendy. Nothing smells worse in Silicon Valley than a company that failed to live up to its over-the-top hype, and the hype for SecondLife was astonishing about seven years ago. Oculus, on the other hand, is still at the takeoff stage in the hype cycle. It is the subject of a cult in the PC gaming community. The company promised to hit a sweet spot of affordability and quality for VR, and hardcore gamers embraced it enthusiastically through one of the first blowout Kickstarter campaigns. Although Oculus wasn’t mainstream news, there are literally millions of Oculus Rift-related videos on YouTube, most of them from enthusiasts drooling over the prototypes.
The cool factor. So by buying Oculus, Facebook makes itself cooler. The trouble is, it makes Oculus less cool. The enthusiasts who embraced Oculus because of its perceived authenticity and deep ties to the gaming world are appalled at the thought of it being owned by Facebook, which is seen as the poster child for lame low-res social gaming. It’s as if Motel Six bought the Ritz-Carlton. The Verge has a nice roundup of the angst
here. My favorite quote: “even Microsoft would have...been better than Facebook.”
Fear of missing out. I wonder if another motivation behind the Oculus purchase was the fear that if Facebook didn’t act, someone else would buy the company. If you feel VR is important and if Oculus is a leader, then maybe you buy it just so you don’t get closed out. The big VCs who invested in Oculus have a playbook for acquisitions, and it usually involves creating competitive bids, or the fear of them, to drive up the price. If Facebook was afraid that a competitor might buy the company, it might have felt the need to make a deal fast at an aggressive price.
Fighting Google. I think the primary motivation for the Oculus purchase was competition with Google. Both companies are led by ambitious technophile founders, and both have more money than they can count. Google has a cool new thermostat company, lots of neat special projects, and a very strong play in mobile that it is leveraging to push its own services, to the potential detriment of Facebook. Google also has a smart glasses initiative. Now Facebook has its own headgear, and the hottest new technology in gaming. The social aspect is important, but I think Facebook just wanted to be a bigger, more dynamic player. As Harry McCracken put it over at Time, “the world's biggest social network is no longer satisfied with just being a social network.” (
link).
Isn’t it interesting how companies impose their own mental paradigms on technologies? Google looks at glasses and sees a way to search and consume web services on the go. Facebook looks at goggles and sees a new means for social communication.
That’s exactly what scares the fans of Oculus. They wanted the next great gaming experience, not a communication tool.
Risks of the dealThat brings us to the dangers in the Oculus deal. Let’s start with the thing not to worry about: the money. Facebook has more cash than it can possibly spend. An acquisition like this is just a way of recycling some of it. It’s kind of like Japan Inc. buying golf courses in the US in the 1980s. They had to do something with the money.
What I’m worried about are the odds that the deal won’t live up to Facebook’s lofty expectations. Let’s start with the risks to Oculus.
Loved to death. Whenever a big company buys a little one, there’s a big risk that the acquiring company will smother its new acquisition to death with enthusiasm. Everyone in the parent company is excited about the sexy new partner and has great ideas on how they can work together. There’s no way for the acquired company to deal with even a small fraction of these new ideas; usually it was working flat out just to do the basics prior to the deal and has no bandwidth for anything else.
Often the acquirer will be aware of this mismatch, and authorize the acquisition to hire a bunch of new employees to deal with the overload. But then the acquisition finds itself consumed by the hiring process, and its capacity for work actually goes down while the new employees are hired and trained. Usually first hiring priority has to be given to the parent company’s own employees, meaning the acquisition gets flooded with the parent company’s culture and business practices, and loses much of the distinctiveness that made it valuable in the first place.
To avoid smothering the acquisition, senior management in the parent company has to rigorously limit contact with the acquisition, and allow it to gradually staff up and grow into its new role. Does Facebook have that sort of discipline? So far it’s saying the right things, but the proof will be in actions, not words.
Arrested evolution. I’ve seen this happen over and over again. New device paradigms, if they succeed at all, usually create their own new usage patterns that nobody can predict in advance. To put it another way, we don’t know what the killer app for VR will be yet. Oculus is still in early beta on its first product, so it hasn’t had much opportunity to learn from the market. Chances are that when it ships, it’ll find that customer reactions pull it in directions it didn’t expect. Features that the company expected to be hot will go by the wayside, while something they casually tossed in at the last minute will turn out to be the biggest differentiator. A nimble startup can usually pivot to follow these discoveries. Will Facebook be open enough to let Oculus find its own way in the market, even if that leads it away from Facebook’s core business? If so, it would be a rare big company indeed.
Dealing with developers. Although Oculus and Facebook agree that its long-term future extends beyond gaming, I think it’s fair to say that unless the company is successful in gaming it may not be able to branch to those other markets. Success in gaming means recruiting developers to support Rift. Oculus had a lot of momentum prior to the acquisition, but we’ve already seen one developer (Mojang, the creator of Minecraft) decommit because of the Facebook deal (
link).
I don’t think Mojang is necessarily an opinion leader among hardcore gamers, but Facebook’s history with developers worries me a lot. At one time, in the race to defeat MySpace, Facebook embraced developers enthusiastically. It made itself a welcoming platform for them, and many companies, especially game creators, jumped in enthusiastically. But although Facebook offered a lot of technical support for developers, it never put much effort into helping them make money. It was almost as if the company lost interest in developers once MySpace was out of the way.
I’m not saying that Facebook deliberately mistreated developers, but I think it never understood that a successful platform has to be both technically cool and financially rewarding to developers. Facebook never made the economics of its platform work, and as a result its developer base withered way. Some of the survivors switched to mobile instead and became leaders in the new generation of mobile games. To this day if you get them talking in private they’ll tell you about their lingering distrust for Facebook.
Facebook seems a lot more comfortable evangelizing developers to use its login and advertising APIs, rather than creating an economic and technology platform that makes them successful. But that won’t be enough to make Oculus a winner. If Facebook is serious about VR as the next big paradigm, it needs to change itself to embrace VR developers and help them succeed as businesses. Will Facebook learn how to take care of a platform business? Or will it take orders from tiny little Oculus in this area? To me, that’s one of the most important unknowns in the Oculus deal.
Indigestion. My other concern is that Oculus could create internal and external problems for Facebook. Working on VR may pull Facebook’s attention away from other, more pressing competitive threats. To me, the most important near-term challenge to Facebook is the rise of the Asian messaging networks that combine free short messaging with games and other online services. The acquisition of WhatsApp was meant to counter that, but Facebook still has to figure out how it’ll be integrated with the core company. Do Mark Zuckerberg and his management team have enough time and brain juice to figure out how to integrate both WhatsApp and Oculus?
Buying Oculus also creates potential new enemies for Facebook. Until the acquisition, companies like Sony and Microsoft had good reasons to view Facebook as a potential partner in their struggles against Google (remember, Microsoft owns about 1.6% of Facebook). But Oculus founder Palmer Luckey has been outspoken in his criticism of both PS4 and Xbox, saying they don’t have the power to do proper VR. And he has speculated about building mobile wireless chips into the Rift goggles, making them a long-term competitor to the smartphone (
link). How will Apple feel about Facebook buying a company that says it’s going to make the smartphone obsolete?
When Google bought Motorola Mobility in 2012, I saw the shock and fear it generated in the Android licensee base. Even though Google eventually sold off most of Motorola, those companies will never again fully trust Google. I don’t think Oculus is the same level of shock to Facebook’s allies, but I suspect they’re now asking themselves whether they can trust Facebook as a partner in the future. That could hurt Facebook in ways it doesn’t even imagine today.
So I’m hopeful because I believe in the potential for VR, but I’m also very worried. For the Oculus deal to work, Facebook needs to understand developers much more deeply, exercise self-restraint organizationally, and navigate a very tricky landscape of allies who are now also competitors. None of those skills are particular strengths of Facebook today.
I hope they can learn quickly.
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Edit: There's an alternate view of the deal: What if Mark Zuckerberg really does want to make Oculus into the next generation of computing, not just a social extension? That creates another set of challenges, which I discuss
http://fullhdresolutionare.blogspot.com /2014/03/more-thoughts-on-facebookoculus.html" target="_blank">here.
