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Two Years Later: Facebook's Oculus Acquisition Has Changed Virtual Reality Forever

Two Years Later: Facebook’s Oculus Acquisition Has Changed Virtual Reality Forever

On a sunny March Tuesday in San Francisco, Oculus co-founder Palmer Luckey was playing tennis.

A half dozen onlookers, most in town from Japan, oohed and aahed as Luckey mixed in overhead smashes with a surprisingly accurate backhand return. He was disposing of his opponent without breaking a sweat — which was ironic, considering he looked as though he’d just stumbled in from the beach in flip-flops, cargo shorts and a flowery blue Hawaiian shirt unbuttoned halfway down his chest.

After notching the match point, Luckey raised his fist and flexed for the tiny, cheering crowd. “I win!” he declared. “That was fun.”

Then he took off his virtual reality headset and returned to actuality, a small back room of The Village, a trendy events space tucked away on one of the sketchier stretches of San Francisco’s Market Street. Luckey shook hands with his opponent, Takeshi Kobayashi, a game developer from the Japanese firm COLOPL in town to show off his new game, VR Tennis Online, to members of the press attending the Game Developers Conference taking place a few blocks away.

Luckey beat Kobayashi at VR Tennis during Oculus's gaming demo day.

Kurt Wagner/ Re/code Luckey beat Kobayashi at VR Tennis during Oculus’s gaming demo day.

COLOPL was just one of 41 game developers partnering with Oculus for this demo day. Last year, Oculus demoed just three games. That jump is an important one for the company, which is about to ship its first wave of consumer headsets, the Oculus Rift. What good is a $1,500 headset without any decent games?

But the jump is also indicative of a budding industry. Friday will mark two years to the day since Facebook shocked the tech world by buying Oculus for $2 billion, a company just 18 months removed from launching thanks to $2.4 million in Kickstarter pledges.

It was a gamble that, put simply, made virtual reality a reality.

“Before [the acquisition] there were a few companies that believed in VR. And when I say a few, I mean a few,” Luckey told Re/code after his tennis victory. “After that [acquisition] happened, I think it was a signal to the rest of the industry that VR was here, this is gonna be a huge thing and if you didn’t invest in VR now you were gonna get your ass kicked down the line.”

“That’s how you wake the giants,” he added.

That Oculus acquisition certainly changed Luckey’s life — Forbes pegs his net worth at $700 million — but ask almost anyone in the VR industry what brought virtual reality from a concept discussed by basement gamers to a product peddled by the world’s largest technology companies, and they’ll point you to March 25, 2014, the day Facebook bought Oculus.

VR AR Investment Activity

Since that deal was announced, the number of venture capital deals and total dollars invested in VR and augmented reality have both tripled, according to CB Insights. Last quarter, investors made 42 VR and AR investments totaling nearly $240 million. There were just 37 VR/AR investment deals made in all of 2013.

“The number of VR companies that we saw before late 2014 was very limited,” said investor Mike Rothenberg, whose firm Rothenberg Ventures has done more than 30 investments in virtual and augmented reality companies. (He also started an accelerator in 2014 called River Accelerator with a major focus on VR and AR startups.) “If Oculus is acquired and now you know it has the backing of Facebook and it’s definitely going to come to market, that definitely de-risks [potential investments]. You want to know the ecosystem is happening.”

The key word associated with the Oculus acquisition is “validation.” When Facebook — and more importantly CEO Mark Zuckerberg — shelled out $2 billion for a virtual reality startup, developers and investors who were hopeful the VR industry would take shape were suddenly convinced of it. Zuckerberg said VR would infiltrate sports and education and health care. Oculus has grown from 75 employees at the time of the acquisition to more than 400 today. Developers took notice.

So, too, did other companies. Sony was already working on a VR headset, announcing it exactly one week before the Oculus acquisition. Google was too, and would announce its cheap cardboard headset a few months later. VR developers believe that Facebook’s push sent Sony and Google and HTC, which also has a headset, into overdrive.

“Facebook got everybody else off their ass,” said Octavio Herrera, co-founder of Lucid Sight, a startup building VR games. “It’s not a coincidence that HTC’s product is awesome. That Sony’s product is awesome. You can’t be lazy when there’s serious competition from Facebook. It raises all ships.”

Oculus founder Palmer Luckey shows off the Rift at an event in San Francisco in June 2015.

Kurt Wagner Oculus founder Palmer Luckey shows off the Rift at an event in San Francisco in June 2015.

Which brings us to spring of 2016. Companies are gearing up for what some are calling the “console wars,” a race to build headset market share among the early VR adopters. Some believe Oculus blew an early lead by waiting two years to ship the Rift, which will make its way to early buyers beginning this month. Its VR controllers were delayed and are still months away.

Luckey disagrees that Facebook missed out on a first-mover advantage. “It’s never a winning strategy to try and compromise on the quality of your device or the quality of your launch just to hit a date,” he said.

The gap, though, allowed others to catch up. HTC’s headset, the Vive, will start shipping soon. Best positioned may be Sony, which just started selling its Playstation VR headset earlier this week. Unlike the HTC and Oculus products, Sony benefits from the fact that more than 35 million people already own a PlayStation 4, the computer necessary to run the headset. (PlayStation’s headset sold out quickly!)

But while 2016 may be dominated by pricing headlines and shipping dates, some believe hardware matters little to Facebook, at least long term. The key is owning the software.

Part of that is the layer that will become VR’s version of Apple’s App Store, where users come to download games or movies. Playstation has its own store, and HTC will use a store called Steam, created by Valve.

Facebook operates the Oculus Store, which runs on the Rift and Samsung’s Gear VR headset, but the company will no doubt try to get it onto as many different devices as possible.

Cris Miranda, an entrepreneur who holds myriad responsibilities at Vivid Vision, a small VR startup focused on building games for people who have amblyopia (a.k.a. lazy eye), believes software could also help with Facebook’s existing advertising business.

“It will be a gold mine for companies like Facebook the day they can track your facial expressions in VR or how you react to certain things,” he explained. “They’ll know what your eyes are looking at.”

Talk to enough people in the VR industry and you’ll quickly learn that there is little consensus on anything. The industry is simply too young. Who will create the dominant headset? When will Apple throw its hat in the ring? What vertical will send VR into the mainstream? (One popular opinion: Porn.) Talk to five people, you’ll likely get five answers.

But while there may not be a lot of black and white in VR, there is a lot of optimism. That’s what a bet by Mark Zuckerberg does.

“I’d say we are five years ahead of where we would have been [without the acquisition],” Luckey said, pointing to the resources needed to improve the hardware technology as well as encourage developers to build games and videos to watch on it. “There’s a strong argument to be made that we just would never have gotten there in five or even ten years.”

After his tennis victory, Luckey admitted that he couldn’t tell if Kobayashi — who had “destroyed” him the day before — had let him win. But whether it happens on your own or thanks to a little help, a win is a win. “I’ll take it,” he said.