I’m a fan of the potential of VR. The cyberpunk genre has spoken to me loudly, and VR is an exciting tech that always gets me excited when reading this genre.
Because of this, I’ve been an Oculus Rift follower since the kickstarter, and have been an evangelist since receiving my development kit (now called the DK1). I’ve already ordered a DK2, and am looking forward to seeing the consumer version (CV1) when it is released.
Waking up to the Facebook deal announcement, my first reaction was one of shock – in common with pretty much everyone online. Shock, and dismay. But I decided to take a few minutes to think before posting online. On reflection, all may not be doom and gloom.
My understanding is that the deal is for $400M cash, and $1.6B stock. A large part of that will likely go to the Venture Capitalists who had already invested $75M. And that’s the first important point:
- OculusVR was already not a master of its own fate. VCs gain a lot of control when they invest, and often expect to get their returns within 3 years, irrespective of the negative impact in the long-term. So the FB deal is in many ways just OculusVR trading one master for another.
Now when an acquisition happens, there is normally an earnout period. What this means is that the company being bought, and the execs who have signed on to the deal, must hit certain targets within certain timeframes. For OculusVR that may mean CV1 being released in certain timeframes, for example. Often it also means that senior leadership cannot leave without huge penalties. So the odds of anyone senior leaving soon are negligible, even if FB does start interfering. In general though, unhappy people will leave immediately after the earnout, which raises point 2:
- John Carmack, Palmer Luckey, and other senior leadership are useful canaries for how the relationship is going. If they leave before earnout ends, then the Rift is dead. If they leave shortly after, then that’s a really bad sign that Facebook’s and OculusVR’s vision of the future is incompatible. If they’re still there 3-6 months after earnout, then the future looks promising.
Note though that earnout restrictions work both ways, so if FB breaks its contractual obligations, then it may face large penalties – those obligations may be things like no interference in design, manufacture, etc – the sorts of things Palmer, Carmack etc care about. That sort of thing may even have to appear in FB public earnings statements, if the penalties and write-downs are large enough.
Impact of the Purchase
One point Palmer has made is that the FB purchase, and subsequent investments, will help with future scaling issues. This is a really important point – businesses are expensive to run, especially when manufacturing hardware. And all companies go through an existential crisis when then stop being little 5-30 person teams, and start suddenly having wage bills of over $1M a month.
Suddenly you start having to get good legal, accounting, HR people. Tax becomes more complex. FB already has teams who can do all that non-VR work, and so OculusVR no longer has to spend time and effort hiring them, installing HR systems and software, being overcharged to put in some over-the-top SAP system, etc. So, another point:
- The FB purchase allows OculusVR to focus on VR, and let Facebook handle all the dull crap that comes with running a company.
Also on the question of scaling is the cost of manufacturing hardware. For DK1, OculusVR covered the cost through kickstarter – people like me donated money so that OculusVR could write a big-ass check to a Chinese manufacturer to make X devices, and then having the tooling and spare parts to make Y more in batches of Z.
For DK2, the funding presumably came from the Venture Capitalists, and of course from pre-orders. That’s all well and good, but note that they haven’t really _sold_ much yet. The margins on DK1 and DK2 are likely not especially large, so profits on each sale will be low, if any. Furthermore, they aren’t selling that many devices – for example 60k units, at $330 ea, assuming a 10% margin, would only mean $1.98M profit. That sounds like a lot, but really it isn’t, given that we’re not factoring in R&D, wages, legal, taxes, etc. And 10% is likely waaaaay too high.
So what does all this mean for scaling and CV1. Well, let’s assume they want to sell 200k of these worldwide on launch. That’s a pretty low target. And let’s say the manufacture cost is $200 a unit. That means that several months before launch, with no real revenue coming in, they need to go to the manufacturer and cut a check for $40M. That’s a lot of money, and they likely wouldn’t have been able to do it without taking on more investors or some big ass loans (with interest). Now though, they’ve Facebook’s deep pockets to help them, and Facebook will be keen to help as it will reduce their own tax bill. Win/win! So, another point:
- With FB’s deep pockets, OculusVR can now easily afford to go large with the launch of CV1, and potentially have a lower price by being able to manufacture in larger batches.
So, what does Facebook get out of all this, and what negative impact may this have on OculusVR and VR in general?
Well, here I’m a bit vague. There’s a load of ideas floating around, but everything is rather nebulous. Some of my thoughts are:-
- FB may just be diversifying. If VR is successful then they’ll have a foot in the door and a new revenue stream. This is not a bad thing.
- FB want Augmented Reality (AR) and this is a way forward. AR means overlaying and interacting with the real world, and this would open up all sorts of new sources of revenue for advertising and data mining. This is quite a ways off though – OculusVR is about good seated VR at the moment – AR brings vast numbers of new challenges so I wouldn’t expect anything serious, and certainly not consumer grade, for a good 3-5 years.
- FB want to pop up adds in games. While they may want this, I doubt they’ll get it. There are a load of other upcoming VR platforms and if OculusVR did this then people would flock away from them. And game designers would leave as well – with good reason as who wants your carefully crafted story interrupted by an Ad for a dating site.
- FB wants to add adverts to games. Now this is a different thing. Having an SDK to allow injection of FB adverts into games opens up new revenue for game designers themselves. Mediaspike is already doing that sort of thing, and it could be a really unintrusive idea. However, it’s the game engines, and not the VR hardware and SDK, that would do this, so really FB could do this irrespective of OculusVR.
- FB want to own the portal and lock-in gamers. Based on the investors call I heard, FB may well want to become the go-to portal for VR games, in the same way as Steam are for PC games (sorry, EA Origin). I see no problem with this, as long as it’s not mandatory. Making the user experience of installing and running VR games easier is an absolute necessity for consumer take-up, and so FB may really help adoption here. However, lock-in, such as that Apple helped create, is baaaad, and if FB do this then I will leave Oculus, simple as that. Unfortunately, consumers may not – look at how well Apple have done…
- FB wants the patents for offensive/defensive purposes. I’m not sure what patents OculusVR actually own though. It may be that they have instead relied on prior art. If that’s the case, then FB doesn’t have anything with which to sue other VR hardware manufacturers and the point is moot. If there are patents, then I’m not sure how much of a chilling effect that will have on VR either – AFAIK Facebook haven’t been the litiginous beasts that Apple and the wider smartphone industry seem to have become over the last few years. Still, something to keep an eye on.
Notch and community reactions
My first action after hearing of the purchase was to check out the OculusVR forums, and reddit. Wow! I was more shocked and dismayed by the vituperation on those than by the purchase itself! But I shouldn’t have expected anything else from the internet – where people reach for keyboards before they’ve taken a breath and had a cup of tea.
To be fair, some of the concerns are valid, and there are well organised thoughts here and there, but overall the reaction reminded me of nothing as much as when a band signs up with a big label.
One potentially valid complaint is in reference to kickstarter. People feel like they have invested their money into an indie, and that OculusVR have broken their word and even worse, made in unethical decision. I must admit to feeling this a little myself, and I do think that OculusVR should give back to the community, maybe by giving all kickstarter followers a free CV1 or similar. But at the same time, everyone must remember what kickstarter is:
- Kickstarter is not an investment vehicle. It’s a way of making donations to things you care about, and potentially getting rewards. Once you’ve received your reward, the recipient of your donations owes you nothing.
Another complaint is that senior OculusVR leadership have stated in the past that they wouldn’t sell. Well, they shouldn’t have said that. But what they probably meant was that they wouldn’t sell just because of the money, and with the Facebook deal they’ve explicitly stated that nothing is going to interfere with their vision.
I’ve seen some posts by people stating they are cancelling their DK2 order, and going for Sony instead. Well, more fool you if that’s truly the case – this is the same Sony who has a patent for pausing games in order to show you adverts… http://www.forbes.com/sites/insertcoin/2012/05/29/sony-files-patent-that-would-pause-games-to-show-ads/
As for Notch’s statement about Minecraft for OculusVR, it’s not as big a deal as people seem to be making out. Firstly and most importantly, because nothing has been cancelled. According to Notch’s statement, they were only “in talks” about bringing “a slimmed down version” of Minecraft to OculusVR. I agree with him on some things – I find Facebook creepy as well, and am regularly disgusted by their behaviour regarding privacy and API changes – but his statement will have little to no effect on OculusVR itself.
Overall, I think the community itself should give itself a communal kick in the genitals about their over-reaction. The sort of incoherent argument, invective, and insults which have been flying around make us sound like a group of spoilt 16 year old hipsters, and is frankly more likely to damage VR in the short term than anything OculusVR and Facebook will likely do.
Overall, my gut feel is that this acquisition will be good for the Oculus Rift product, and VR in general, for the next 1-2 years. Most of the worst-case predictions that people are coming up with online are too far-fetched to be realistic. But there are definitely areas for concern, especially if the Rift becomes too tied into Facebook, and if the worst case scenario of curated app stores and vendor lock in happen. Depending on the patent situation though, any such idiocy by Facebook/Oculus would not harm the overall VR industry too much – there will be competitors to pick up where OculusVR left off.