Facebook purchases VR headset maker Oculus for $2 billion [Updated]

Giant social networking company Facebook has just announced it has “reached a definitive agreement” to acquire virtual reality headset maker Oculus for $400 million in cash and 23.1 million shares valued at $1.6 billion. Oculus can earn another $300 million if it reaches unspecified performance milestones, and the deal is expected to close in the second quarter of 2014.

In announcing the deal, Facebook founder and CEO Mark Zuckerberg indicated that the move is about much more than gaming, and goes well beyond the kneejerk FarmVille VR jokes that propagated at warp speed immediately in the announcement’s wake. “While the applications for virtual reality technology beyond gaming are in their nascent stages, several industries are already experimenting with the technology,” Facebook said in a blog post. “Facebook plans to extend Oculus’ existing advantage in gaming to new verticals, including communications, media and entertainment, education, and other areas,” he wrote.

“Mobile is the platform of today, and now we’re also getting ready for the platforms of tomorrow,” Zuckerberg said in a statement. “Oculus has the chance to create the most social platform ever and change the way we work, play, and communicate.”

“The history of our industry is that every 10 or 15 years, there’s a new major computing platform, whether it’s the PC, the web, or now mobile,” Zuckerberg continued on a conference call following the announcement. “History suggests that there will be more platforms to come, and that whoever builds and defines these will not only shape all of these experiences that our industry builds, but also benefit financially and strategically.” He believe that “vision,” in the form of virtual and augmented reality technologies, will form the basis of that next major platform.

Zuckerberg went on to characterize the Oculus acquisition as a “long term bet on the future of computing” that could take “five or ten years to get there,” as smartphones have over the past five to ten years. While he assured listeners that Oculus’ plans in gaming “won’t be changing,” he said he also sees VR as a much wider platform, capable of driving experiences from real-time chat to virtual tourism.

“Imagine enjoying a courtside seat at a game, studying in a classroom with students and teachers all over the world, consulting with a doctor face to face, or going shopping in a virtual store where you can touch and explore the products you’re interested in just by putting on goggles in your own home,” he said during the conference call.

In the works for months

While gaming-focused Oculus selling its company to a social behemoth may seem to have come out of nowhere from an outsider perspective, the company says in a blog post the process started “a few months ago” when members of the Facebook team, including Zuckerberg, came to the Oculus office to “discuss how we could work together to bring our vision to millions of people.”

“When Facebook first approached us about partnering, I was skeptical,” 21-year-old Oculus Co-founder Palmer Luckey said, elaborating on today’s news in a separate post on Reddit. “As I learned more about the company and its vision and spoke with [Zuckerberg], the partnership not only made sense but became the clear and obvious path to delivering virtual reality to everyone.

“In the end, I kept coming back to a question we always ask ourselves every day at Oculus: what’s best for the future of virtual reality? Partnering with Mark and the Facebook team is a unique and powerful opportunity. The partnership accelerates our vision, allows us to execute on some of our most creative ideas, and take risks that were otherwise impossible. Most importantly, it means a better Oculus Rift with fewer compromises even faster than we anticipated.” Luckey added that “very little changes day-to-day at Oculus” following the acquisition.

In the conference call, Oculus CEO Brendan Iribe also noted that while the company got its start in gaming, it quickly became apparent that its VR solution had the potential for many more general applications. “When you truly feel in virtual reality like you’re actually present in another space, and you look around and your brain is completely convinced that it’s comfortable and it’s OK but it’s in an entirely impossible, something fundamental changes,” he said.

“In that same sense of presence and a new space, if you can see someone else and actually look at them, and your brain believes they’re right in front of you—you’re not looking through a screen or a TV window, they’re actually right in front of you—you do really start to realize just how big this could be and how big of an impact it will have on social and communication industries,” he continued. Once Oculus realized that, Iribe said, teaming up with Facebook seemed an obvious choice.

Valuation

Today’s acquisition will be a major payday for Oculus’ investors. The company secured $16 million last June from Spark Capital, Matrix Partners, and others and it brought in $75 million more in a second round led by Andreessen Horowitz in December. The company also raised $2.4 million in its Kickstarter campaign last year and has seen over 75,000 orders for development kits at $300 or more.

For some perspective, today’s acquisition values the company at roughly one-eighth of messaging app WhatsApp, which Facebook purchased for $16 billion last month. Zuckerberg said that making two such 10-plus-figure acquisitions in such a short time was not Facebook’s new standard operating procedure. “These are rare companies,” he said. “We’ll go a long period of time where we do nothing like this, and now we’re in a rare period of time where we do two right next to each other. There are not that many things that are candidates to be the next major computing platform, and this company Oculus has a very clear lead in doing that. We felt like we could apply a lot of leverage to accelerate their growth.”