Oculus, Facebook and the $2 billion dilemma

There's been too much talk on Oculus and Facebook, and not enough analysis...

I've been watching with heightened curiosity the past few days of discussion regarding Facebook and Oculus Rift. Acquisitions don't tend to happen too much in the gaming industry, so when they do it's a great time for speculation and predictions.

When a purchase upward of $US1 billion happens – let alone $US2 billion – it's pretty much grounds to freak out a little bit.

Naturally, a lot of the discussion has been centered on how Facebook could ruin Oculus. This is a pretty simplistic approach to take, but it's completely understandable. There were no signs of any sort of discussion happening between the two companies, (short of an amusing anecdote buried on Reddit), and there weren't necessarily any public signs Oculus was looking to be acquired.

Except that last part is dead wrong.

I've been a little frustrated with some of the discussion happening during the past few days. One of the main criticisms against this deal, mostly coming from those who backed the Kickstarter campaign, is that Oculus is selling out its community roots. Backers were under the impression virtual reality was by the people, for the people, and so anything which gets in the way of that goal is a betrayal.

They're not the only people who feel this way – even Minecraft creator Notch said on his blog he didn't put $10,000 into the Kickstarter campaign so Oculus could just be acquired.

But this shouldn't come as a surprise to anyone. Not the Facebook part – that's a completely left-field acquisition I'm not sure anyone could see coming. But at one point or another, it was inevitable Oculus was going to be acquired. The only question was by whom, and for how much.

How do I know this? Easy – it took $90 million in funding last year from several different private equity sources, including Andreesen Horowitz. This is a clear sign Oculus wasn't looking to just take a piece of technology mainstream – it was looking for an exit. At some point, in the next three to five years, it was going to be acquired.

It was inevitable. That level of funding dictates such a move. 

But the gaming industry doesn't see it that way. This isn't a fault, I don't think, but it clearly shows the gap between something like games media and business journalism. For instance, look at the two pieces on both Kotaku and Polygon last year about the $US75 million funding round from Andreessen Horowitz and some other investors.

They're pretty snappy stories. A few hundred words each, maybe. And both are focused on how this funding helps Oculus achieve growth. The Polygon piece from earlier in 2013 even said the original $US16 million round was to help fund a consumer launch.

But Silicon Valley funding comes with strings. Venture capital firms don't just push tens of millions of dollars into a company in order to see it grow – they aren't charities. This funding should have sent alarm bells through the industry that Oculus was looking to be acquired at some point in the future, but neither of these pieces – nor any other piece by games media on the funding round – speculated on what that funding could mean.

Again, I'm not saying this is necessarily a deficiency in games media – this isn't business journalism for a reason. But why weren't backers complaining then that the company was becoming beholden to corporate overlords? Because that's exactly what they should have been doing if they felt so strongly about it. Those funding rounds weren't coming out of a place of charity, they were coming from a desire of the VC backers to take the Oculus technology, expand it and then finally sell to a bigger customer.

These stories weren't just a red flag. They were a master alarm blaring a warning siren through their ear drums. It's like noticing a shark biting a hole in your boat then only complaining when the ship finally sinks.

This happens all the time in Silicon Valley. Companies are pumped full of cash for a bigger exit later on – that's what VC firms do. They invest money to make money. The timing of the Facebook deal is a little unusual in that it comes so quickly after a funding round, but it's not unheard of.

This brings me to my other point. So much of the conversation among critics has been that Facebook is going to ruin Oculus, that it's going to take the technology away from its gaming roots, make it mainstream and completely ruin everything it has going for it.

Several writers have already explained why an Oculus acquisition is a good thing, (Leigh Alexander's take and Ben Kuchera's are both reasonable, nuanced and comprehensive wraps on the situation). But there is another perspective here that's warranted.

Acquisitions of this size aren't done for the hell of it.

It's true, technology companies are bought all the time and their products are disposed of. Take something like We Are Hunted, the music app acquired by Twitter. It disappeared to be integrated into the social network. Or something like Readmill, a German app bought by Dropbox for about $US8 million last year. During my time as a business journalist I spoke with dozens of smaller companies which had been purchased with the purpose of being integrated into a larger parent.

But that's the key – smaller companies. Ones that are bought for less than $US10 million. When you're dealing with numbers of upwards than $US100 million, you aren't just buying a company for the talent. You're buying everything that comes with it.

This is what I think a lot of people don't understand. We talk about $US2 billion as it if's a small amount of money, and it is, compared to a lot of the numbers that get thrown about in headlines. But it's a huge, massive, overwhelming amount of cash. A company like Facebook doesn't put that much money into an initiative if it's just going to ruin it. You might not like the people running these companies, but they aren't stupid, and they recognise that taking technology away from the user base that made it popular in the first place is a bad idea.

I've talked to people in companies like Facebook - and people at VC firms like Andreessen Horowitz. They don't just buy companies for billions of dollars to gobble them up. They're interested in making money, and the best way for them to do that is to let the companies they acquire simply follow the same trajectory they had been before they were discovered. 

Besides, people complained about Instagram and it's turned out okay. You might not like the ads showing up next to your pictures, but has its user base gone down? Not at all. Has the user experience changed that much? No - it hasn't changed at all. Anyone who quit the network when it was acquired by Facebook back in 2012 were just shooting themselves in the foot.

If Oculus fans were really worried about what was happening to the company, they should have been paying attention last year when Silicon Valley pumped $US100 million into the business. As it stands, most seem to be lamenting the idea VR is getting ripped out of the hands of the few and into the realm of many. But this is merely an inevitable step to where they wanted Oculus to go in the first place.