Oculus deal is Facebook's 'long-term bet' on virtual reality

Oculus, a leading virtual reality company and the maker of the Oculus Rift headset, will be bought by Facebook in a $2 billion deal. The Oculus purchase comes on the heels of a technology spending spree for Facebook. 

Mark Zuckerberg says Facebook is betting that the future of social media is virtual reality, as the company spends $2 billion to add a virtual reality headset designer Oculus to its portfolio.

But it's not entirely clear how VR and social media will work together.

"I think that Facebook has a peripheral interest in this from a social perspective… in the next one, two, five-plus years, I think it's going to be difficult for them to make a case that virtual reality is a core social experience," said Brian Blau, a research director in consumer technologies at the analyst firm Gartner. 

On Tuesday, Facebook announced it was buying Oculus for $400 million in cash and about $1.6 billion in stock. Oculus could also receive up to $300 million in additional cash and stocks if it meets certain performance goals, according to Facebook.

"We're making a long-term bet that immersive virtual and augmented reality will become a part of people's daily lives," said Mr. Zuckerberg during a Tuesday conference call with investors.

Zuckerberg said that while gaming is currently Oculus' focus, Facebook sees virtual reality as a future platform for online activities like shopping and education, although it could take the market between five to ten years to develop.

On Wednesday, following news of the deal, Facebook stock dropped by about 6.69 percent, to $60.85 per share.

Oculus has generated excitement from investors -- the company raised about $75 million in a funding round last year -- but that was due to the firm's work in developing VR for computer games, according to Mr. Blau. Facebook said it determined the $2 billion price for Oculus based on its potential in the gaming industry alone.

Oculus hasn't sold a consumer product yet, but it was the largest independent VR developer before the Facebook purchase, said Blau.

"We don't have any experience doing this on a mass market scale, so we don't really know what the future has to hold there," he said.

Facebook has been criticized in the past for not moving quickly enough to focus on new technologies. Around the time Facebook filed its initial public offering in 2012, it acknowledged that its ability to monetize is mobile user base was "unproven." Facebook launched its IPO at $38 per share, and then dropped 45 percent from May to October of that year.

Facebook has 556 million people who use the site daily from a mobile device as of December 2013, an increase of nearly 50 percent from a year earlier, according to Securities and Exchange Commission filings. About 1.2 billion people use the social networking site at least once a month.

Last month, the company spent $19 billion for WhatsApp, a chat program for mobile devices with about 460 million users. Coupled with the Oculus deal, it's an indication that Facebook is trying to finally get a handle on mobile and come out ahead of emerging technologies. 

"Facebook's acquisition of Oculus seems motivated more by fear than by good business alignment,"  writes James McQuivey, a principal analyst and vice president of the analyst firm Forrester, in an e-mail. "Facebook missed the shift to mobile and has played catch up ever since."

While mobile devices can be used in any location, Mr. McQuivey writes, VR is limited by the hardware and the ability for content creators to produce material for it.

"Your Facebook friends certainly won't be developing virtual reality content anytime soon," he wrote.