Was Facebook’s Acquisition of Oculus a Bargain?

Apple’s new App Tracking Transparency in iOS 14.5 explains Zuckerberg’s need to own the VR market

The VR battlefield has been formed.  Facebook has firmly taken control of the consumer VR market share with the Quest headset.  And this week, HTC stamped its dominant footprint on the commercial market with the release of the Focus 3 and a suite of software services for business.  

HTC Focus 3, the best VR for the business market, will take market share.
The new HTC Focus 3 all-in-one headset

There are some other players out there like HP and Pico in the business market, and Valve and Sony on the consumer side.  But at this point, unless something shifts dramatically, or Apple enters the fray (which has been long-rumored), the best VR on the market comes from Facebook. 

Facebook is the leader in the consumer VR market share for one reason, they’re heavily subsidizing the cost of hardware. With the release of their Quest 2 at $299, they sent a clear message to the market that they wanted to spur mass adoption. They are doing this because they want to own the next computing platform. Mark Zuckerberg, Facebook’s CEO, has explicitly stated their goal is to get 1 billion people into VR. 

Control Your Supply Chain

The biggest threat to Facebook’s revenue isn’t another social network or government regulation. It’s that they do not have direct access to their inventory. Facebook’s inventory is your attention. That’s what they sell to advertisers. And their unique value proposition is that they know more about you than anyone else, which is an advertiser’s wet dream. 

When Apple announced iOS 14 in June 2020, they planted a stake in the ground of user privacy. When they stated app developers would need to gain explicit permission to track users most people yawned.  But my guess is Zuck did not. 

As more details were released Facebook panicked. They even resorted to taking out full-page ads in major newspapers saying Apple was going to harm small businesses by making it more difficult to target ads. They followed these with ads that said Apple against a free internet because ads were the currency of free content online. 

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Opt-in rates of ATT from Flurry.com

App Tracking Transparency (ATT), the feature that forces developers to get permission from users, was released with iOS 14.5 on April 26, 2021. As of May 12th, only 5% of users presented with a choice have selected to be tracked. 

Facebook is All-In on VR Market Share

This is a primary example of why Facebook purchased Oculus for nearly US$3 billion and now reportedly has 20% of their global workforce working on VR/AR. Zuckerberg knew that their reliance on Apple and Google (Android) were existential risks.  It’s why they tried to develop their own phone but were self-admittedly late to the mobile game. 

The failed Facebook phone is why VR market share is so important to Zuck.

Wayne Gretsky famously said “skate to where the puck is going to be.” Zuckerberg saw the future of computing would be spatial. And he wanted to own the operating system, if not the hardware itself. Then nobody could come between his company and his inventory. 

I am sure he figured that if Apple could come from nowhere to dominate the smartphone landscape, surely Facebook, with an early enough jump, could come to dominate the VR market. 

Facebook is Printing Cash

Fueled by an advertising-driven growth engine, Facebook generated free cash flow of more than US$ 9 billion in Q4 2020 alone, growing 55% year over year. They have the money to buy VR market share. And that’s what they’re doing. 

I’ve yet to find a teardown price estimation of a Quest 2, but the original Oculus Rift headset was reportedly carrying $206 worth of components in 2016. That headset required a gaming PC.  The new Quest 2 contains the Qualcomm Snapdragon XR2 system on chip (SoC), a fancy term for a processor with lots of different capabilities built-in. 

Oculus Quest 2 is the best VR on the market when factoring in price.
Oculus Quest 2 packs in a lot of computing for US$299

Every product comes with a value exchange.  Most have the price you are paying listed on a sticker. But with Facebook and all ad-supported products, the price you pay is opaque. Nobody knows how much ad revenue Facebook generates from their attention. But there are clues. 

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The Price of Your Attention

Oculus recently announced their Quest 2 under their Oculus For Business program will be priced at $US 799 plus $180 per year. That’s more than twice the cost of the consumer version. What’s the difference you might ask?

The consumer version of Quest 2 requires every user to log in with their Facebook account. And their Supplemental Oculus Data Policy states they extract and share with Facebook, and “related companies” things such as:

  • Physical features
  • Interactions
  • Movement data
  • Estimated hand size and dimensions
  • Voice interactions
  • Audio content
  • Physical movements

Oh, and every Quest comes with 4 machine vision cameras capable of video pass-through. It can see everything in your home. And with machine learning and recognition software, identify everything in your home. You’re the product. 

Pass through video gives Facebook even more access to data.
Image Courtesy of Upload VR

To further underscore how important it is for Facebook to have your VR data, they are restricting access to the Oculus Quest store if you have the Quest Business Edition. The only way to get the games and content most people want is to log in with a Facebook account. 

This is one of the reasons Facebook says no to VR For Kids. Because nobody under 13 is “allowed” to have a Facebook account. And if they’re subsidizing the hardware, there’s no way for them to profit off a user without tracking their activity so they can sell more effective advertisements. 

So why will Facebook win the consumer VR market?

Because people have shown their willingness to be tracked if given no choice. Apple is offering that choice and people are saying no to tracking. But Facebook is not giving people a choice in VR. They are the best ever at extracting the value of consumer data tracking for advertisers. And VR just gives them even better data. 

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Facebook knows the value of your tracking data. So they can wisely invest their cash flow now to subsidize hardware and create a sustainable competitive advantage selling VR headsets.  The only company that could possibly compete this way is Google, but they’ve chosen not to. 

HTC must agree with this assessment. This week they doubled down on the business segment with the Focus 3 Pro, a superior product to the Quest 2 in almost every hardware sense, but priced at US$ 1300. Clearly they’re letting the ceding the consumer market to Facebook and Oculus. 

HTC doesn’t have a way to subsidize hardware yet. Maybe during the next generation of headsets, when 5G is more prevalent, network carriers might subsidize hardware like in the early days of smartphones. But by then Oculus will have such a lead on installed-base and content, it will probably be too late. 

The VR Matrix is Coming

Having a company like Facebook control the next computing platform, after being busted repeatedly for privacy and ethics breaches, should give everyone reason to pause. Imagine a Ready Player One metaverse controlled by Facebook. It’s coming, and it’s called Horizon. 

Horizon is Facebooks strategic quest to own the VR market.

VR is powerful enough to distract hospital patients from physical pain. Imagine the metaverse in the hands of a company that monetizes your distraction via advertising.  The Matrix comes to mind.  In that fable, machines harvested our energy to power themselves. With Facebook, they mine our attention to power their earnings.

Think about how much time we now spend on our mobile devices and computers. When we start spending ever-increasing amounts of time in VR, Facebook will own our attention. I don’t know that there’s anything we can do about it at this point other than become more conscious of where we direct our attention. I invite you to continue to watch this space as it develops. And if you think someone you know would be interested, please share this blog.