Zuckerberg’s Big Bet on a New Set of Network Benefits
Facebook’s acquisition of Oculus VR is all about indirect network benefits.
In March of 2014, Mark Zuckerberg shocked the technology and financial world once again when it was announced that Facebook had agreed to acquire Oculus VR, a virtual reality technology company, using a combination of cash and Facebook stock valued at $2 billion at the time of the announcement. While Facebook had acquired businesses with little-to-no revenue for eye-popping amounts before (most successfully with Facebook’s 2012 acquisition of Instagram for $1 billion and somewhat more questionably with Facebook’s acquisition of WhatsApp for ~$20 billion just one month prior to the Oculus announcement), this deal felt different. Purchasing Oculus was not just a bet on a new company or potential competitor; it was an investment in an industry that had yet to be established. What was Zuckerberg thinking?
Perhaps unsurprisingly for the founder and CEO of Facebook, Zuckerberg was thinking about network effects. In his Facebook post announcing the Oculus deal, Zuckerberg laid out the many ways that Oculus stands to benefit from indirect network effects in the immediate and long-term future. As one of the first high quality VR platforms, Oculus hoped to attract “gamers” to a new kind of immersive gaming experience that only Oculus could provide. This large pool of platform users would in turn attract video game developers who would be willing to invest the significant capital required to produce the immersive games. And as developers produce more games for the platform, additional value is created for Oculus consumers helping to attract even more people to the platform. In many ways this market dynamic had already played out in the Play Station, Xbox and Wii video game consoles of the early 2000s.
But Zuckerberg envisioned additional indirect network benefits beyond those apparent in the gaming world. Eventually Zuckerberg hoped that Oculus would become an all-encompassing entertainment platform that opened the door for new partnerships with sports leagues that would be encouraged to create complimentary products or services, such as “court-side” vision that would allow Oculus wearers to experience a basketball game as if they were sitting in the front row, center court seats. Such offerings would greatly enhance the value for Rift owners and help develop an entirely new offering within sports and traditional entertainment. One could even foresee a future where Oculus benefitted from networks by acting as a compliment to Facebook, using the Rift as a new way to experience users’ pictures and videos in a more immersive fashion.
But for any of these positive feedback loops to take hold, Oculus first must find a way to achieve scale, meaning the company has to convince consumers that they should actually purchase this new platform which is likely to launch with somewhat limited content. One solution to this classic chicken-and-egg dance is for Oculus to start off producing its own content in order to attract initial users, just as Microsoft produced Halo to launch alongside the original Xbox. Oculus could also choose to form partnerships with game developers and provide assistance or financing as they navigate the early-stage development process. Separately, Oculus can utilize a broad and multi-faceted launch campaign to capture consumers’ interest from the get-go. While these steps would no doubt be costly endeavors, Facebook’s acquisition provided Oculus with the capital required to make such upfront investments that can lead to a beneficial two-sided market.
However it chooses to proceed, Oculus must demonstrate that Oculus will become a large marketplace for future products in order to convince potential complimentors to produce the goods and services that will lead Oculus’s indirect network benefits.
Interesting post. I wonder, though, if Google is going to beat Facebook at the VR game with a strategy that’s almost antithetical to the Oculus approach to VR. In 2014, Google launched Google Cardboard — a $20 device made of cardboard that is essentially a “good enough”, low cost version of a VR headset. VR hardware is incredibly hard to get right — It has traditionally needed tonnes of R&D investment, and there is only a very few widely acclaimed high quality VR headsets on the market. Google, however, is now poised to create strong indirect network effects in the VR market rather quickly compared to Oculus headsets which haven’t been launched in the market yet. Google’s $20 headsets will acquire users and in turn attract developers way quicker than $200+ Oculus headsets.
Interesting post and great explanation of the network effects – I definitively see a huge potential in sports such as the “court-side” service that you mentioned!
I like your points about VR being a network bet. To me, the dynamics of the VR market is similar to that of 3D printing, do you agree? I wonder if the “winner” in this market is whomever that enables more developers to build on top of their platform, in order to get over the early adopter hump for the product to be attractive to the early majority.
Interesting post! I’d argue that Facebook’s acquisition and Zuckerberg’s endorsement of VR legitimizes the VR industry. The acquisition has clearly brought a lot of attention to the space. While I think indirect network effects are clearly beneficial as you discussed in your blog, the way Zuckerberg has talked about the acquisition seems to suggest it might be more than just indirect network effects. He talks about VR being the next revolutionary platform impacting our lives. Do you agree with this? I’d recommend listening to the Ted Radio podcast about the future of screen time. I’ve included an excerpt below and link: http://www.npr.org/programs/ted-radio-hour/438902974/screen-time-part-i
ZUCKERBERG: Mobile is the platform of today. And now we’re starting to also get ready for the platforms of tomorrow. To me, by far the most exciting future platform is our own vision or modifying what you see to create augmented and immersive experiences. I believe Oculus can be one of the platforms of the future.
RAZ: So basically, this is Mark Zuckerberg in March, 2014 predicting that virtual reality goggles are the next smartphone, the next Internet, the next thing that’s going to transform our lives. And quietly over the past few years, a lot of other tech companies – Microsoft, Google, Sony – they’ve also been betting a lot of money on that same idea.
Fascinating space, to say the least. VR will definitely be incredibly applicable across a staggering variety of applications, however I think the content issue is a very sizable obstacle. VR is such a different mode than anything that exists today: many people can’t actually physically handle wearing the headsets for long durations as it is so trying on the senses; the technology required on the infrastructure side is substantial given the amount of data that has to be transferred; the technology on the content-creator side is complex as many additional visual and audio qualities are necessary to ensure users won’t get sick; the technology on the hardware side has to be robust such that it can mirror human senses of hearing and feeling on all sides, not just in front of the person. Given these complexities, financing content will be incredibly costly, and runs into the issue that the hardware capabilities must be built to match the content capabilities. This chicken and egg problem will not be one that is quickly resolved.
Great insights! Unlike WhatsApp and Instagram, Oculus did not come with an established user base and still has technology risks. There are other companies (Jaunt, Magic Leap) that are tackling the VR space. It remains to be seen what Oculus/Facebook will do to overcome technical hurdles and build out a sizeable platform.