Facebook just dumped $2 billion ($400 million of it in cash) into its acquisition of virtual reality headset maker Oculus Rift. The news took some time to sink in for me. First, I thought about the possibilities. There are myriad applications for the device: gaming, education, shopping, communication and entertainment to name a few. Then, I thought about the business opportunity Rift presents and how it might impact Facebook’s stock price. A few things clicked:
1) Advertising is just one of many revenue opportunities. Sure, advertising will be possible: from commercials in the middle of immersive tv shows, sporting events and movies to in-game ads. I don’t think that’s key, though. Facebook already generates 90 percent of its revenue from advertising. Ultimately, the company views itself as a connection platform, not an ad agency.
2) Rift as a communication platform. Facebook CEO Mark Zuckerberg touts rift as a communications platform. That idea has potential, but it’s a long way off. After all, to use it as a communication platform you and the people you want to communicate with will need Rifts, too. It took a decade for cell phones to fully penetrate the developed world (from 18 percent adoption in 1997 to 97 percent adoption in 2007). I would guess that Rift-to-Rift communication is a long way off – at least five years.
Here’s where I really think Facebook could make money off Rift:
3) The Rift app store. Apple’s App Store generated $10 billion in revenue for Apple (AAPL) last year and made the company $1 billion in profit. Most of that money was generated by low-cost games and productivity apps. If Facebook enhances and helps develop Rift’s app store, I suspect it could quickly eclipse App Store sales (if not in the number of apps sold then definitely in the amount of revenue generated). The App Store models works so well for Apple that Microsoft (MSFT) copied it with the launch of its own app store in Windows 8. Droid has an App Store, Kindle’s got a store, xBox has a Marketplace, etc. A Rift app store would generate lots of cash, and, best of all, outsource the development of apps to others. If Rift apps catch on, Facebook’s $2 billion acquisition will look cheap in the years to come.