Analysts View Oculus As Long-Term Bet By Facebook, Price Questioned

Oculus Rift and FacebookFacebook’s $2 billion purchase of virtual reality goggle-maker Oculus VR is a long-term bet on the future of computing that won’t pay immediate dividends for the social networking giant. That’s how Wall Street analysts characterized Facebook’s second major acquisition in a little over a month, following its $19 billion deal for WhatsApp in February.

Considering that Oculus has yet to even release its virtual reality headset -- the Oculus Rift -- to consumers, it’s hardly surprising that analysts are taking the long view. Looking at the tech industry historically, Jordan Rohan of investment firm Stifel Nicolaus noted that a new computing platform arises every 10 to 15 years.
 
“Today, that platform is mobile, which after being introduced approximately 10 years ago, has culminated in over 1 billion active smartphones. With this acquisition, Zuckerberg is betting that immersive virtual reality may be the next emerging platform, and believes Oculus is the leader in the nascent space,” he wrote in a research note Tuesday evening.
 
In a conference call yesterday, Facebook CEO Mark Zuckerberg himself drew an analogy with smartphones first appearing 10 years ago to being a device in everyone’s pocket to explain the company’s decision to snap up Oculus before virtual reality takes off in the next decade.
 
JPMorgan analyst Doug Anmuth pointed out Facebook believes Oculus’ technology is well ahead of competitors and it would take several years for it to build similar technology and acquire talent in the field. Among those competitors is Sony, which last week unveiled its rival virtual reality headset, the Morpheus Project, at the Game Developers Conference.
 
“We like Facebook's long-term thinking around the future of computing, but we also believe there is much to do in the core business, and we do not expect Oculus to have any impact on Facebook's near-term revenue,” wrote Anmuth in a research note.
 
Given the long time frame for the acquisition to pay off, Brian Wieser, senior analyst at Pivotal Research Group, raised questions about the $2 billion price tag for a 2-year-old startup with virtual revenue. In particular, he questioned Facebook’s assumption that it would have trouble recruiting talent when virtual reality technologies become more important.
 
“If we have concerns, it is that $2bn seems like a significant amount of money for a problem that has yet to emerge, and as illustrated with the company’s efforts to improve its offerings for mobile platforms, by the time a problem was afoot, talent was more plentiful. The solution was produced by managerial and operational means rather than with a significant capital investment,” he wrote.
 
In buying Oculus, Facebook has also emphasized the potential for virtual reality beyond games to areas like education, health, travel and the workplace. While these areas all have social attributes, Wieser points out, “they fall a fair degree away from social media and even further away from ad sales, at least so far as we can envision the medium today.”
 
Don’t get your hopes up, Madison Avenue. Tech analysts have also raised questions about Facebook’s foray into hardware in light of its historic focus exclusively on software and services. The company has previously sworn off even building its own smartphone, despite persistent rumors in recent years.
 
"They want to do software and infrastructure, and they're clearly focused on social. Virtual reality isn't any of those things,” Gartner analyst Brian Blau told USA Today. Ross Rubin, principal analyst at Reticle Research, tweeted Tuesday: “Facebook buying Oculus leads me to believe that Sony’s Morpheus will be the only viable high-quality VR headset for the near future.”

Investors also seemed to have doubts about the Oculus acquisition, with Facebook's stock down more than 2% in early trading Wednesday.
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