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.