Episode 35 Oculus



In episode 35 of Acquired, hosts Ben Gilbert and David Rosenthal delve into Facebook's acquisition of Oculus VR, exploring the strategic move behind the $2.3 billion deal and its implications for the future of virtual reality. They highlight Oculus's journey from a Kickstarter sensation to a leading VR company, emphasizing the role of key figures like Palmer Luckey and John Carmack in driving the technology forward. Despite initial excitement and the potential for VR to become the most social platform, they critique Facebook's integration of Oculus and the subsequent competition from Valve's superior Vive product. With a cautious grading of the acquisition and a discussion on the horizontal versus vertical business models, they ponder if Oculus can truly secure Facebook's position in the next wave of computing.

Summary Notes

Audio Quality Disclaimer

  • Ben Gilbert (Speaker A) informs listeners about the initial poor audio quality.
  • The quality issue is temporary and improves after the first eight minutes.
  • The hosts appreciate listeners' patience as the audio gets better.

"Hey, acquired listeners. Ben here. You'll notice for the first eight minutes or so of the episode my audio quality isn't the greatest, but bear with us, it'll be crystal clear for most of the episode. Thanks."

The quote is an upfront disclaimer about the audio quality to set expectations for listeners.

Podcast Introduction

  • Ben Gilbert and David Rosenthal introduce Episode 35 of the "Acquired" podcast.
  • The episode focuses on Facebook's acquisition of Oculus.
  • The topic was highly requested by listeners.

"Welcome back to episode 35 of acquired, the podcast about technology acquisitions and ipos. I'm Ben Gilbert. I'm David Rosenthal, and we are your hosts. Today's episode, we are covering the Facebook acquisition of Oculus, a much requested episode by a lot of our listeners in the slack, and one we've gotten a lot of email about."

The quote introduces the episode's topic and hosts, highlighting the acquisition's relevance and listener interest.

Listener Engagement and Community

  • The hosts appreciate listeners leaving iTunes reviews.
  • Positive reviews, even those that are self-deprecating, help grow the podcast.
  • They mention a specific review from a user named Daniel X and another from "active users".
  • The podcast has a Slack community for ongoing discussions.

"So as we mentioned a couple episodes ago, if you leave one that we think is worth reading on the air, we're going to go ahead and do just that. [...] Thank you so much."

The quote emphasizes the value of listener reviews and engagement for the podcast's growth.

Sponsorship and Accounting Solutions

  • Pilot is a sponsor, offering accounting services for startups and growth companies.
  • Pilot has grown significantly, now backed by prominent investors.
  • The importance of outsourcing non-core activities like accounting is discussed.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner Pilot for startups and growth companies of all kinds."

The quote introduces the episode's sponsor, Pilot, and their services for startups, highlighting their growth and investor backing.

Acquisition History and Facts

  • The history of Facebook's 2014 acquisition of Oculus begins in 2010.
  • Palmer Luckey, a 17-year-old from Long Beach, California, was passionate about immersive gaming.
  • He aimed to create a virtual reality (VR) headset, leading to his involvement with USC's Institute for Creative Technologies.
  • The Department of Defense funded virtual reality research at USC.

"So we pick up our story of Facebook's 2014 acquisition of Oculus, the virtual reality company, in 2010, when a 17 year old homeschooled kid in Long Beach, California, named Palmer Lucky was taking."

The quote sets the stage for the Oculus story, focusing on Palmer Luckey's early interest in VR.

Early Development and Community Involvement

  • Palmer Luckey's VR development began in his garage, using smartphone components.
  • He shared his progress on the "Meant to be Seen 3D" forum.
  • John Carmack, co-founder of id Software, noticed Luckey's work and reached out.

"He's posting progress as he's building these prototypes in his garage on the meant to be seen forums."

The quote highlights the role of online communities in Palmer Luckey's early Oculus development.

John Carmack's Influence and E3 2012

  • Carmack demonstrated a version of Doom 3 running on a prototype Rift at E3 2012.
  • The demonstration garnered significant attention from the video game industry and media.

"John Carmack goes to e three, which is one of the two big industry conferences for video games. [...] he demonstrates a version of Doom Three that he's created that is running on the Rift."

The quote describes the impact of Carmack's demonstration on the Rift's visibility within the gaming community.

Founding of Oculus and Kickstarter Success

  • Brendan Iribe and Michael Antonov, experienced in the gaming industry, joined Palmer Luckey to found Oculus.
  • The Oculus Kickstarter campaign was launched in August 2012, raising $2.5 million.
  • The campaign's success continued with pre-orders on the Oculus website, selling developer kits rapidly.

"So the three of them get together with a few other folks who are the initial engineers. Brendan's the CEO of the company. They found the company kind of in June, July 2012, and then immediately afterwards, they launched the Kickstarter in August 2012."

The quote details the founding of Oculus and the immediate success of its Kickstarter campaign.

Oculus Developer Kit Shipping and VC Interest

  • Oculus began shipping their developer kit and by June 2013, venture capitalists (VCs) started to take notice of the company's activities in Southern California.
  • The company successfully raised a $16 million Series A co-led by Spark and Matrix in June of 2013.
  • John Carmack, a prominent figure in the gaming world, left id Software to join Oculus as the CTO, signaling a major endorsement for Oculus.

"And the company ends up raising a $16 million series, a co led by Spark and Matrix. And that's in June of 2013." "John Carmack actually decides to leave id and join Oculus as the CTO."

The quotes highlight the successful funding round and the significance of Carmack joining Oculus, which lent credibility and seriousness to the company in the eyes of the tech and gaming communities.

Andreessen Horowitz Investment and Facebook's Acquisition

  • Andreessen Horowitz led a $75 million Series B in Oculus in December 2013, only six months after the Series A, with Mark Andreessen joining the board.
  • Mark Zuckerberg's interest in Oculus led to Facebook acquiring the company for $2.3 billion in March 2014.
  • The acquisition deal consisted of $400 million in cash, $1.6 billion in Facebook stock, and an additional $300 million earn-out.
  • Facebook's aggressive acquisition strategy was a response to missing out on mobile and not wanting to miss the next big technology wave.

"Andreessen Horowitz ends up leading a $75 million Series B in the company." "Facebook acquires Oculus for 2.3 billion in total."

These quotes indicate the rapid investment interest from Andreessen Horowitz and the substantial acquisition by Facebook, reflecting the tech giant's strategy to stay ahead in emerging technologies.

Oculus' Hardware and Software Development

  • Oculus announced the DK2 (Developer Kit 2) at GDC in March 2014, with significant improvements over the DK1.
  • DK2 enabled a more immersive VR experience, moving beyond the "duct tape heritage" of the DK1.
  • Crescent Bay was the iteration that hinted at the consumer version Oculus would ship in 2016, offering an even more compelling VR experience.

"And Oculus announces that they've been successful with the DK one, and they're coming out with a new version of the developer kit." "The DK two is vastly improved over the DK one."

These quotes outline the progression of Oculus' hardware from the initial developer kits to the more refined Crescent Bay prototype, showing a clear trajectory towards a consumer-ready product.

  • ZeniMax sued Oculus and Facebook, alleging that John Carmack stole critical IP and that Palmer Luckey violated an NDA.
  • In February 2017, a jury ruled in favor of ZeniMax, awarding a $500 million judgment against Facebook and Oculus.
  • ZeniMax also sought an injunction to halt sales of the Oculus Rift.

"They end up suing Oculus and Facebook, alleging Carmack. A couple things." "A jury in Texas, actually rules in favor of Zenimax. A 500 million dollar judgment against Facebook and Oculus."

The quotes discuss the legal troubles that followed Oculus after the Facebook acquisition, highlighting the risks and complications that can arise from high-profile tech mergers and acquisitions.

Valve's Entry into VR with HTC Vive

  • Valve, in collaboration with HTC, launched the Vive VR headset at GDC in 2015, which had superior features compared to Oculus Rift.
  • The Vive included hand touch controllers and laser positional tracking, allowing for a more immersive and interactive VR experience.
  • Oculus eventually released similar touch controllers, but Valve's execution was seen as superior during that period.

"Valve unveils in collaboration with HTC, the chinese consumer electronics company. They unveil the Vive, which is in many ways a superior product to Oculus and the Rift." "Facebook ends up shipping the consumer version of the Oculus rift before Valve by a week."

These quotes emphasize Valve's strategic move into VR hardware with the Vive and its competitive edge over Oculus, showcasing the fast-paced nature of innovation in the VR industry.

VR Gaming and Social Interaction

  • VR technology provides a unique and immersive gaming experience reminiscent of early gaming milestones.
  • Rec Room is highlighted as a prime example of VR's potential, likening its impact to that of GoldenEye 64.
  • VR is evolving to be more than just gaming; it's becoming a social platform for interaction.
  • The quote from Mark Zuckerberg emphasizes VR's potential as a social platform.

"Zuckerberg over and over again, said VR is going to be the most social platform."

The quote from Zuckerberg, as referenced by the speaker, underlines the belief that VR will become a predominant medium for social interaction, which is a key aspect of Facebook's interest in VR technology.

Facebook's Bet on VR

  • Facebook's investment in VR is seen as a strategic move to ensure their presence in future technology platforms.
  • The acquisition of Oculus by Facebook is discussed in terms of integration with the company's social networking services.
  • There's a debate on whether the acquisition is a business line or a technology play.
  • The speakers discuss the challenge of maintaining a balance between horizontal (Facebook's social network) and vertical (Oculus VR hardware) business models.

"VR is clearly the future. We need to make sure that we have a position on the dominant technology platform of the future."

This quote expresses the strategic reasoning behind Facebook's acquisition of Oculus, emphasizing the importance of securing a strong position in the emerging VR market to protect and extend their social networking dominance.

Statsig Sponsorship

  • Statsig is introduced as a sponsor, providing a feature management and experimentation platform for product teams.
  • The platform allows for A/B testing and real-time observability of product features' impact on business metrics.
  • Statsig is used by various companies, including Notion and Microsoft, to make data-driven decisions.

"Statsig is a feature management and experimentation platform that helps product teams ship faster, automate A/B testing, and see the impact every feature is having on the core business metrics."

This quote explains the functionality and purpose of Statsig, showcasing its role in helping companies optimize their product features through data analysis and experimentation.

Oculus's Integration into Facebook

  • Oculus's integration into Facebook is becoming tighter, with the Oculus team moving closer to Facebook's headquarters.
  • The speakers discuss the implications of Oculus's integration and the potential risks of prioritizing Facebook features on Oculus VR.
  • The potential conflict between Oculus as an insurance policy and Facebook's horizontal strategy is debated.

"Oculus is getting more integrated. There's still the Oculus group that makes the Oculus Rift. Facebook has more independent VR teams. There's a PCVR, mobile VR."

This quote describes the current state of Oculus within Facebook, indicating a move towards deeper integration and the existence of multiple VR-focused teams within the company.

The Future of Facebook and VR

  • The speakers speculate on alternate scenarios where Facebook did not acquire Oculus but still needed to ensure a first-class presence on VR platforms.
  • Comparisons are made to Google's strategy with Android, suggesting that Facebook could adopt a similar approach with Oculus.
  • The conversation touches on the challenges of being both a horizontal and vertical business and the importance of clear priorities for employees and product strategies.

"Facebook is the horizontal and Oculus is the vertical. It seems like unless Facebook believes that the Oculus will be, or Facebook VR will be the only VR platform where they will need to reach users, it seems really dangerous to start doing integration."

This quote captures the strategic dilemma Facebook faces in integrating Oculus while maintaining its broad reach across all platforms. It highlights the potential risks of prioritizing their own VR platform over others.

Facebook's Acquisition of Oculus

  • Oculus, as a startup, faced significant challenges that were mitigated by Facebook's resources.
  • The acquisition by Facebook accelerated Oculus's progress by at least five years.
  • Facebook's brand had a positive network effect on the development community for Oculus.
  • The acquisition was a long bet for Facebook, costing $2.8 billion for technology they could have survived without.

"I'd say we are five years ahead of where we would have been without the acquisition, pointing to the resources needed to improve the hardware technology, as well as encourage software developers to build games and videos to watch on it."

This quote from Palmer Luckey, the founder of Oculus, emphasizes the significant acceleration in progress that Oculus experienced post-acquisition, highlighting the importance of financial resources and developer engagement in the tech industry.

VR Hardware Evolution

  • Oculus Rift's hardware evolved from a basic prototype (DK1) to refined consumer products.
  • Facebook's financial backing raised questions about whether Oculus could have achieved its hardware advancements independently.

"The DK one was like one step past duct tape, but the DK two. But then the consumer version. These are true, good consumer products."

Speaker B reflects on the evolution of Oculus Rift's hardware, from a rudimentary first version to a high-quality consumer product, which may not have been possible without substantial investment.

Facebook's Position Without Oculus

  • Facebook's venture into VR has been slow, with less than a million daily active VR users compared to billions on mobile.
  • The acquisition was not critical for Facebook's immediate survival but was more about not being left behind in potential future technologies.

"Facebook still hasn't done much in VR, but that's the other thing. Know, it's just so early, right?"

Speaker B points out that despite the acquisition, Facebook's impact on the VR industry remains minimal, suggesting that VR's significance is still emerging and Facebook's investment is a future-oriented strategy.

VR as the Most Social Platform

  • Zuckerberg's vision for VR as the most social platform is debated.
  • The execution by Facebook and Oculus in realizing this vision has been lacking, despite the potential.
  • Competitors like Snapchat (Snap) and Rec Room are considered more compelling in the social aspect of VR.

"I think he is both 100% right and Facebook and Oculus have executed poorly on it."

Speaker B agrees with Zuckerberg's vision of VR's social potential but criticizes the execution by Facebook and Oculus, suggesting that other companies are leading in this area.

Kickstarter's Role in Oculus's Success

  • Oculus Rift's success was partly due to Kickstarter, showcasing the power of platforms that enable creativity.
  • The ability to raise funds and support through Kickstarter was pivotal for Oculus's early development.

"Oculus and the rift being one of the first, not the first, but one of the first really breakout companies ideas to come out of creative endeavors to come out of the Kickstarter platform."

Speaker B highlights how Kickstarter served as a crucial launching pad for Oculus, demonstrating the impact of crowdfunding platforms on technological innovation.

Acquisition Grading

  • Facebook's acquisition strategy was initially seen as positive, but the subsequent execution has led to a downgrade in its assessment.
  • The acquisition's future impact is still uncertain, with room for reassessment based on future developments.

"So I think you foreshadowed this a little bit, but the strategy of Facebook acquiring the preeminent VR company and paying a lot for that I think is great so far."

Speaker A initially praises the acquisition strategy but goes on to grade it a 'C' due to the execution and competition from other technologies.

Horizontal vs. Vertical Integration in Tech

  • There is an ongoing debate about whether large platforms should own hardware to maintain direct customer relationships.
  • The discussion includes whether Facebook could have achieved a monopoly through Oculus.

"Is there a world where the technology behind Oculus was so breakthrough or anything that they acquire is so breakthrough that it is the only hardware platform and then they breach everyone and get to own the hardware?"

Speaker A questions the feasibility of Facebook achieving a hardware monopoly with Oculus, indicating the complexities of horizontal versus vertical integration in tech.

Snap's IPO and Investor Sentiment

  • Snap's IPO performance and future growth potential are discussed.
  • Concerns are raised about the potential negative experience of investors, especially millennials, who bought shares based on emotional attachment.

"Let's just hope that everyone that bought in a very excited way on that first day does not become extremely pessimistic right now."

Speaker A expresses hope that Snap's IPO investors maintain a long-term perspective, acknowledging the emotional aspect of investing in familiar companies.

Intel's Acquisition of Mobileye

  • Intel's acquisition of Mobileye for $15 billion is seen as a strategic move in the autonomous vehicle market.
  • The acquisition is part of a broader discussion about vertical versus horizontal approaches in technology sectors.

"So Mobileye is an israeli company. They build self-driving car technology and they were bought by intel for about $15 billion."

Speaker A discusses Intel's acquisition of Mobileye, which is significant for the autonomous vehicle industry and reflects the broader strategic patterns in tech acquisitions.

Podcast Recommendations

  • Recommendations for podcasts and articles that provide insights into various topics, including politics and technology.
  • The importance of quality interviewing and journalism is emphasized.

"My carve out this week is the Podsave America with Kara Swisher interviewing the gang from Podsave America at South by Southwest."

Speaker A recommends a podcast episode for its quality interviewing and engaging content, showcasing the value of media in providing insights and entertainment.

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