Mar 25, 2014 · 9 minutes

Facebook today announced that it intends to acquire Oculus, the Los Angeles-based company making the crowdfunded Oculus Rift virtual reality headset, in a deal worth up to $2 billion. The deal will be made in a mixture of cash ($400 million) and stock (23.1 million shares worth approximately $1.6 billion based on the stock's current value) and provides for an "additional $300 million earn-out in cash and stock based on the achievement of certain milestones."

The acquisition marks Facebook's first entrance into the hardware market, and will offer the company control over the virtual reality headset expected to define the market even as Sony, Microsoft, and other companies are developing their own products.

Facebook explained the rationale behind the acquisition in its blog post:

While the applications for virtual reality technology beyond gaming are in their nascent stages, several industries are already experimenting with the technology, and Facebook plans to extend Oculus’ existing advantage in gaming to new verticals, including communications, media and entertainment, education and other areas. Given these broad potential applications, virtual reality technology is a strong candidate to emerge as the next social and communications platform.

'Mobile is the platform of today, and now we’re also getting ready for the platforms of tomorrow,' said Facebook founder and CEO, Mark Zuckerberg. 'Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate.' Zuckerberg expanded on those thoughts in a Facebook post:

This is really a new communication platform. By feeling truly present, you can share unbounded spaces and experiences with the people in your life. Imagine sharing not just moments with your friends online, but entire experiences and adventures.

These are just some of the potential uses. By working with developers and partners across the industry, together we can build many more. One day, we believe this kind of immersive, augmented reality will become a part of daily life for billions of people. Oculus offered its explanation for the sale in its own blog post:

At first glance, it might not seem obvious why Oculus is partnering with Facebook, a company focused on connecting people, investing in internet access for the world and pushing an open computing platform. But when you consider it more carefully, we’re culturally aligned with a focus on innovating and hiring the best and brightest; we believe communication drives new platforms; we want to contribute to a more open, connected world; and we both see virtual reality as the next step.

Most important, Facebook understands the potential for VR. Mark and his team share our vision for virtual reality’s potential to transform the way we learn, share, play, and communicate. Facebook is a company that believes that anything is possible with the right group of people, and we couldn’t agree more. PandoDaily spoke to Oculus investor and board member Antonio Rodriguez of Matrix Partners today who called the deal an "incredible financial outcome" and described the negotiation process as very fast from start to finish.

"I think that's one of the big advantages of being a strong founder CEO is the ability to run quick process – both knew what they wanted and moved quickly." Rodriguez says, referring to both Facebook's Mark Zuckerberg and Oculus' Brendan Iribe.

Matrix led Oculus' June 2013 Series A round and participated in its $75 million Series B in November of that same year, maintaining its status as the company's largest outside shareholder. The company has sold more than 70,000 units to date across its first- and second-generation products and offers Facebook the opportunity to enter the Apple-like territory of combining hardware, software, and services models.

Today's announcement marks the second high profile exit for the LA startup ecosystem this week following Yesterday's $950 million acquisition of Maker Studios by Disney.

This deal represents Facebook's first foray into hardware and the company's first marquee acquisition outside of its core social verticals of photos and messaging. While the rationale may not be immediately obvious to outside observers, Rodriguez calls it highly strategic and a big bet on the next generation platform – virtual reality and wearables.

"It's almost an Android-like bet, but one with a lot more zero’s on the back end," he says.

Oculus' founders and its investors had no intentions of selling and were not actively pursuing buyers, Rodriguez tells me. Rather, the company was fully committed to building a massive, category-defining company. It's a narrative that doesn't fully jive with today's news, but obviously the company felt like Facebook's resources could help them achieve that goal quicker and on a bigger scale.

"[While it hasn't done consumer hardware] Facebook has terrific systems engineering, as evidenced by their open compute program," Rodriguez says. Zuckerberg also promised Iribe and his team the kind of autonomy that he famously granted Instagram and Whatsapp as part of their acquisitions.

"We certainly felt a level of commitment to the vision and autonomous execution or this would not have happened," Rodriguez says.

Oculus investor Chris Dixon (who, disclosure, is a personal investor in Pando) wrote about the acquisition and why he initially invested in the company on his blog:

Virtual reality has long been a staple of science fiction. In real life, however, attempts to create virtual reality have consistently disappointed. Oculus was founded on the contrarian belief that the right people at the right time could finally deliver on the science fiction promise. Hardware components had become sufficiently powerful and inexpensive, and the pioneering engineers who invented 3D gaming were eager to explore a new frontier.

Last year, my partner Gil Shafir and I spent time studying Oculus and virtual reality technology more generally. The more we learned, the more we became convinced that virtual reality would become central to the next great wave of computing. We were therefore thrilled when we got the chance to invest in Oculus later on. Pando weighs in

Sarah Lacy wrote about Facebook's willingness to spend vast amounts of capital to acquire nascent startups following the company's $19 billion acquisition of WhatsApp:

The mo’ money, no problem attitude isn’t just limited at valuations. In 2006, Facebook was the only startup that had furniture from Design Within Reach– rather than startup staple Ikea. And Facebook was the biggest spoiler in the Techtopus Silicon Valley wage-fixing plot, reported here on Pando by Mark Ames. While other Valley companies conspired to keep wages artificially low, Facebook had no issue bidding mightily for talent, forcing wages to rise across the industry. Facebook also revived the late-1990s Cisco habit of swallowing companies whole just to get their talent– jump-starting the recent years’ acquihire boom. And, of course, with the $1 billion Instagram deal, Facebook was the first to put a $1 billion price tag on a mobile-first company that was less than two years old.

Facebook is like a reverse Amazon. If Amazon squeezes out prices through efficiencies and passes on the savings to everyone else; Facebook sucks in cheap capital through high valuations and spreads the inflation to the rest of the Silicon Valley machine. She also wrote about how Facebook CEO Mark Zuckerberg's claim that WhatsApp will operate independently like many of Facebook's other acquisitions was a little less than forthcoming:

Pre-Instagram that level of autonomy was precisely not what Facebook was known for, particularly when it comes to its acquisition strategy. People acquired into Facebook did well. Their projects were killed almost immediately. They fit into the Borg and there was no pretending otherwise.

Zuckerberg’s blithe 'this is just how we roll' explanation of how WhatsApp will fit shows how different Facebook’s acquisition strategy has become pre-IPO roadshow and post-IPO roadshow. Acquisitions were previously a means of assimilating talent, and Facebook was better at that game than most. Now, with the wherewithal of a surging public stock, the success of Instagram behind it, and the obvious fear of the inflection point of the mobile Web, Facebook’s game plan has changed. Deals need to move the needle, and the company has the currency to go big. It’s less Borg and more Voltron. (Or Frankenstein if the strategy becomes unwieldy.) Instagram CEO Kevin Systrom might be glad that Facebook successfully acquired Oculus, as building virtual reality features into its service might be harder than cloning Snapchat:

Above all, this proves how valuable Instagram is to Facebook. The app is just getting started in its advertising efforts, which will likely become a sizable business for Facebook. But the intangible value Instagram creates in fending off competitors is even more more meaningful.

The copycat label may sting, but you have to hand it to Systrom for once again walking the fine line between responding to competition but not looking like a pathetic rip-off artist the way Facebook did with Poke. Instagram Direct is different enough from Snapchat that Systrom can say with a straight face that this is still an Instagram product. Instagram power users will likely eat it up the way they did with video, and it may staunch the bleeding of users spending more time outside of the Facebook/Instagram walls.

But Zuckerberg should tread carefully: Too many more calls to his copycat hit man and he may destroy the reason he paid $1 billion for the distinct mobile social network to begin with. Reactions from around the Web

Iribe laid out his virtual reality dreams to Re/code earlier this year:

'A decade or two from now, it will be nothing but sunglasses,' Iribe said at the time. 'You’d put them on and have this new virtual world.'

Intriguingly, he described in that interview a hypothetical social/messaging application for the Rift that would let people be 'finally free of this 2D monitor.' The application, he said, would let people communicate in a 3-D, 360-degree virtual environment, as if they were standing in the same room.

'Kids will one day look back and laugh at FaceTime,' Iribe said. Polygon reports on a call Zuckerberg and Iribe held after the announcement:

In an investor call this afternoon following the announcement, Zuckerberg noted that most of his company's recent work has been targeted toward making Facebook available everywhere through mobile apps. He indicated that Facebook is satisfied with that progress, and ready to shift focus.

'We feel strong enough in our position that we want to focus strategically on building the next big platform that will be coming after mobile,' said Zuckerberg. 'Today's acquisition is a long-term bet on the future of computing. I bet Oculus can be one of the biggest platforms of the future.' Minecraft creator "Notch" announced that he has canceled plans for an Oculus Rift version of the game:

We were in talks about maybe bringing a version of Minecraft to Oculus. I just cancelled that deal. Facebook creeps me out.
Additional reporting by Michael Carney.

(This post will be updated as we learn more.)

[Image credit: Wang65 (Creative Commons)]