Facebook learning the costs of consumer hardware with Oculus

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By Ian Sherr

Facebook’s $2 billion deal to buy virtual reality pioneer Oculus VR brings the promise of new technologies that literally change how people see the world.

But the acquisition of the headset maker, expected to be completed in coming weeks, is also giving Facebook some headaches.

When Facebook CEO Mark Zuckerberg announced in March he was buying a virtual reality company that, on the face of it, has nothing to do with social networking, company watchers were surprised. Oculus makes a headset, called the Rift, that plugs into a computer and displays images designed to transport users into virtual worlds. Put on the goggles and you could suddenly be exploring a sandy beach halfway across the world or battling an enemy from the cockpit of a starship — without leaving your chair. The Rift has become a darling of video game industry veterans who extoll its virtue as an entirely new way of engaging in virtual experiences.

But Zuckerberg says games are “just the start.” Oculus’ technology will change industries, from health care to education and beyond. “People who try it say it’s different from anything they’ve ever experienced in their lives,” he wrote in a March 25 Facebook post explaining how virtual reality is no longer the “dream of science fiction.” Oculus’s technology, he said, “opens up the possibility of completely new kinds of experiences.”

What Zuckerberg perhaps didn’t see was that making consumer hardware is expensive — and more so for Oculus than initially expected. The costs associated with researching, developing, and building Oculus’s headset has begun raising eyebrows among Facebook’s executives, people familiar with the matter say. Some of that is the result of Oculus’s efforts to keep expanding its operations and building out its teams, as well as new initiatives such as publishing and research and development. Some has to do with a change in the components Oculus wants to use to build its devices.

The result is that the acquisition is proving more complex than other large deals, such as of photo-sharing app Instagram, though Oculus is a larger company with more than 100 employees.

Facebook declined to comment, as did Oculus.

No matter what’s driving up costs, the surprise at Oculus’ increasing financial demands could stem from Facebook’s lack of experience producing mass market consumer hardware. Facebook partnered with hardware makers in the past, including with HTC on its Facebook Home initiative – which was launched and abandoned last year.

But building technology on its own is different. With Oculus, the decade-old social networking giant is now funding everything from industrial design to manufacturing — and tackling all the rigmarole that comes with becoming a serious player in the consumer electronics market.

“Hardware is hard,” said Michael Geyer, who researches manufacturing technologies for design software maker Autodesk. The logistics of mass production are usually more expensive than newcomers expect, he said, particularly when they begin grappling with finding reputable factories that can churn out products quickly, and at a high quality. “Getting where Oculus got with their first prototypes was fantastic, but the work is only beginning for them.”

Oculus has said it will be happy to break even, though investment costs could reach into the billions before that happens.

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