What Oculus’s $2 billion payday teaches us about innovation

March 26

Tuesday’s announcement that Facebook is buying the virtual-reality start-up Oculus for $2 billion no doubt left many people scratching their heads.  It was only a month ago the social network giant shocked everyone by paying as much as $19 billion for WhatsApp, an Internet-based text messaging start-up which had amassed an eye-popping 400 million users in only a few years.

Have Silicon Valley companies and investors been transported to some alternate universe in which start-ups become irresistible targets before they’ve made any profits or, in the case of Oculus, before they’ve even made any products?

In a word, yes.  Whether Facebook ultimately has the last laugh on skeptics who snort that it is speculating with its investors’ money, the logic behind these and other billion dollar deals is all too rational.

Thanks to a combination of better, cheaper and smaller digital technologies and fanatic consumers who have new ways of networking with each other all the time, the nature of disruptive innovation has changed utterly in the last decade.  When success comes, it often comes all at once, in a process my colleagues and I call “Big Bang Disruption.”

The back story on Oculus highlights just how much the process of change has itself been transformed.  I first came across the company a little over a year ago, at the 2013 International Consumer Electronics Show.  Oculus had already attracted attention through a Kickstarter campaign a few months earlier that asked donors to help the company create state-of-the-art virtual reality goggles, the Oculus Rift, which would allow players to immerse themselves in 3D environments for increasingly elaborate digital games.

The campaign was looking for $250,000 in funding to build a $300 developer’s kit that game developers could use to integrate their products with Oculus Rift.  But thanks in part to enthusiastic endorsements from respected gaming icons, within a month nearly 10,000 enthusiastic donors had pledged $2.5 million.

The company hadn’t even had time to arrange a booth at CES.  I had my demo of their prototype in a Las Vegas hotel room, where the entire development team was giving interviews, continuing to work on the product and, occasionally, sleeping.  Everyone who tried on the prototype Oculus Rift was stunned by how easily flat game environments suddenly became real.  (Personally, I got a little dizzy, but I am not the target demographic.)

Beyond the technology’s visceral promise, what had proven so irresistible — first to 10,000 Kickstarter backers — and a year later to Facebook?  In part it was the story of founder Palmer Luckey, a former community college student obsessed with both gaming and virtual reality.

Until Oculus, most virtual reality gear had been built for high-end simulations, many for military applications, and cost thousands of dollars.  Palmer had been buying used equipment off eBay, convinced that virtual reality products could be made that would work with increasingly sophisticated game consoles, such as Microsoft’s Xbox One and Sony’s PS4.

The problem, he discovered, was that the specialized gear was too specialized to be adapted.  And even after only a year or two, thanks to exponential improvements in digital technology, the military-grade equipment had grown obsolete.

Like many practitioners of Big Bang Disruption, Luckey ditched the high-end components and went in the opposite direction.  Thanks to the worldwide explosion of smartphones, vast global markers now exist for cheap component parts, including displays, processors, cameras and sensors.  Luckey’s first prototype for Oculus combined two used cell phone screens with a pair of ski goggles.  A little bit of software and, voila, a $2 billion company was born.

At this year’s International CES in January, Oculus had an actual booth, but still no product.  It did, however, have a more advanced prototype, codenamed Crystal Cove, that was so impressive it actually won the official “Best of the Best” Award — the top prize at the biggest consumer electronics show in the world.  For a prototype.

And while consumers still can’t get their hands on a finished products, developers are embracing the Oculus prototypes.  Thanks to an open interface and a focus on providing third-party developers with the tools they need to take advantage of the Oculus Rift’s features, a rich ecosystem is already developing for innovative uses for the company’s gear.

Intel and others, for example, are already working with the Oculus technology for non-gaming applications.  One company, SoftKinetic, had added motion sensors to the goggles, making it possible for natural gestures to be translated to manipulations inside the virtual environment.   In the near-future, Oculus devices may be used in virtual reality product design environments, and possibly medical applications.

Facebook is betting that immersive display technology will help it become an even bigger part of its users’ social lives, keeping them on the site if only to play even more addictive games.  It’s far too soon to know whether or not that strategy will succeed, or whether $2 billion will prove to be too high — or too low — a price.

But the lessons of the Oculus acquisition for entrepreneurs and incumbents alike are clear.   In the upside-down world of big bang innovation, combining readily-available off the shelf parts means better and cheaper products.  And customers don’t just buy your product, they fund its development, promote it better than any marketing professional ever could, and even collaborate with you to find new applications for it before you’ve even manufactured a single unit.

In the fully immersive world of exponential innovation, a passion to satisfy an unmet market other think is too small or too expensive to serve profitably can translate, for one community college student and a small team of believers, into a $2 billion payout and access to hundreds of millions of potential new users.

Downes is co-author with Paul Nunes of “Big Bang Disruption:  Strategy in the Age of Devastating Innovation” (Portfolio 2014).  

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Matt McFarland | March 26