Episode 35: Oculus

[0] Hey, Acquired listeners, Ben here.

[1] You'll notice for the first eight minutes or so of the episode, my audio quality isn't the greatest.

[2] But bear with us.

[3] It'll be crystal clear for most of the episode.

[4] Thanks.

[5] Is ocular and occluded from the same route?

[6] I don't know.

[7] I don't know.

[8] Anyway, go with it.

[9] That feels right, because I think that's her logo, right?

[10] It's an eye, yeah.

[11] Yeah, all right.

[12] I concede.

[13] Welcome back to episode 35 of Acquired, the podcast about technology, acquisitions, and IPOs.

[14] I'm Ben Gilbert.

[15] I'm David Rosenthal.

[16] And we are your hosts.

[17] 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.

[18] So we've now got enough distance from the acquisition that there's a lot more to come.

[19] but we feel comfortable covering it.

[20] No doubt about that.

[21] And we thought now it would be a good time to do it, given some of the themes we talked about on the Snap IPO episode, that this would be a good counterpoint, a sort of different approach to a camera company.

[22] Indeed.

[23] So before we dive in, we have some incredible listeners that leave some great iTunes reviews.

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[35] We love you just the same, Ben.

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[63] Now, onto the episode, David, can you take us through the acquisition history and facts?

[64] I will.

[65] as always then 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 he'd been been homeschooled for its education up till then and he was taking some classes at at Cal State Long Beach and he had he had a problem and his problem was that he loved video games and he loved them PC games in particular and he loved them so much that he had created this like massive setup at home where he had six monitors and he just wanted to get like as immersed into the games he was playing as possible um but even with all these monitors it still wasn't good enough He wanted to get, like, deeper into the game.

[66] He wanted, like, what I was writing this, I was thinking about, the EA sports tagline, you know, they get in the area.

[67] It's in the game.

[68] I think I read somewhere he had, like, the largest collection of HMD's head -mounted displays of currently existing or hacked together hardware in the world before he set out to build Oculus.

[69] Yes.

[70] So, well, his problem was he wanted to literally get into the game.

[71] and so, you know, lots of kids, myself included, wanted to do that when I was 17, but Palmer actually did something about it.

[72] So he went over to USC and USC had this thing, has this thing called the Institute for Creative Technologies, which is a lab that was created there in 1999 and it was actually funded by the Department of Defense.

[73] And the idea is that in L .A. they would combine sort of, you know, the resources of USC, a major research university, kind of all the special effects technology in Hollywood and a video game industry, which has a huge base in L .A. And they'd use it to build advanced training and simulation technologies.

[74] And what that meant in practice was virtual reality.

[75] Yeah, I mean, it feels like a great thesis to me. And it's funny thinking about funded by the Department of Defense, boy, oh boy, have we seen that that as a tech theme over and over again in a lot of these companies.

[76] Yeah, absolutely.

[77] Either the companies themselves or the research labs they come out of or, you know, even just the history of Silicon Valley and the importance of how the semiconductor came to be.

[78] Yeah.

[79] So Palmer, a 17 -year -old kid in Long Beach, he talks his way into getting a part -time job at the ICT at USC.

[80] And he's working on a team that's trying to design cost -effective virtual reality.

[81] But he still wants to move faster.

[82] So in his parents' garage, he starts hacking away with basically like components from smartphones trying to make the device that's really going to achieve his dreams, which is be able to play video games in virtual reality.

[83] And at the same time, he's, you know, on the internet natively, as all kids are back then and these days.

[84] And he hangs out in forums online.

[85] And in particular, at this one forum called the meant to be seen 3D discussion forum, which is, I don't know if it was the largest, but it's certainly a very active internet forum dedicated to trying to create virtual reality devices at the time.

[86] Yeah, man, forums were like, that's where everything happened back in the day.

[87] Totally.

[88] It's like back in, you know, the more things change, the more they say the same, right?

[89] the original, like, you know, Netscape and, you know, ARPANET days.

[90] Yeah.

[91] And I mean, anybody like, but predating forums or, you know, mailing lists and Usenet and like, it's just a constant reinvention of the same thing.

[92] People see community.

[93] Internet's incredible for community.

[94] Revision, revision, revision.

[95] Yep.

[96] And, you know, now we have virtual reality.

[97] So maybe the next great entrepreneurs will meet, you know, on an Oculus or on a vibe.

[98] Yep.

[99] So he's posting progress as he's building these prototypes in his garage on the on the meant to be seen forums.

[100] And turns out that there are among the other posters on the forum or lurkers on the forum is a guy named John Carmack.

[101] And that might ring, that name might ring some bells for some of our listeners.

[102] John is probably one of the most famous people in the video game world.

[103] he was the co -founder of Id Software and Id created and John in particular pioneered a lot of the techniques.

[104] Quake, Quake, Doom, Wolfenstein 3D, all of the first generation of first person shooter PC games.

[105] Yeah, and I think his like one of his greatest contributions was the algorithms to do the shading of shadows so that things look appropriately far away and appropriately lit as you, you know, approach them or turn corners or, you know, the things we take incredibly for granted today, but we actually required a lot of complexity.

[106] Yeah, and I mean, I remember, gosh, I was probably in middle school when those games were coming out.

[107] And, like, it was, they were so far advanced versus anything else on the PC at the time.

[108] Even PC or like the NES.

[109] Yeah.

[110] Yeah.

[111] So, Carmack is on the forums.

[112] And he sees, and he's on the forums.

[113] because he is also interested in VR.

[114] And he kind of shares Palmer's dream that playing video games in VR is going to be a totally new paradigm and really, really compelling.

[115] And actually, his CarMax dream, he had, it had released Doom 3 recently.

[116] He wanted to port Doom 3 into VR.

[117] And so he sees, he sees all the progress that Palmer's making.

[118] and he reaches out to him.

[119] And there's no great hardware out for VR, right?

[120] Like if anybody wanted to port to VR at this point, it's like, you know, highly specialized installations in science centers and stuff, right?

[121] Yeah, I mean, basically, you know, it's the kind of stuff that USC is doing at the ICT for the military or science applications.

[122] You know, you're talking hundreds of thousands of dollars for a room scale installation.

[123] You know, nothing like what the Rift becomes, which was you could go on, on Oculus's website and order a development kit for $300.

[124] So Carmack reaches out to Palmer, asked if he can buy a Rift.

[125] And Palmer apparently says, he says an interview later, he decided he was just going to play it cool.

[126] And he's like, oh, I'll just give you one.

[127] So he does.

[128] And it's fortunate for him and for the future of VR that he did.

[129] This was, we're now into 2012, and John Carmack goes to E3, which is the big, one of the two big industry conferences for video games.

[130] The other one is GDC, which we're going to talk about in a minute.

[131] But John goes to E3 in 2012, which is in June.

[132] And he gives, he gives a big talk, and he talks about how excited he is about VR.

[133] And he shows, he demonstrates a version of Doom 3, that he's created that is running on the Rift.

[134] And the Rift is like a totally hacked duct taped together prototype that Pomer had sent him.

[135] It was actually duct taped, right?

[136] Like there's some I read about a meeting with them where like he actually duct taped the display to the head mounting piece.

[137] Yeah, there are great videos online.

[138] And of course, you know, after this, all the tech and video game press covers this and then goes and tries it out.

[139] And where's it?

[140] And like the unit is actually duct taped together.

[141] Yeah.

[142] And just like ridiculous watershed moment when, uh, when John Carmack is demoing on your hardware at E3, you know, it's, uh, this is pre -Kickstarter, is that right?

[143] Or is this?

[144] So this is pre -Kickstarter.

[145] There's not even a company yet.

[146] It's literally just Palmer working on this stuff.

[147] And, uh, and he's at this point, I believe, either 18 or 19 years old.

[148] Crazy.

[149] Totally crazy.

[150] So E3, 2012 is the big moment for what would, the artist that would become known as a And a few other folks, you know, in addition to the entire video game industry, sort of take notice.

[151] And two of the folks who reach out to Palmer, when they hear the story about this, are two guys named Brendan Aribe and Michael Antonov, who also were in the L .A. area.

[152] They had been co -founders of a company called Scaleform, which was a sort of video game UI technology.

[153] company that Adobe had acquired several years earlier.

[154] They'd worked at Adobe for a while, and then Brendan actually had left, and he joined a company called Guy Kai, which folks in the video game industry might remember was a streaming video game company that Sony acquired a couple years earlier.

[155] And the idea being, and actually a lot of consoles use this today, that rather than buying a game on a physical media or downloading it, you can play a game just by streaming it over the internet.

[156] Oh, yeah.

[157] I remember, I mean, I remember Microsoft showing off some, some tech like this, too, where the whole idea was that, you know, you're done with downloading the bits to your device.

[158] And, in fact, on, this is actually a Windows phone demo, the device is hardware constrained, but we have all this amazing cloud computing and we're going to, in a low latency way, stream your interactions back up to the cloud.

[159] The game computation is going to happen in the cloud and then stream it back down to your device and it'll feel native.

[160] I feel like I've seen a lot of those demos and the trend seems to be toward powerful clients still.

[161] Like we haven't gone to this world where gaming is happening.

[162] It's never totally worked, right?

[163] Yeah.

[164] I mean, the dream is really cool, right?

[165] That like on any client, as long as you have a fast enough internet connection, you don't actually have to do all the hard rendering on the client, it can all be done in the cloud and just streamed his video, but it's never quite lived up to the promise.

[166] Yeah, and I think this is kind of a tech trend for me later, but I think to quickly derail into it, we continue to pursue this dual track of pushing the envelope on desktop grade or even, yeah, it's called desktop grade gamer PCs.

[167] So you see the Oculus hooked up to really, you know, really crazy towers.

[168] And then simultaneously, what we were trying to do in a low power way on phones, like phones keep getting more powerful.

[169] And the processors in phones keep getting better at originally, you know, apps and then casual games and now a little bit more serious games on mobile.

[170] And we're definitely seeing the trend of, you know, anyone who is interested in pushing all the intense compute up to the cloud for games that are played on mobile, well, mobile got good enough to largely just play them themselves.

[171] And then the ones that require better experiences, the intense sort of R &D push the envelope of what can be done is really still being done on towers.

[172] And that's not, you know, that's not going away anytime soon.

[173] Yep.

[174] And especially in VR.

[175] You need one of the things limiting the market right now, which we'll get into, is you need a super powerful PC to make this stuff work, which not that many people have anymore.

[176] Yeah, I remember we're interrupting a lot, but as a quick aside for listeners, I remember going into David's office like a few years ago at Madrona.

[177] And he's like putting together this like crazy tower to hook up his, his dev kit, Oculus to and telling me about how like, VR is here.

[178] Like, we're looking seriously at this now.

[179] Like, it's the future.

[180] Like, people are maybe not consumer adoption right away.

[181] And I remember thinking, like, maybe not consumer adoption right away.

[182] Like, nobody has a tower.

[183] Nobody's to buy a $4 ,000 gaming rig.

[184] And like, that's still kind of the state of good VR right now.

[185] Yeah.

[186] I mean, we're going to get into it, but we still have that at Madrona.

[187] It's, uh, the thing weighs about 50 pounds.

[188] It's huge.

[189] But anyway, so, so Brendan and Michael coming from scale format and Brendan then immediately from Guy Guy they reach out to they're really excited about this um you know their game guys and business guys in in the game industry reach out to Palmer and basically convince him that there's a big company to be started here and that they want to start the company together so the three of them get together with a few other folks who are the initial engineers Brendan's the 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 which which Palmer had been planning to do beforehand but and and right after E3 but got delayed as they were starting the company and the Kickstarter becomes hugely successful and I actually went and rewatched it right before we recorded this and like it is um it's great to watch but so funny knowing the history of what happens immediately thereafter so Carmack is is is featured heavily in the video, as are folks from Valve, including Gabe Newell, who's the founder of Valve, go watch the video.

[190] We'll link to it in the show notes.

[191] He gives a kind of glowing discussion of Palmer in the future of VR, and he says, quote, we strongly encourage you to support this Kickstarter, we meaning, you know, him and Valve.

[192] Oh my God, that's awesome.

[193] It's so awesome.

[194] So on the strength of this, and for listeners that don't know why we're saying that's awesome, like Valve and HTC would go on to create the only serious competitor to the Oculus right now.

[195] And arguably better.

[196] Anyway, leaving that aside, the five.

[197] And it's hilarious to see him on Team Oculus at the start.

[198] Yeah.

[199] Well, and Valve's had such a long history with trying to get into VR, but they finally do it right after the Facebook acquisition.

[200] So the Kickstarter is hugely successful.

[201] They had set an initial goal of $250 ,000.

[202] They end up raising 10 times that.

[203] There is almost $2 .5 million.

[204] And then they do something really smart, which is after the Kickstarter ends, they basically just continue it on the Oculus website.

[205] And anybody can go there and order a developer kit for $300.

[206] And this is like earlier in the crowdfunding era.

[207] And it's like amazing to see, you know, if you're an entrepreneur and you're trying to just put together around a $250K, like you don't want to raise $2 .4 million because you give up your whole.

[208] whole company.

[209] But like in the in the in the isn't crowdfunding great where you know there's there's no equity.

[210] So it's just like money for you to play around with.

[211] And sure you have to fulfill those pre -orders and that's the the biggest issue with with kick starters.

[212] But like what an amazing, what an amazing model to bootstrap a company and get some cash in there, you know, long ahead of when you're going to ship the units.

[213] Yeah.

[214] Totally.

[215] And um, you know, and they turn it around pretty quickly.

[216] But, but when they when they put the pre -orders up on the website after the Kickstarter campaign, There's so much momentum continuing that they're selling, you know, supposedly for the first couple days that it's up on the website, they're selling four to five developer kits, DK1s, as they come to be known, quote, quote, DK for developer kit, the first one, at four to five every minute at 300 bucks a pop, which is pretty impressive.

[217] Wow.

[218] Yeah.

[219] So they go along and they're working on shipping the developer kit.

[220] They start shipping it.

[221] And by the summer of next year, June 2013, The VCs, you know, start to get, us VCs start to get wind of what's going on down there in Southern California.

[222] And the company ends up raising a $16 million series A co -led by Spark and Matrix.

[223] And then, and that's in June of 2013.

[224] And then right after the first, well, the company wise, the first really big victory happens, the, that John Carmack actually decides to leave id and join oculus as the cTO and this is a huge huge moment in the gaming world for the company yep and actually as someone who wasn't following it that closely at the time this was the first time that i took oculus seriously and i didn't realize that carmack was in the video or presenting on stage this is the first time i had heard his name associated with it and suddenly it was like okay this company's serious like the you know the creator of doom and quake is is joining as their ctio yeah so and you weren't uh weren't the only person to notice this now that They had obviously raised the Series A that summer, but Mark Andresen and Andreessen Horowitz also noticed that John Carmack has just gone and joined this left it and joined this baby virtual reality company based down in Southern California.

[225] And in December, a couple months later, Andreson Horowitz ends up leading a $75 million series B in the company.

[226] And Mark Anderson joins the board.

[227] So what was the time between that series A and series B?

[228] It was six months or less.

[229] Wow.

[230] And the other sort of foreshadowing of the future here, you know, Mark, of course, and why this is important to the story, also happens to be on the board of another company that's going to get involved here, which is Facebook.

[231] Yeah.

[232] Yeah, that's convenient.

[233] Yes.

[234] So that was December 2013.

[235] A couple months later at GDC, which, as I mentioned, is the other big industry conference.

[236] the video game industry.

[237] And that happens in San Francisco.

[238] That's at the beginning of March.

[239] And Oculus announces that they've been successful with the DK1 and they're coming out with a new version of the developer kit.

[240] So still focused on shipping these to developers.

[241] They're not ready to release a consumer device yet, but they announced the DK2 and that that's going to begin shipping in July 2014.

[242] And the DK2 is vastly improved over the DK1.

[243] Yeah, I think.

[244] I think, yeah, the DK2 was the first.

[245] one I had tried.

[246] And I remember putting out on being like, okay, this is very different.

[247] Like, this is, uh, you know, I understand what the hype is about now.

[248] But I still wasn't like, this is, this is the next title wave.

[249] But then the one after that, I think the Crescent Bay, which I don't know if they, like how many different presidents they never sold, they never sold the Crescent Bay.

[250] Um, that was sort of like the, the, the first iteration of what would become the consumer version that they'd ship in 2016.

[251] Yeah, I think I tried that at 2015 ETH or no 2015 CES and they'd take you into this private room you have like a 15 minute little demo with it and that was the one the Crescent Bay was the one where I was like okay this is the next title wave of technology yeah it's uh and it really you know the DK 2 um the DK 1 was was you know still had a lot of the duct tape heritage in it and I'd say the DK 2 did from a like software perspective but from a hardware perspective it was pretty good and had solid components in it.

[252] And when you used it, it really enabled the average person, the average person couldn't, you know, I think just buy one off the internet and set it up on their laptop.

[253] However, if you had a friend or knew somebody who had a set up with the DK2, you could put it on and it would kind of just work and you could see what was so amazing and how different and immersive VR was versus just playing a regular video game.

[254] Yep.

[255] So that was the beginning of March, and then very shortly thereafter, our recurring character on acquired, Mark Zuckerberg comes knocking, and he gets in touch with the company and says, hey, heard some really cool things about what you're doing.

[256] I'd love to get a demo.

[257] Yeah.

[258] Do you know how that introduction was brokered?

[259] Is that through Andreessen or like, do you just get an email from Zuck at Facebook that's like, hey?

[260] I don't, I don't know.

[261] It maybe out there.

[262] Listeners, if you know, hit us up on Slack or shoot us an email.

[263] I assume that there were easy channels to make that introduction happen.

[264] Yeah.

[265] But somewhat like the original Snapchat episode, Zuck, I believe as the story goes, you know, asked for them to come up to Facebook's campus and do a demo up there.

[266] And Brendan responds and says, hey, and this is from an interview with Brendan after the acquisition, hey, you know, actually it'd be better if you come down here because we have a better setup here.

[267] So just like he did with Evan Spiegel.

[268] So get on your private plane and fly down to Irvine.

[269] Mark flies down to Irvine, meets with Oculus, is really impressed with what he sees.

[270] And it says, you know, hey, what can Facebook do to help you?

[271] And that quickly leads into acquisition discussions.

[272] So by the end of the month, the deal's done.

[273] It gets announced.

[274] Facebook acquires Oculus for $2 .3 billion in total, of which, interestingly, only $400 million in cash, $1 .6 billion in Facebook stock.

[275] And then there was an additional earnout of $300 million.

[276] But this was similar to the Instagram deal and the failed Snapchat deal from the year before and WhatsApp.

[277] This was sort of cementing Facebook and Mark Zuckerberg's reputation as a very aggressive acquirer.

[278] Yeah, yeah.

[279] And I think, again, we always bleed into tech themes here, but like, it's really exemplifying Facebook's FOMO.

[280] I mean, their fear of missing out where they see something that they're not currently working on that is either something with an existing strong network effect like a WhatsApp or an Instagram that they could unseat them or a powerful new piece of technology that could become the next wave of computing.

[281] And if they're not on it, they're kind of screwed.

[282] So they're, they're, They've very masterfully had an M &A strategy to kind of make sure that they stay on top and don't act like the social networks of years past.

[283] Yeah, and we're going to get into this in the rest of the show, but I think what's so cool given how often Facebook has showed up on Acquired and all the both the IPO and the acquisitions we've talked about, you can really see how and why this philosophy came to sort of rule the day with Mark and at the company, you know, through the IPO when they had the huge disaster with mobile and realizing, you know, Mark realizing as a CEO and the company realizing that they had missed that wave and they needed to paddle over to it, you know, with all strength ASAP.

[284] And that included acquiring Instagram.

[285] I saw a fascinating stat that I didn't even think about is that so Facebook was constantly referred to as a website when they when they launched and for years after and in 2008 they launched a mobile app but nobody referred to them like as an app company and it really took them like four whole years after so that you know they founded in 2004 app launched in 2008 still largely a website even though they had an app and it took them all the way until 2012 to be taken seriously as a mobile company and you know now 84 plus percent of their revenue comes from from mobile advertising and I think that it's interesting to note that like it takes time even though you are on a platform or have a technology to make that the competency of your company and I think that Facebook's on an opportunity here to you know not let VR evolve around them and then have to play catch up and get on that platform and then like turn the company to be centered around that platform this is an opportunity to say you know we don't know exactly what it is yet.

[286] If, you know, Oculus by Facebook is the platform and other people are on it or if Facebook is delivered over VR through Oculus, that much is unclear.

[287] But what is important is they can't afford a four -year lag before starting to play on a platform and turning the company to be centrally oriented around that platform when that's the one that everybody's on.

[288] Yeah.

[289] And it's interesting.

[290] I mean, you look at, you know, the billion dollars they spent for Instagram, the $19 billion they spent for WhatsApp, the $3 billion they offered Snapchat, you know, those were all examples of they were too late and they needed to come in and take out these unsuccessfully in Snapchat's case, take out these threats that were popping up in their, you know, within their current domain.

[291] But $2 .3 billion was a lot of money to spend for a wave and a technology and a modality that was, you know, Even then, you know, I think if rational cooler heads prevailed at that moment looking at the company, it was still a long way away.

[292] I mean, we're here in 2017 and it's still a ways away, even three years later.

[293] Yeah.

[294] Yeah.

[295] So, okay, what was the date of the acquisition?

[296] It was March 2014.

[297] Okay, so that 75 million series B was in December of 2013.

[298] So moving away from the Facebook side a little bit and looking over at the Andreessen side of this, they invested 75 million million and then just a little over three months later got let's see yeah well and i think i believe i don't know if it's official but in research so i believe the the valuation of the andresen round was between 300 and 400 million wow so that's uh call it a 10x i mean somewhere slightly less than 10x um but still that's on a a lot of money yeah Well, good for them.

[299] Yeah, great for them.

[300] We'll get into acquisition category in a minute here, but the story doesn't quite end, unfortunately, for Facebook when they acquire the company, because two things happen over, well, starting immediately, but play out over the next couple years.

[301] One, it turns out that, you know, Carmack is as important as he was, and I really think Oculus, the company, and the technology wouldn't exist without him.

[302] Unfortunately, his former employer, Id Software, which itself had been acquired a couple years before by a video game conglomerate called Zenimax.

[303] They also agreed that Oculus wouldn't exist without Carmack and his contributions.

[304] And they end up suing Oculus and Facebook alleging Carmack, a couple things.

[305] One, that Carmack had stolen critical IP from his work at Id and taken it to Oculus.

[306] And two, actually, in 2012, Palmer Lucky had met, I don't know if it was when he was meeting with Carmack or with other folks that did, had signed an NDA with the company.

[307] And as a result of everything that happens, Xenomax is alleging that he had violated that NDA.

[308] And alleged and then, and then, you know.

[309] And so that, that lawsuit hits.

[310] almost immediately after the acquisition.

[311] And then only just a month ago, as we're recording this, in February of 2017, a jury in Texas, which its software was based in Texas, is based in Texas, actually rules in favor of Xenamax, a $500 million judgment against Facebook and Oculus.

[312] And Facebook has said that they're going to appeal, but still, that's not good.

[313] Yeah, I mean, that takes it from a 2 .3 up to 2 .8.

[314] Right.

[315] But it gets even potentially worse in that Xenamax has also filed a court injunction arguing that the courts should halt sales of the rift, which would just be terrible.

[316] Wow.

[317] Yeah, that's a far more serious blow.

[318] Yeah.

[319] It hasn't happened yet, but it is potential.

[320] Clearly, they're posturing and trying to bargain between the parties here.

[321] Yeah.

[322] I did some research on Xenimax for this.

[323] And yeah, it's actually, it's.

[324] It's quite a large video game conglomerate.

[325] They own a bunch of studios, including the one that makes them.

[326] Video game fans among our listeners will know the Elder Scrolls, the Fallout series.

[327] But guess who is on the board of Xenamax?

[328] The only thing that wouldn't surprise me is Carl Icon.

[329] No, but almost as good.

[330] So they have quite the cast of characters.

[331] They have Cal Ripkin Jr., the Iron Man, the baseball player.

[332] Yeah.

[333] Jerry Bruckheimer.

[334] the movie producer and in addition to Les MoonViz who is the CEO of CBS but this is really the kicker I just couldn't believe it when I read this Robert Trump Donald Trump's brother is on the board of Zeta Max the internet says it's true boy what a weird company God conglomerates are a weird man yeah totally weird So, you know, you can't make this stuff up.

[335] Truth is, in fact, sometimes more stranger than virtual reality.

[336] Yeah.

[337] And, you know, we'll have a follow -up.

[338] I'm sure, probably not an episode, but this will be in follow -up and future episode.

[339] But I suspect you're right that the injunction to stop selling the Rift is just posturing and trying to get potentially a settlement or more out of the current ruling or something.

[340] And it would shock me if they stop shipping the Rift because of this.

[341] does feel like Facebook's going to get to pay some more money there.

[342] Yeah.

[343] Or at least it's posturing perhaps trying to get Facebook to drop their appeal.

[344] But the other major thing that happens after the acquisition that we've alluded to on the show is that Valve and Gabe Newell decide that rather than just supporting Oculus, they actually want to get into virtual reality themselves.

[345] So the next year at GDC in 2015, Valve unveils in collaboration with a HTC, the Chinese consumer electronics company, they unveil the Vive, which is in many ways a superior product to Oculus and the Rift.

[346] And the Vive has two key innovations that the Rift doesn't have at that point.

[347] One are true hand touch controllers.

[348] So when you would play the experiences or games on Oculus before Valve came out with the Vive.

[349] you would have to use either a keyboard and a mouse or a video game controller, an Xbox controller.

[350] And that's just totally...

[351] Boy, is that pull you out of the experience.

[352] It really pulls you out of the presence, which is the whole point of VR.

[353] Valve ships these controllers that enable you to move your hands around and grab things and pick things up and interact much more naturally with the environment.

[354] And then they also have the, while it's still tethered, the headset that you wear still has a cable coming out of it.

[355] attaches to the PC, there are, they're called lighthouses that are laser positional tracking boxes that you put in the room and that allow you to walk around the room.

[356] So you're no longer just sitting in a chair with your hands on a video game controller like the old video game paradigms, but it really changes this into a much more immersive experience.

[357] And boy, what a, what a brilliant freaking end around by, by Valve.

[358] Like, they're a software company.

[359] For listeners that don't know a bunch about Valve.

[360] They're a software company.

[361] They make games and they make a platform called Steam and they make, I think they make most of their money from Steam and they get a cut of all the distribution of the games that go out over Steam.

[362] And Steam's sort of the default way if you're a PC gamer to go and get new games that come out.

[363] So basically they own the pipe.

[364] And, you know, they're super wacky company, brilliant, brilliant engineers there, brilliant game designers that, of course, are interested in VR.

[365] But like, they're not going to make hardware.

[366] that that's not in their core competency at all and they've been as David alluded to trying for years to figure out what the right way to get into VR was and for them to be able to you know closely track and and be a fan of of Oculus see that fall into Facebook's hands which loosely competitors right at the very least you don't want to put too much of your your company's stake on on in Facebook's control and to be able to in that tight of a window turn around find a hardware partner like HTC and get into market with a superior product.

[367] Like, there's a lot of things that we'll conclude out of this episode, but one of them is that there are people at Valve and HTC that are executionally brilliant.

[368] Yeah, and Valve is, we'll link to this in the show notes.

[369] I suspect a lot of our listeners are know the company well, but for those that don't, it is a fascinating place.

[370] Their employee handbook leaked on the internet a few years ago, and it's more like a There's no hierarchy.

[371] Nobody reports to anyone else there.

[372] Everybody decides what they work on.

[373] Everybody's desk is on wheels.

[374] And if you decide you want to work on something else with the other team, you just pick you, move your desk over to wherever that team is.

[375] And you start working on whatever they're working on.

[376] And I believe it's 100 % owned by Gabe Duel.

[377] So there's no, I mean, there's not a lot of leaks of stuff from shareholders or public disclosures or any.

[378] or really even like known market cap of the company.

[379] It's a very...

[380] Yeah, it's very, very closely held.

[381] I don't believe Gabe owns exactly 100%, but he definitely controls the company.

[382] Just one person.

[383] And they make, you know, nobody knows outside of Valve the exact number, but a lot of money.

[384] I mean, billions of dollars of revenue from, mostly from Steam, as Ben mentioned.

[385] Yep.

[386] And if there's an opposite podcast to acquired, it's like, so in the acquired or in the corp dev parlance, you know, Acquired is often about the buy, not the build.

[387] If there was a podcast that was about the build decision instead of the buy decision, we would really want to like examine what Valve does here and what their existing business with Steam sort of allowed them to do in going into VR and taking this like very expensive risk on something that has, you know, super unclear business value, especially when they start the venture.

[388] Yeah.

[389] And they, you know, they really, you know, I don't think there's really any two ways about it.

[390] They out -execute Facebook and Oculus over the next two years.

[391] Facebook ends up shipping the consumer version of the Oculus Rift before Valve by a week.

[392] So the consumer version of the Rift comes out in, at the very end of March 2016.

[393] And then at the beginning of April, Valve ships the Vive.

[394] But again, with these two key innovations that Oculus doesn't have, and it's not until December 2016, so just a few months ago now, that Oculus finally brings out their touch controllers, which brings them closer to parity with the hand controllers of the Vive.

[395] Yeah, and you know what?

[396] I mentioned earlier that the Crescent Bay woke me up to the idea that VR is a, you know, the next title wave and technology.

[397] I'd say the next step function was that was the first time I tried the Vive.

[398] I think that there was a thing, I think Google might have even made it, but it was a thing where you could paint and you use the controllers to paint.

[399] Tilt brush, yeah.

[400] Tilt brush, yeah.

[401] And then there was super cool.

[402] It's like MS paint in VR is the only way to describe it.

[403] It was an independent company, a couple developers, and Google ended up acquiring it.

[404] Oh, nice.

[405] Nice, nice.

[406] So there's that demo and then there's one in a kitchen where like you go in and you're supposed to like, you know, start making a food.

[407] Yeah, the job simulator.

[408] Yeah, but really what ends up happening is like you can just mess every, like you can just pick up pans and heave it at a wall and knock the, like this is incredibly thrilling experience of like throwing an entire rolling cart full of dishes on the ground and having no consequences.

[409] And I'd say that that was the first time where like, I think I was in that thing for like a half hour.

[410] It felt like five to ten minutes.

[411] And that was the first time where like I legitimately didn't want to leave.

[412] Like that was the first time where I was like, oh, people are going to get real addicted to this.

[413] Yeah.

[414] And that's, you know, I'd say for our listeners that aren't into VR, maybe haven't even tried it yet, you know, go find.

[415] You know, go find.

[416] It's worth it.

[417] You owe it to yourself.

[418] If you care about technology and thinking about where waves are going to break in the future, go find a friend or go to your local venture capital firm that has a vibe installed and try out a few things.

[419] Try out Tilt Brush.

[420] It's really, you know, it'll take you back to the first time you used MS Paint on a PC if you're old like me and Ben.

[421] Try out.

[422] There's this, my favorite, favorite app and game is in VR these days is by our friends over at Rec Room, which is a really amazing company in Seattle.

[423] And the best I can describe Rec Room is you just have to play it yourself and you'll be a believer about the potential of VR.

[424] But that's like the first time I played Golden I, 64 as a kid and had my first, you know, like shooter 3D video game experience.

[425] And Rec Room is so much more than that.

[426] But just that pure fun, it's great.

[427] Yeah.

[428] And the reason is, and we'll get into this.

[429] and I think this is part of Facebook's bet is, you know, Facebook, I think Zuckerberg, let me read the quote real quick.

[430] He, uh, he's over and over again said VR is going to be the most social platform.

[431] And I think the super cool thing about rec room is like, you're in there just hanging out.

[432] You're doing all sorts.

[433] You're in a room.

[434] You're playing paintball.

[435] There's like all these different activities you can do, but it's all centered around like, you're just like hanging out with other people as if it was sort of real life.

[436] And one thing I want to dissect later in the tech themes is like, does that like, do you agree that the, the, you agree that the, the, The, you know, killer app of VR is a social one.

[437] But the cool thing about Rec Room is like, when you try it, you're like, wow, I really am just like hanging out in here.

[438] And I could do this for hours with other people.

[439] Yeah.

[440] And that's what, you know, when I said, it reminded me, it reminds me of what it was like playing Golden Eye the first time.

[441] Like, the single player campaign in Golden Eye, like, you know, it's fine.

[442] It's whatever.

[443] It's good.

[444] But like GoldenEye was all about playing with your friends and everything, like all the talking smack and, you know, the hours and hours and hours.

[445] I spent in high school and college with my friends playing that, you know, that's what rec room is like.

[446] And it really feels like a glimpse into the future.

[447] Yep.

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[469] Hey, Acquired listeners.

[470] I'm jumping in with a quick update.

[471] In the next section, we talk about where Oculus is today and recent events involving the team.

[472] There was some pretty big news between recording and releasing this episode, so I'm here to tell you, Oculus founder Palmer Lucky has left Facebook.

[473] On March 30th, Facebook confirmed his departure following a long stretch of Facebook being very quiet about Palmer.

[474] This came after he denied and then confirmed reports of funding a pro -Trump organization called Nimble America and then did not appear at Oculus's developer conference.

[475] Now, back to our regularly scheduled programming.

[476] Okay, so let's finish up history and facts.

[477] David, you want to take us to like the recent events of the last six months to a year and then we'll go on to Acquisition category?

[478] Well, I think we've kind of done that.

[479] Yeah, I guess I mean personnel -wise.

[480] So Facebook, yeah.

[481] Yeah, I mean, there's been some really interesting things that have happened as Oculus starts to merge more into Facebook.

[482] So Palmer Lucky is no longer the CEO of Oculus, but is still at Facebook working on things.

[483] That's actually Brandon.

[484] So Palmer was never the CEO.

[485] Oh, right.

[486] Sorry, sorry.

[487] Brendan Arribe, yep, stepped down as CEO.

[488] He's now managing Oculus's, quote, PC division, which is basically the Rift.

[489] Right, right.

[490] And then, so Palmer similarly is at Facebook, kind of titleless.

[491] And so the way you can kind of think of what's going on at Facebook right now is, is Oculus is getting more integrated.

[492] There's still the Oculus group that makes the Oculus Rift.

[493] Facebook has more independent VR teams.

[494] There's a PCVR, mobile VR, and, you know, obviously we've seen the, there's been demos on stage of these incredibly social experiences that may be the future of what Facebook looks like in VR.

[495] And, you know, they're shipping the Rift, but it's very clear that.

[496] whereas with Instagram and WhatsApp, they stay very separate.

[497] Oculus is an acquisition where they're getting much tighter integration with the company and it looks a lot more like a division than it does a separate company.

[498] And one huge marker of that is the whole team, or at least a good chunk of the team, move from Irvine up to Menlo.

[499] Yeah, Oculus's headquarters is now in Menlo Park with the rest of the Facebook campus.

[500] But I think that's a perfect transition to acquisition category.

[501] And I think for me, clearly this is, well, you're curious what you will say, Ben, but to me, it's clearly a business line acquisition.

[502] I mean, this is a new product, a new platform, not part of the existing wave that Facebook is on, that they're buying.

[503] And I think, you know, it was interesting that they initially kept, they tried to run the playbook of keeping the team totally separate.

[504] and totally autonomous, and in particular, you know, kind of at arm's length the way down in Southern California.

[505] But then that didn't work out quite so well as they got ended rounded by Valve.

[506] And now they're moving it much more, you know, moving to integrate it much more deeply into the rest of Facebook the company.

[507] Disagree entirely.

[508] I love it.

[509] It's, I think it's a technology acquisition.

[510] I would, I would say that the signaling initially could could lead more toward business line, of keeping it separate, of it being its own revenue generator.

[511] But to me, this is a defensive play on protecting the network that Facebook has and their existing business model.

[512] I think that for them, they looked at this and said, okay, VR is clearly a future.

[513] We need to make sure that we have a position on the dominant technology platform of the future.

[514] And we are right now at risk of other people building all the hardware and the platforms and us having nothing to do with it.

[515] And then having no leverage.

[516] in making sure that we have a dominant position on that platform.

[517] And Facebook has seen, they've seen, like, I guess the point I'm making is they don't care about the business line of selling Oculus Rifts to people.

[518] And I think that they've looked around and seen crap, we don't actually own the direct relationship with any of our users.

[519] They're in a slightly tenuous position where, you know, people are, you know, into Facebook.

[520] They're on it all the time.

[521] They're on it every day.

[522] It's an essential part of people's lives and provides a ton of utility.

[523] But they access it through either their Apple device, their Android.

[524] Android device.

[525] Facebook desperately tried to make their own phone.

[526] That didn't work.

[527] Like, Facebook is in a little bit of a tenuous position in not directly owning their customers and, or at least not directly owning the users that their advertising customers monetize.

[528] And I think what Oculus is, is them trying to get out ahead and making sure that with this technology that clearly evolves to be the future of computing, that they aren't going to be upended by someone else who decides that, and we're not going to prioritize Facebook on the platform where all the users are.

[529] Ben, I think you hit the nail on the head.

[530] It's about owning the customer relationship at the point of access in the next wave, which they don't right now.

[531] It's fun doing this episode right now, and in particular after the Snapchat IPO, but it's hard to judge right now.

[532] I think if they had kept in fully in that like, oh, we're going to keep it separate mindset, this would be a failure.

[533] But now that they're starting to integrate it more deeply, that feels like the right approach to me at this point.

[534] Yeah, so let me, this is the third time I've dangerously danced into tech themes ahead of schedule, but let me throw something out there that I think Facebook would be much better off keeping them separate and keeping it like its own little division with a kind of a firewall between Oculus and Facebook because as they, so Facebook is a horizontal company.

[535] Facebook needs to make sure that they are on every single platform.

[536] in the same way so that the most users, in the same way that Google needs the most users, they need scale, can get access to it.

[537] And the closer they start to integrate these things, the more the danger comes up of them prioritizing Facebook features to be Oculus only and not putting them on the Vive or whatever other platforms come to be.

[538] And I think that's a really, when you're an employee at a company like that, you start to get confused as to what the priorities are.

[539] Yeah.

[540] Like I remember being at Microsoft, end up with an iMessage situation right totally and and one that i've experienced personally is like you know when you're at microsoft like at least a few years ago it wasn't if you're in office you hear the message that office isn't an important business on its own maybe the most important but then things happen where like we don't ship office for ipad because we want to give the surface a head start and be the only platform with you know with with office on it and so with office being horizontal windows being a vertical we take this over to facebook and say Facebook is the horizontal and Oculus is the vertical, it seems like, unless Facebook is, believes that the Oculus will be, or the, you know, Facebook VR will be the only VR platform where they will need to reach users, it seems really dangerous to start doing integration.

[541] And I would argue that they, they really need to figure out how to make sure that they're not prioritizing Facebook for Oculus.

[542] This gets into the really interesting part of the show, which is, you know, We talked about how Snap is clearly thinking about their future and what that's going to look like in a whatever, augmented, virtual mixed, whatever you want to call it, reality perspective.

[543] Total aside, I might talk about this in tech themes, but as long as we're like, as long as people are debating what to call something, it's not a wave yet.

[544] The wave has not yet broken until like phones are just phones.

[545] when you're talking about like PDAs or smartphones like no you know once they're just phones once it's just like your glasses then we'll be there but David the the wave is VR AR MR MR slash slash slash slash slash slash but the breaking of the wave is clearly coming and snaps working on it Apple's working on it Valve has a very successful, arguably more successful than Oculus product in the market.

[546] So what should Facebook do?

[547] Yeah, I mean, well, one thing you could argue they could do is what if they didn't, actually, let's move into what would have happened otherwise.

[548] What if they didn't buy Oculus, but they found a way to make sure that Facebook was great on all of these platforms?

[549] Like, how do they get the leverage to make sure that they have a first class relationship with customers of VR or do they actually have to own one of them to like have an insurance policy that you know they're going to invest a ton of money in making this single VR platform really great but somehow they're going to have the the restraint to never prioritize the Oculus business.

[550] Yeah, I don't know.

[551] I mean, I think it's the question you were asking, which I feel like we need to get Ben Thompson on this show to discuss like can Facebook be a horizontal and a vertical business at the same time?

[552] I mean, I don't know anybody that's ever succeeded at that.

[553] With great restraint, man. Like, you just got to make it so clear to all of your employees that, like, Oculus is an insurance policy.

[554] And, like, Oculus needs to be really great.

[555] But we all, but, like, the main business is Facebook.

[556] Like, it mince money and it's going to continue to make money as long as we don't screw it up.

[557] Yeah.

[558] I mean, easy to say in theory, right?

[559] Like, I've literally never seen that happen before.

[560] And I don't know that you could sell great employees on that, right?

[561] Like, if you're, if you're the best VR developer, screw that.

[562] I'm going to valve.

[563] Yeah.

[564] Well, okay.

[565] Here's a potential counterfactual, one we've covered on this show, Android.

[566] So Google's a horizontal company, Google search, and Google services, Gmail, maps, whatnot, were great on iOS, as on Android, obviously.

[567] And I think it's pretty clear at this point, you know, like we talked about on that episode, the mobile wars are over.

[568] and that everybody within Google is aligned on making those services work great across all platforms, and yet they still have Android.

[569] But now here's what's key about Android, I think, to my mind.

[570] Google doesn't make Android phones.

[571] I mean, that's changing a little bit, right?

[572] But the whole strategy was get the software out there, get the operating system, let other people, let other ecosystem partners build great hardware and get it in the hands of people.

[573] and that use, use Android as a way to make sure that we are going to be able to continue to deliver these great Google services to everybody across all platforms.

[574] A, do you think that's the, you know, that's a viable strategy?

[575] B, can Facebook do that?

[576] Totally a viable strategy.

[577] Very interesting to, like, the main takeaway for me is Android itself doesn't make money.

[578] It prevents Google from having to give money to other.

[579] people like Apple um out of its out of its they do give as we talked about a lot of money to apple yes but they could give many times more money to apple if android didn't exist and and for listeners that's the of the uh search engine uh affiliate revenues that they they pay out to wherever the search originates from yeah so google pays on the order of a billion dollars or more every year to apple in order that google remains the default search engine on the iPhone and and they it's not just like a straight payment.

[580] It's that Apple actually gets a cut of AdWords revenue.

[581] So it's like a variable rev share for AdWords that are served on searches on the iPhone.

[582] Yeah.

[583] Good to be Apple there.

[584] So I think that...

[585] Hey, it's good to be Google.

[586] You've got the best business model of all time.

[587] Yeah.

[588] So the Android strategy, I mean, Facebook totally could build like Oculus OS and then have reference design and then do the same thing that Android did and have third part.

[589] parties build the hardware.

[590] I mean, is, is that what Daydream is?

[591] Is Google sort of taking that approach with Daydream VR?

[592] Yeah, I don't know enough about it to say for sure, but I believe it is similar, except that it's on Android phones that are powering it.

[593] So there is, there is that wrinkle.

[594] It's not like it's a, it's not like Daydream, as far as I know, I could be wrong, but I don't believe Daydream's going to work on like iOS.

[595] I think you're right.

[596] So, getting back to the other point that you're making though like i'm i'm not sure it actually buys google or facebook much to build the sort of vr software layer and then let someone else do the hardware i mean that maybe it does i don't know i haven't i haven't actually really thought through that i mean clearly that's the approach that valve is sort of taking that like they're going to continue to make money from steam and steam is going to be on all of the um all the vibes and like htc you take on all that that uh hardware difficulty and risk and and and cost for for for making the hardware.

[597] Well, it reminds me a little bit.

[598] I hadn't thought about this until you brought it up a couple minutes ago, but I think it kind of comes back to Microsoft too, right?

[599] Like, that's what Microsoft did with the PC, which was build the operating system, give it to everybody, get it out there.

[600] You know, and Apple wasn't, you know, that's great that Apple exists, right?

[601] Like, we'll make, we'll make office for Mac too, you know, and we'll cripple it, you know.

[602] But, But I think, you know, there are plenty of examples, whether it's Microsoft and Windows or Google and Android of that type of approach working.

[603] It's when you then cross over into trying to be both vertical and horizontal that you get the Office for iPad situation.

[604] Yeah.

[605] I mean, I think it keeps coming down to this.

[606] They just have to figure out a way, and Google took years to do this, to be clear that Android exists to power the search advertising business.

[607] And it has to be first class and a great OS on its own to have people use it because it's in a competitive landscape.

[608] But like, it doesn't exist on its own to be Google's main revenue stream.

[609] And Facebook's just going to have to do the same thing with Oculus.

[610] And hopefully there's less tumult on the way to get there.

[611] Totally.

[612] So what would have happened otherwise?

[613] I mean, we're kind of in this section right now.

[614] But where, you know, if Oculus doesn't land at Facebook, what happens to it?

[615] Well, that's a really good question because they'd raised a lot of money really quickly but it was going to take a lot more money to get to where we are now and clearly i mean i think if if facebook doesn't acquire oculus there's a chance that maybe valve continues to partner with oculus and doesn't go off on its own however if given that they did and if they had an oculus was still alone and independent you know they would have had to do something because we saw with the execution that Valve had when you bring the resources and the huge amounts of money that a corporation like them can to building new technology like that, they were just going to blow Oculus out of the water.

[616] You know, Oculus probably only was able to hang on because it had Facebook's resources.

[617] So I think it's hard to imagine Oculus remaining an independent company, a fully independent company without needing to i mean i guess as we've talked about with both snapchat and uber and d it is possible to raise huge sums of money these days but i think it's not just about the money too it's about being able to get the right oem partnerships you know the right think about how much how many years and how much effort apple has invested in creating their supply chain um you know the idea that a startup would be able to do that within a competitive landscape is hard to imagine these days.

[618] Yep.

[619] Yep.

[620] And actually, here's a great quote from Palmer Lucky.

[621] He said, I'd say we are five years ahead of where we would have been without the acquisition.

[622] 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.

[623] There's a strong argument to be made we would never have gotten there in five or even 10 years.

[624] And there's a great point that the Facebook brand boosted the network effect of developers making stuff for it, too.

[625] Yeah.

[626] And we've sort of talked about the evolution of the Rift hardware.

[627] You know, the DK1 was like one step past duct tape.

[628] But the DK2, but then, you know, the consumer version, like, these are true good consumer products.

[629] Like, totally.

[630] Even with a lot of money, would they've been able to create that?

[631] Yep.

[632] Okay.

[633] So what would, real quick, what about the flip side of that?

[634] What would Facebook have done in VR without Oculus?

[635] Hmm.

[636] Well, Facebook still hasn't done much in VR.

[637] But I mean, that's the other thing that, you know, it's just so early, right?

[638] Even three years later after the acquisition, best guesses are, it's growing and growing quickly.

[639] But I bet there are, you know, there are certainly still well less than a million active, you know, daily active VR users out there in the whole world.

[640] You know, compare that to like six billion daily active users.

[641] six billion with a B, you know, in mobile.

[642] So I think Facebook is still totally fine.

[643] Yeah.

[644] I think so, too.

[645] Which is interesting to think about and grading the acquisition is they've so far paid $2 .8 billion for a thing that they would have been completely fine without.

[646] But it's a long bet.

[647] Yep.

[648] Okay.

[649] Tech themes.

[650] So the running through my list of, I'll just say like, check next to the ones we've really already talked about.

[651] But, you know, Facebook doesn't want to get left behind like they did with mobile check already talked about that you know owning the customer relationship okay here's the one that i really want to posit to you so Zuckerberg often says that facebook is going to be or VR is going to be the most social platform and i'm curious do you think that that's actually where where VR is headed or is Zuckerberg saying this because it's like a mash of like facebook is the company that connects people and it makes a world a more open and connected place also VR is the future so we therefore must match these things together because, you know, our business must survive in the world where VR is the future.

[652] Or is it, or do they actually have a good confluence and work together well?

[653] I think he's, this is maybe foreshadowing migrating.

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

[655] You know, I think if you look at the vision that Snapchat is putting, that Snap is putting forward of, you know, a camera company, right?

[656] which is the closest that I have seen to anything resembling, you know, normalcy and a true wave in what we're talking about.

[657] Because like I said, you know, the wave is not quote unquote VR or AR or MR.

[658] It's glasses or a camera.

[659] It's something that real people everywhere are going to use people who don't listen to this podcast.

[660] And so I think he's right.

[661] And I think if you just look at Snapchat or look at Rec Room, honestly, you know, I mean, that to me is what is, the example of what's most compelling in this medium is actually being there and playing with people or doing things together with people.

[662] So I think he's right.

[663] On the other hand, I think if you look at the product strategy and the history over the last couple years of what Oculus and Facebook have done, you know, they're behind because it's natural hand movements that are so important to that.

[664] It's walking around.

[665] It's the types of things that Valve has done with the Vive.

[666] But it's also what Snapchat's done, which is, like, to really make this mainstream, you need to get out of the PC entirely.

[667] You need to make this something that people are going to be open with in the real world, you know, interacting with other people.

[668] Yep.

[669] Okay.

[670] So my, I think we've talked about a bunch of my themes, too.

[671] The only one I would say, you know, that we just got a brief mention earlier in the episode, but really came out for me thinking about this.

[672] and doing the research is Kickstarter, right?

[673] Like Oculus and the Rift being one of the first, not the first, but one of the first really break out companies slash products slash ideas to come out of creative endeavors to come out of the Kickstarter platform.

[674] And that reminds me of what I think is a deep theme in technology that anytime you can build a platform that enables other people.

[675] people's creativity in kind of ways that you would never imagine, that's a recipe for something special, whether that's an operating system, enabling software developers to create and distribute anything like the app store or like Windows or like Apple, whether that's Facebook, enabling anybody to share, you know, anything that they want to write or say.

[676] You know, I think Kickstarter is just a really cool example of that and led to Oculus.

[677] Yep.

[678] I think it's a great point.

[679] Should we grade it?

[680] Let's do it.

[681] All right.

[682] So I, I think you're, you foreshadowed this a little bit, but like the strategy of Facebook acquiring the preeminent VR, VR company and paying a lot for that.

[683] I think it's great.

[684] Like that, you know, I, so far, if we're, you know, at the date of acquisition, I'm like, this should be an A. Like, I, I really feel, yeah, this makes lots of sense to me. Facebook needs to be here.

[685] Uh, I think in the last couple of years, you know, I think in the last couple of years of where it's ended up, I'm going to go with a C for this acquisition with, you know, as we've said before, a high level of variance.

[686] So when we revisit this acquisition in years to come, very open to changing that.

[687] And I think it's very likely it will change.

[688] But like, holy crap, they bought Oculus.

[689] And then a year later, a far superior, you know, piece of technology comes out.

[690] And it didn't seem that hard for someone else to pounce on it.

[691] And especially someone that was so interested in the Oculus in its development.

[692] And then on top of that all, I really disagree with Facebook integrating VR tighter.

[693] Like I really think that, I think they're potentially at risk of not making sure that they understand that Facebook needs to be a horizontal platform that doesn't prioritize anything on Oculus.

[694] People that work at Oculus should view themselves as working on a thing that is that makes sure Facebook doesn't get unseated in the future, but ultimately, you know, Facebook is the business.

[695] Like, they should look at their competition as Snapchat, even though they work at Oculus.

[696] Yeah.

[697] Totally agree.

[698] I think you've nailed it on this one.

[699] You know, the only, I'm tempted to quote Tom from our Tom, Tom Allberg, from our Amazon IPO episode, himself quoting Jeff, which is just such a great line in tech that Jeff Bezos is saying that, you know, it's okay to fail at things.

[700] It's not okay, not to try.

[701] So I want to give Facebook and Mark Zuckerberg a ton of credit for, you know, trying here and seeing, you know, the potential in VR as a future medium and pouncing on it early.

[702] On the other hand, like, he pounced really early and execution has not been great since then.

[703] So for the same reasons as you've been.

[704] I'm going with a C on this one so far.

[705] Yeah.

[706] And maybe there's a there's abstraction here where we need to say like, huh, it turns out if you're a horizontal that needs to have scale and reach every internet connected user in the world, then maybe you don't own the hardware platform.

[707] And like a risk of your business of reaching everyone is that you don't, you know, you don't necessarily own that direct customer relationship.

[708] And that just has to be okay.

[709] Like that just has to be baked into these like mega horizontal scale models.

[710] Yep.

[711] Because there's no way, like, could Facebook have its cake and eat it too?

[712] Could, 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?

[713] I just don't see a world where that's possible.

[714] Well, what you're talking about is a monopoly on a direct customer relationship.

[715] And, you know, monopoly is a word that gets thrown around in tech a lot.

[716] usually in conjunction with network effects and the power there.

[717] But what's interesting about network effects, at least in the companies we've seen them expressed powerfully so far, very few if any of those companies actually own the means of ingress, you know, so to speak.

[718] You know, they own it in a sense in that Facebook, you know, owns the app that people, you know, come to and spend most of their time in, but they don't own the phone, you know, and Google owns where people find their information, but they don't own the computer or even necessarily the phone, even if it's Android.

[719] Right.

[720] I think it's just hard or maybe impossible.

[721] It's unlikely to believe that Facebook would be able to do that with VR in the future.

[722] Yep.

[723] Agreed.

[724] Okay.

[725] Quick follow -ups.

[726] So one, snap.

[727] They're still a public company.

[728] They are still a public company.

[729] They have not completely imploded.

[730] Their stock is trading below IPO price.

[731] Yeah.

[732] Well, their stock is trading up from where they priced the IPO, but it is trading down from where it closed on the first day of trading, which is fine.

[733] The real story will come after they release their first quarter and probably a couple quarters of earnings.

[734] And we see whether they're able to reignite growth.

[735] Yep.

[736] Yep.

[737] Yep.

[738] Let's just hope that everyone that bought.

[739] in a very excited way on that that first day does not uh um become extremely pessimistic right now and and you know i i in my whatever i we're not we're not picking stocks we're not forecasting we never timed the market blah blah blah i think it's going to bounce back a little bit and uh let's let's hope for snap's sake that the people that bought in are uh are sort of in it for the long haul and understand that too because i think um one interesting point that a friend brought up the other day is tons and tons of millennials bought Snap because it's the first kind of accessible IPO to them that was both large and something they were super familiar with.

[740] And people bought on a motion of, I like this company.

[741] And, you know, you don't want to see all those people, you know, have a super negative experience and lose out.

[742] Yep.

[743] Well, echoes of the Facebook IPO episode.

[744] Go listen to that one if you haven't already.

[745] I think that is some of our best work here on Acquired.

[746] Okay.

[747] Other hot take, Intel acquiring Mobile Eye.

[748] Ben, I hear autonomous cars are a thing.

[749] Forget VR.

[750] Yeah.

[751] Boy, sure seems like it, huh?

[752] I think...

[753] Wait, is Mobile Eye a camera company?

[754] In a sense.

[755] In a sense.

[756] It's more like an applied machine learning company.

[757] It's really fascinating to me that, you know, so MobileE is an Israeli company.

[758] They build self -driving car technology and they were bought by Intel for about $15 billion.

[759] billion dollars yeah yeah and uh you know what they're really doing is applied machine learning like to me this is a company that is um their core competency is is uh the collecting and uh synthesizing of the all of the training data and building a pipeline out of that so that uh they can appropriately hook into all of the systems of someone else that makes the car and make that car self driving and it's so fascinating to me that as this market gets you know so much attention so quickly and it's so clear that this thing is going to happen, that, you know, by pointing your technology in the right direction and really starting to get market traction with the makers of these cars, like, if this company was a machine learning company, they would have sold for a 15th of what they sold for.

[760] Yeah.

[761] It's interesting.

[762] I think we might have unexpectedly on this episode touched on a really, really deep theme in technology, which is this vertical versus horizontal idea.

[763] Ever since we talked about it a couple of minutes ago, I can't stop thinking about it.

[764] it and thinking about Intel acquiring Mobile Eye and like, okay, yeah, we're going to be, you know, we're now going to sell this horizontal platform to all the car companies to enable them to be, to compete in the in the autonomous market.

[765] Contrast that with a Tesla, which actually used to use Mobile Eye components, ended their relationship, took it in -house as vertically integrating, taking an Apple -like approach.

[766] I mean, dude.

[767] It would be very interesting to see this, how this plays out.

[768] rewind 20 years ago.

[769] Like Tesla is Apple.

[770] They're like, you know, totally.

[771] They're vertically integrating.

[772] They're selling a, you know, high -end premium consumer product that's priced and experienced in a premium way.

[773] And they capture a lot of value.

[774] And the rest of the value is captured by an ecosystem that is based on Intel, uh, that are basically component makers.

[775] And it's like, you know, history repeats itself.

[776] Yeah.

[777] Well, I think the question is, and actually Ben Thompson wrote a great piece, The smiling curve.

[778] Last week, I believe, the smiling curve about this.

[779] The question is, can a combination of Intel be the Microsoft, not just the Intel?

[780] Yeah, yeah.

[781] And could Intel be the Microsoft, right?

[782] Like, can they, is that what they're trying to do here is sort of like level up the stack?

[783] Yep.

[784] Fascinating.

[785] Yep, yep.

[786] Fun stuff.

[787] Future episode.

[788] Intel self -driving OS.

[789] We will see, uh, see if that happens.

[790] Coming soon to a podcast client near you.

[791] Indeed.

[792] Speaking of podcast clients, uh, one that you can listen to on your, podcast client.

[793] My carve out this week is the Pod Save America with Kara Swisher interviewing the gang from Pod Save America at South by Southwest.

[794] So Pod Save America is the guys that used to do keeping it 1600 on the Ringer podcast network after this election moved over to start their own media company called Crooked Media of Pod Save America, Pod Save the World, and other left -leaning, highly cynical, very funny podcasts.

[795] And If you're into keeping up on all the stuff that's going on and you want some insights from the people that held those jobs in the Obama administration, it's an awesome podcast.

[796] Like, Pod Save America is incredibly entertaining.

[797] And the Kara Swisher interview is phenomenal because she might be the best interviewer alive.

[798] Like, she is so good at, yeah, like, thinking about like, what do I want to know?

[799] What do I think my listeners want to know?

[800] I'm going to abuse you until I get those things out of you.

[801] And you're going to like it.

[802] because I do it in such a fun and entertaining way and let you tell your story and give you the respect as the person being interviewed and the and starting from a place of like, look, I think you're really smart and I think you have a lot to share.

[803] Why don't you share those things with us?

[804] And there's there's this incredible mutual respect between the interviewer and the interviewees and I just highly recommend it.

[805] We look up to her on Acquired and a lot that we can learn and hope to keep learning as interviewers and podcast.

[806] hosts and journalists in our in our own random internet way kind of sense ourselves mine real quick for the week speaking of left -leaning liberal folks great article in the new yorker this week that really made me think by adam gopnik who several years ago wrote this great book called paris to the moon which is just hilarious being in paris as i am right now for the next month or two.

[807] Great satire of the French and of Paris.

[808] But he wrote a, wrote a piece called asking the question, are liberals on the wrong side of history in the New Yorker?

[809] And we'll link to it.

[810] It's really good.

[811] But one of my favorite elements of the piece of which there's several is sort of asking this question like, what does the course of history have to say about whether, you know, what the themes are behind it, which, which reminds me, of course, of our podcast.

[812] And, you know, know, what we do on acquired.

[813] But Koppnick kind of makes the point that like, because events turned out a certain way, because Trump won the election, because Brexit happened, et cetera, or other things deeper in history.

[814] Like, the human mind is such a, you know, this is Kahneman and Tversky classic stuff, is such a like storytelling machine that we seize onto that narrative that like, oh, well, that was inevitable and it reflects this deep truth.

[815] But the reality is like maybe it wasn't inevitable.

[816] Maybe, you know, it was a probabilistic thing.

[817] Maybe it was even a low probability thing that just happened to happen.

[818] And I love thinking about stuff like that.

[819] Just because it happened, it doesn't mean it was destined to.

[820] Exactly.

[821] And it doesn't mean that like, that you should create or accept a gospel about like the truth behind it because the truth is complicated.

[822] Yeah.

[823] Sounds very cool.

[824] Cool.

[825] Our sponsor for this episode is a brand new one for us.

[826] Statsig.

[827] So many of you reached out them after hearing their CEO, Vijay, on ACQ2, that we are partnering with them as a sponsor of Acquired.

[828] Yeah, for those of you who haven't listened, Vijay's story is amazing.

[829] Before founding Statsig, Vijay spent 10 years at Facebook where he led the development of their mobile app ad product, which, as you all know, went on to become a huge part of their business.

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[840] There are, like, so many more that we could name.

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[851] You can click the link in the show notes or go on over to statSig .com to get started.

[852] And when you do, just tell them that you heard about them from Ben and David here on Acquired.

[853] well that's what we've got listeners thank you so much for uh joining us as always if you've been a long time subscriber as uh as we mentioned in the beginning and uh and you appreciate the show we'd love a review on iTunes make it something stupid make it something funny we'd love to read it on air um and it helps us grow the show get more guests and uh and really um bring acquired to more people so yeah feel free to uh if this is your first show subscribe from your your podcast client of choice you can shoot us email at Acquiredfm at gmail .com.

[854] Go to Acquire .fm.

[855] Join us in the Slack.

[856] Gosh, I don't know what more I could plug.

[857] So I'm just going to call it here.

[858] Find us in VR.

[859] Yeah.

[860] Yes.

[861] Signing off.

[862] Have a good one.

[863] Talk to you guys soon.