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Facebook learning the costs of consumer hardware with Oculus

The social networking giant's $2 billion bet on the virtual reality pioneer is bringing into focus the real costs of becoming a mass market consumer electronics maker.


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.

Those costs are accentuated by an increasingly serious lawsuit from ZeniMax Media, which claims a former employee and now one of Oculus' executives, John Carmack, misappropriated its technology in helping build initial versions of the headset. Oculus denies those assertions, painting ZeniMax as an opportunist looking for a payout after the surprise acquisition.

ZeniMax did not immediately respond to a request for comment.

Still, one of the people says, Zuckerberg is committed to the deal.

From fantasy to virtual reality

Oculus made waves in 2012 when it announced a developer kit for its virtual reality headset and launched a successful Kickstarter campaign that pulled in more than $2.4 million to fund development. The Irvine, Calif.-based company has since sold more than 85,000 headsets to developers. It's been iterating along the way, adding new sensors that can more precisely track a user as their bodies move. The company has also created versions of its headset that can display higher-resolution images.

Oculus currently sells prototypes to developers for $350, and said it plans to sell the Rift to consumers for as close to cost as possible when it's publicly available. The company hasn't publicly committed to a launch date.

In recent months, Oculus has been on a hiring binge, poaching industry veterans from game makers such as Valve, Bungie, and Electronic Arts. The company is also hiring employees in Menlo Park, Calif., Facebook's hometown, to help manage publishing deals. And Oculus has already started lining up content, including signing an exclusive agreement with a new company headed by Paul Bettner, one of the creators of the hit mobile title "Words With Friends."

Oculus' other areas of focus have been on its R&D crew in the Seattle area. The company earlier this week agreed to acquire Carbon Design, the team that helped create the controller for Microsoft's Xbox 360 game console and original Kinect motion sensor. The terms of the deal weren't disclosed. Oculus says it's given its research teams a nearly unlimited budget and carte blanche to hire whomever they need, though that team is still expected to grow relatively slowly.

In an interview earlier this month, Oculus CEO Brendan Iribe said board members were surprised by the R&D moves. He said they reminded him that the Rift headset hadn't yet shipped and the investments made in the company were for the startup, not a research outfit. "But this is what you have to do," Iribe said. "This is VR. It's so new."

Oculus has also made a commitment to higher-quality hardware. A day after the acquisition was announced, Palmer Luckey, Oculus's founder, told The Wall Street Journal that Facebook's financial reserves will allow his team to build headsets with custom-made parts. He and Iribe said that using those parts, rather than off-the-shelf-components originally designed for mobile devices like smartphones, will lead to a higher-quality product.

Tom Dinges, head of analysis firm Carriage Group International, said costs may rise further as Facebook and the Oculus team face the inevitable production struggles that hit all new hardware. If Oculus decides to create custom parts, it may be even harder to perfect the manufacturing process and produce working Rift goggles in high-enough quantities and at a quick enough pace. This isn't uncommon though, Dinges said: Young hardware companies often miscalculate their development and manufacturing costs by millions of dollars.

Mark Dziersk, managing director at the design and engineering firm LUNAR, said the increasing investments send a good signal to consumers and the market. Many companies often make the mistake of rushing a product out to meet a set launch time, resulting in cut corners and unfinished features like an app store or vital content.

"I don't know how investing in getting the product right can be a bad idea," Dziersk said. "I think it's the only way companies will succeed in the future."

Luckey shared a similar sentiment in March, saying part of why Oculus agreed to Facebook's takeover was to ensure they could afford to make the Rift headset the way he and his team wanted. "A lot of people don't understand how much money it takes to build things--especially to build hardware," he said.

For Facebook and Zuckerberg, that learning is just beginning.