Acquired - Episode 35: Oculus

Episode Date: April 11, 2017

Ben & David transcend the barriers of “real” reality, and dive into Facebook and Mark Zuckerberg’s geek-eutpoia vision of the future of gaming, social, and maybe even the entire internet: strapping goofy-looking goggles to your face. Is VR for real this time or are we living through another Virtual Boy moment? Tune in to find out! Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Topics covered include: Oculus’s origins in 2010 as a twinkle in the eye of the then-17 year old VR wunderkind, Palmer Luckey, who started by prototyping VR headsets in his parents’ garage in Southern California Palmer’s time interning at  USC's Institute for Creative Technologies, and chronicling of his own VR efforts in the Meant to be Seen 3D internet forumsLegendary game developer John Carmack’s own interest in virtual reality, his intersection with Palmer on the MTBS3D forums, and how he acquired and popularized one of Palmer's first early prototypes of the Oculus Rift (which was  literally held together with duct tape!) by demonstrating it onstage at E3 2012 How former Scaleform cofounders Brendan Iribe and Michael Antonov teamed up with Palmer after E3 to create the company Oculus VRThe newly-formed Oculus’s wildly successful August 2012 Kickstarter campaign, including video endorsements from both Carmack and Valve founder Gabe NewellOculus’s subsequent venture capital fundraisings, and catching the attention of Facebook and Mark Zuckerberg Facebook’s acquisition of the company in March 2014 for $2.3BThe Zenimax lawsuit filed against Oculus and Facebook following the acquisition Valve (home of the most incredible company handbook of all-time) and Gabe Newell’s subsequent pivot from supporting Oculus to launching their own competing VR efforts with the Vive Team changes at Oculus post-acquisition   Followups: SNAP:  still a public company  Hot Takes: Intel’s $15B acquisition of Mobileye (with reference to  Ben Thompson’s analysis of the deal and Smiling Curves)  The Carve Out: Ben:  Kara Swisher interviews the Pod Save America team at SXSWDavid: Adam Gopnik asks Are Liberals on the Wrong Side of History?

Hey Acquired listeners, Ben here. You'll notice for the first eight minutes or so of the episode, my audio quality isn't the greatest, but bear with us, it'll be crystal clear for most of the episode. Thanks. Is ocular and occluded from the same root? Uh, I don't know. I don't know either. Anyway, go with it. That feels right, because I think that's her logo, right?

It's an eye, yeah. Yeah, all right. I concede. Welcome back to episode 35 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. 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. So we've now got enough distance from the acquisition that there's a lot more to come, but we feel comfortable covering it.

No doubt about that. And we thought now 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. Indeed. So before we dive in, we have some incredible listeners that leave some great iTunes reviews. And sometimes they're even a little host deprecating. But we love them all the same as long as they're five stars and they help us grow the show. to go ahead and do just that. So one we've got from Daniel X is an emoji review, which is trophy, bag of money, unicorn, which I think is quite appropriate. And this one's a little, I had trouble parsing it at first, and then I was like, oh, I see what they're doing. The subject is, yep, yep. And the description is is that's one of my favorite phrases Ben uses.

Oh man. Yeah. And super interesting are up there too. So now I'm going to be incredibly self-conscious every time I use those phrases. Thank you so much. We love you just the same. And the username on that one is active users. So thank you to all the active users out there that really appreciate my catchphrases. That's great. All right, moving on. I'm happy to leave that behind. But the point we're trying to make is

leave us iTunes reviews. Helps us grow the show. We love it. And hopefully if you're creative, then we get to share it with the rest of our audience. Speaking of the rest of our audience, we've got a Slack. So join us at acquired.fm.

You can join the over 500 of us that are in talking about tech, M&A, and any news that comes up between episodes. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep.

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handling the busy work across your business so that your teams can actually focus on what truly matters. Ultimately, ServiceNow and agentic AI is the way to deploy AI across every corner of your enterprise. They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. Now, onto the episode. David, can you take us through the acquisition history and facts? I will, as always, Ben. 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 and he loved them pc games in particular and he loved them so much that he 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 but even with with all these monitors, it still wasn't good enough. He wanted to get like, deeper into the game. He wanted like, when I was writing this, I was thinking about the EA Sports, EA Sports tagline, you know, get in the area, it's in the

game. I think I read somewhere he had like the largest collection of HMDs, head mounted displays of currently existing or hacked together hardware in the world before he set out to build Oculus? Yes. So well, his problem was he wanted to literally get get into the game. And and so you know, lots of lots of kids, myself included, wanted to do that when I was 17. But Palmer actually did something about it. 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. And the idea is that in LA, 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 the video game industry, which is, has a huge base in LA. And they'd use it to build advanced training and simulation technologies. And what that meant in practice was virtual reality. 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 is a tech theme over and over again. And a lot of these companies, companies themselves, or the research labs they come out of, or, you know, even the history of Silicon Valley and the importance of how the semiconductor came to be. Yeah. 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. And he's working on a team that's that's trying to design cost effective

virtual reality. But he still he still he wants to move faster. 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, uh, in virtual reality. And, uh, and at the same time, he's, he's, you know, on the internet natively as, as all kids are back then and these days. And he hangs out in forums online. 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. Yeah, man, forums were like, that's where everything happened back in the day. Totally. It's like, it's like back in, you know, the more things change, the more they stay the same, right? The original, like, you know, Netscape and ARPANET days. Yeah. And I mean, anybody like, but predating forums were, you know, mailingPANET days. Yeah. And I mean, anybody like, but pre-dating forums or, you know, mailing lists and use net and like, it's just a constant reinvention of the same thing. People see community, internet's incredible for community revision, revision, revision. Yep. And you know, now we have virtual reality. So maybe, maybe the next, uh, great entrepreneurs

will meet, you know, in, uh, on an Oculus or on a Vive. Yep. So he's posting progress as he's building these prototypes in his garage on the meant-to-be-seen forums. And it turns out that there are, among the other posters on the forum or lurkers on the forum, is a guy named John Carmack. And that name might ring some bells for some of our listeners. John is probably one of the most famous people in the video game

world. He was the co-founder of id Software. And id created and John in particular pioneered a lot of the techniques. Doom, Quake. Quake, Doom, Wolfenstein 3D, all of the first generation of first-person shooter PC games. Yeah, I think 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 that we take incredibly for granted today, but we're actually required a lot of complexity. Yeah. And I mean, I remember, gosh,

I was probably in middle school when those games were coming out and like it was, they were so far advanced versus anything else on, on the PC at the time, even the PC or like the NESes yeah yeah so uh karmak is on the forums and he sees and he's and he's on the forums because he is also interested in vr and he kind of shares uh palmer's dream that playing video games in v VR is going to be a totally new paradigm and really, really compelling. And actually his CarMax dream, he had, uh, it had released doom three recently. Uh, he wanted to

port doom three into VR. And so he sees, uh, he sees all the progress that Palmer's making and he reaches out to him. And there's no, there's no great hardware out for VR, right? 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. Yeah. I mean, basically, you know, it's the kind of stuff that USC is doing at the ICT for the military, um, or science applications, you you know you're talking hundreds of thousands of dollars for a room scale installation you know nothing like uh what the rift becomes which was you could go on on oculus's website and order a development kit for three hundred dollars so karmak reaches out to to palmer uh asked if he can buy a rift and uh and and palmer apparently says he says an

interview later he uh he decided he was just gonna play it cool and he's like oh i'll just give you one so uh so he does and um and it's fortunate for for him and for the future of vr that he did. 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. The other one is GDC, which we're going to talk about in a minute. But John goes to E3 in 2012, which is in June. And he gives, he gives a big talk and he talks about how excited he is about VR. And he shows, he demonstrates a version of Doom 3 that he's created that is running on the Rift. And the Rift is like a totally hacked, duct-taped together prototype that Palmer had sent him. It was actually duct-taped, right?

There's some, I read about a meeting with them where he he actually duct taped the the display to the head mounting piece yeah they're great videos online and of course you know after this all the tech and video game press covers this and um and then goes and tries tries it out and wears it like the unit is actually duct taped together yeah and just like ridiculous watershed moment when uh when when John Carmack is demoing on your hardware at E3, you know, it's this is pre Kickstarter. Is that right? Or is this so this is pre Kickstarter? There's not even a company yet. It's literally just Palmer working on this stuff. And and he's at this point, I believe, either 18 or 19 years old. Crazy, totally crazy. So E3 2012 is the big moment for what would the artist that would become known as Oculus. Um, and a few other folks, you know,

in addition to the entire video game industry, uh, sort of take notice. And two of the folks who reach out to Palmer, uh, when they hear the story about this, are two guys named Brendan Aribe and Michael Antonov, who also were in the LA area. They had been co-founders of a company called Scaleform, which was a video game UI technology company that Adobe had acquired several years earlier. They'd worked at Adobe for a while, and then Brendan actually had left and he joined a company called guy Kai, uh, which folks in the video game industry might remember was a streaming video game company that Sony acquired a couple of years earlier. Um, and the idea being, and actually a lot of consoles use this today, um, that rather than buying a game on a you

know physical media or downloading it you can play a game just by streaming it over the internet oh yeah 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 you're done with downloading the bits to your device and um in fact on 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. The game computation is going to happen in the cloud and then stream it back down to your device and it'll feel native. I feel like I've seen a lot of those demos and the trend seems to be toward powerful clients still like we haven't

gone to this where gaming is happening it's never totally worked right yeah i mean the dream is really cool right that like on any uh 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 on the client it can all be done in the cloud and just streamed as video, but it's never quite lived up to the promise. 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, let's call it desktop grade gamer PCs. So you see the Oculus hooked up to really, you know, really crazy towers. And then simultaneously, what we were trying to do in a low

power way on phones, like phones keep getting more powerful. And the processors and phones keep getting better at originally, you know, apps and then casual games, and now a little bit more serious games on mobile. And we're definitely seeing the trend of 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. 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. And that's not going away anytime soon. Yep. And especially in VR. 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. Yeah. I remember we're interrupting a lot, but as a quick aside for listeners, I remember going into David's office a few years ago ago at, at, uh, Madrona and he's like putting together this like crazy tower to hook up his, uh, his dev kit Oculus to, and telling me about how like VR is here. Like we're looking seriously at this now. Like it's the future. Like people are maybe not consumer adoption right away. And I remember thinking people are maybe not consumer adoption right away and i remember thinking like maybe not consumer adoption right away like nobody has a tower nobody's gonna buy a four thousand dollar gaming rig and like that's still kind of the state of good vr right now yeah i mean we're gonna get into it but we still have that at madrona it's uh

the thing weighs about 50 pounds it's huge but anyway so so brendan and michael and Michael coming from Scaleform and Brendan then immediately from Guy Guy, they reach out to they're really excited about this. You know, they're game guys and business guys 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 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 Palmer had been 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 featured heavily in, in the video as are folks from valve, including Gabe Newell, uh, the founder of valve, go watch the video. We'll link to it in the show notes. He, he gives a kind of glowing discussion of, of Palmer and the future of VR. And he says, quote, we strongly encourage you to support this Kickstarter. We meaning, you know, him and Valve. Oh, my God, that's awesome. It's so awesome. 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 and arguably better. better anyway leaving that aside the five and it's it's hilarious to see him on team oculus at the start yeah well and valves had

such a long history with trying to get into vr but but they finally do it right after the facebook acquisition so the the kickstarter is hugely successful they had set an initial goal of 250 000 They end up raising 10 times that. They raise almost $2.5 million. And then they do something really smart, which is after the Kickstarter ends, they basically just continue it on the Oculus website. And anybody can go there and order a developer kit for $300. And this is earlier in the crowdfunding era. And it's like amazing to see, you know, if you're an entrepreneur and you're trying to just put together around a 250 K,

like you don't want to raise 2.4 million cause you give up your whole company. But like in the, in the, isn't crowdfunding great where, you know, there's, there's no equity. So it's just like money for you to play around with and sure you have to fulfill those pre-orders and that's the biggest issue with, with Kickstarters. But like what an amazing, uh, 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. Yeah, totally. And, um, you know, and, and they turn it around pretty quickly, 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 supposedly for the first couple of days that it's up on the

website, they're selling four to five developer kits, DK ones, as they come to be known, quote, unquote, DK for developer kit. The first one at four to five every minute at 300 bucks a pop, which is pretty impressive. Wow. Yeah. So they go along in there, they're working on shipping the developer kit. They start shipping it. And by the summer of next year, June 2013, the VCs start to get wind of what's going on down there in Southern California. And the company ends up raising a $16 million Series A co-led by Spark and Matrix. And then, and that's in June of 2013. And then right after the first, well, company-wise, the first really big victory happens. 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'd heard his name associated with it. And suddenly it was like, OK, this company is serious, like the creator of Doom and Quake is joining as their CTO. Yeah. So and you weren't the only person to notice this. They had obviously raised the Series A that summer, but Mark Andreessen and Andreessen Horowitz also noticed that John Carmack has just gone and joined this left it and joined this, uh, this baby, baby, uh, virtual reality company based down in Southern California.

And in December, a couple months later, Andreessen Horowitz ends up leading a $75 million Series B in the company and Mark Andreessen joins the board. So what was the time between that Series A and Series B? It was six months or less. Wow. And the other sort of foreshadowing of the future here, 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. Yeah. Yeah, that's convenient. Yes. So that was December 2013. A couple months later at GDC, which, as I mentioned, is the other big industry conference in the video game industry. And that happens in San Francisco. That's at the beginning of March. And Oculus announces that they've been successful with the DK1 and they're coming out with a new version of the developer kit. So it's still focused on shipping these to developers. They're not ready to release a consumer device yet, but they announced the DK2 and that that's

going to be in shipping in July 2014. And the DK2 is vastly improved over the DK1. Yeah, I think DK2 was the first one I had tried. And I remember putting out on being like, okay, this is very different. I understand what the hype is about now, but I still wasn't like, this is the next tidal wave. But then the one after that, I think the hype is about now, but I still wasn't like, this is the next title wave. But then the one after that, I think the Crescent Bay, which I don't know if they... How many different products they had in there. They never actually sold the Crescent Bay. That was the first iteration of what would become the consumer version that they'd ship in 2016.

Yeah. I think I tried that at 2015 ETH or no 2015 CES and they'd take you into this private room and you have like a 15 minute little demo with it. And that, that was the one, the Crescent Bay was the one where I was like, okay, this is the next tidal wave of technology. Yeah. It's, uh, and, and it really, you know, the DK two, um, the DK one was, was, you know, still had a lot of the of the duct tape heritage in it. I'd say the DK2 did from a software perspective, but from a hardware perspective, it was pretty good and had solid components in it. When you used it, it really enabled the average person. The average person couldn't, I think, just buy one off the Internet and set it up on their laptop.

However, if you had a friend or knew somebody who had a had a setup 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. Yep. So that was the beginning of March. And then very shortly thereafter, our recurring character on a, on a, on acquired, uh, Mark Zuckerberg comes, uh, comes knocking and he gets in touch with the company and says, Hey, heard some really cool things about what you're doing. I'd love to get a demo. Yeah. And, uh, do you know how that introduction was brokered?

Like, is that through Andreessen or like, do you just get an email from Zuck at Facebook that's like, hey, I don't I don't know. It may be out there. Listeners, if you know, hit us up on Slack or shoot us an email. I assume that there were easy channels to make that introduction happen. Yeah. But somewhat like the original Snapchat episode, Zuck, I believe as the story goes, asked for them to come up to Facebook's campus and do a demo up there. And Brendan responds and says, hey, and this is from an interview with Brendan after the acquisition, hey, actually it'd be better if you come down here because we have a better setup here. So just like he did with Evan Spiegel.

So get on your private plane and fly down to Irvine. Mark flies down to Irvine, meets with Oculus, is really impressed with what he sees and and says, you know, hey, what can Facebook do to help you? And that quickly leads into acquisition discussions. So by the end of the month, the deal's done. It gets announced. Facebook acquires Oculus for $2.3 billion in total, of which, interestingly, only $400 million in cash, $1.6 billion in Facebook stock. And then there was an additional earn out of $300 million. But this was similar to the Instagram deal and the failed Snapchat deal from the year before and WhatsApp. This was sort of cementing Facebook and Mark Zuckerberg's reputation as a very aggressive acquirer. Yeah, yeah. And I think, again, we always bleed into tech themes here,

but it's really exemplifying Facebook's FOMO. 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 could unseat them, or a powerful new piece of technology that could become the next wave of computing. And if they're not on it, they're kind of screwed. So 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. 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 shown up, showed up on acquired and, and all of 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, with Mark and, and, and at the company, you know, through the IPO, when they had the huge disaster 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 and that included acquiring Instagram. I saw a fascinating stat that I didn't even think about is that Facebook was constantly referred to as a website when they launched and for years after. And in 2008, they launched a mobile app, but nobody referred to them as an app company. And it really took them four whole years

after. So 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, to make that the competency of your company. And I think that Facebook saw an opportunity here to not let VR evolve around them and then have to play catch up and get on that platform and then 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. 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. 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. Yeah. And it's interesting. 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, they were too late and they needed to come in and, and, and take out these, uh, uh, unsuccessfully

in Snapchat's case, take out these threats that were popping up in there, you know, within their current domain. But $2.3 billion was a lot of money to spend for, for a wave and a technology, uh, and a modality that was even then, you know, I think if, if rational, uh, cooler heads prevailed at that moment, looking at the company, it was still a long way away. I mean, we're here in 2017 and it's still a ways away even three years later. Yeah. Yeah. So, okay. What was the date of the acquisition? It was, uh, it was March, 2014. Okay. So that 75 million series B was in December of 2013. So, uh, moving away from the Facebook side a little bit and looking over at the Andreessen side of this, they invested 75 million and then just a little

over three months later got, let's see, 20X. I don't know if it's official, but in research, I believe the valuation of the Andreessen round was between $300 and $400 million. Wow, so that's, call it a 10x? I mean, somewhere in the 8x? Yeah, slightly less than 10x. But still, that's on a lot of money. Yeah. Well, good for them.

Yeah, great for them. We'll get into acquisition um, we'll get into acquisition category in a minute here, but, uh, the story doesn't quite end, unfortunately for Facebook when they acquire the company, um, because two things happen over, uh, well starting immediately, but play out over the next couple of years. One, it turns out that, you know, Carmack is as important as he was. i really think oculus the company and and the technology wouldn't exist without him unfortunately his former employer id software which itself had been acquired a couple years before by a video game conglomerate

called xenomax they also agreed that oculus wouldn't uh wouldn't exist without Carmack and his contributions. And they end up suing Oculus and Facebook, alleging Carmack a couple things. One, that Carmack had stolen Critical IP from, I don't know if it was when he was meeting with Carmack or with other folks that had signed an NDA with the company. And as a result of everything that happens, ZeniMax is alleging that he had violated that NDA. And alleged and then uh and then you know and so so that that lawsuit hits almost immediately after the acquisition and then only just a month ago as we're recording this in February of 2017 a jury in Texas which id Software was based in Texas is based in Texas actually rules in favor of ZeniMax, a $500 million judgment against Facebook

and Oculus. And Facebook has said that they're going to appeal, but still that's not good. Yeah. I mean, that takes it from a 2.3 up to 2.8. But it gets even potentially worse in that ZeniMax has also filed a court injunction arguing that the courts should halt sales of the Rift, which would just be terrible. Wow. Yeah, that's a far more serious blow. Yeah. It hasn't happened yet, but it is potential. Clearly they're posturing and trying to bargain between the parties here. Yeah.

I did some research on Zenimax for this, and it's actually it's quite a large video game conglomerate they they own a bunch of studios including the one that makes video game fans among our listeners will know the elder scrolls the fallout series but uh guess who is on the board of xenomax uh the only the only thing that wouldn't surprise me is carl icon no but uh almost as good so they they have quite the cast of characters they have cal ripken jr the uh the iron man baseball player yeah jerry bruckheimer the uh the movie producer and um uh in addition to less less moonves who's who 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 Zeniacs. The internet says it's true. Boy, what a weird company. God, conglomerates are weird, man. Yeah, totally weird. So you can't make this stuff up. Truth is, in fact, sometimes more stranger than virtual reality. Yeah. And we'll have a follow-up, I'm sure. Probably not an episode, but this will be an

in-follow-up and future episode. 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 and um it would shock me if they they stop shipping the rift because of this but it does feel like facebook's gonna gonna pay some more money there yeah or or at least it's it's posturing perhaps trying to get facebook to drop their appeal but the other major thing that happens uh after the acquisition um that uh that we've alluded to on the show is that valve and gabe newell decide that rather than uh rather than just supporting oculus they actually want to get into virtual reality themselves so the next year at gdc in 2015

valve unveils in collaboration with HTC, the Chinese consumer electronics company, they unveil the Vive, which is in many ways a superior product to Oculus and the Rift. And the Vive has two key innovations that the Rift doesn't have at that point. One are true hand touch controllers. So when you would play the experiences or games on Oculus before Valve came out with the Vive, you would have to use either a keyboard and a mouse or a video game controller, an Xbox controller. And that's just totally. Boy, does that pull you out of the experience. Really pulls you out of the presence, which is the whole point of vr valve ships these controllers that enable you to move your hands around and grab things and pick things up and and interact much more naturally

with the environment and then they also have the the while it's still tethered the headset that you wear still has a cable coming out of it and attaches to the pc there are they're called lighthouses uh that are laser positional tracking boxes that you put in the room and that allow you to walk around the room 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 and boy what a what a brilliant freaking end around by uh by valve like they're a software company for for listeners that don't know a bunch about valve uh they're a software

company 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. And Steam's sort of the default way if you're a PC gamer to go and get new games that come out. So basically, they own the pipe. And they're a super wacky company, brilliant, brilliant engineers there, brilliant game designers that, of course, are interested in VR. But they're not going to make hardware. 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 closely track and be a fan 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 company's stake 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. 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. Yeah. And Valve is, we'll link to this in the show notes. I suspect a lot of our listeners know the company well, but for those that don't, it is a fascinating place. Their employee handbook leaked on the internet a few years ago.

And it's more like a manifesto. There's no hierarchy. Nobody reports to anyone else there. Everybody decides what they work on. Everybody's desk is on wheels. And if you decide you want to work on something else with the other team, you just move your desk over to wherever that team is and you start working on whatever they're working on. And I believe it's 100% owned by Gabe Duell. So there's no, I mean, there's not a lot of leaks of stuff from shareholders or public disclosures or any or really even like known market cap of the company. It's a very... Yeah, it's very, very closely held. I don't believe Gabe owns exactly 100%, but he definitely controls the company. Just one person. And they make, you know, nobody knows outside of Valve the exact number, but a lot of money. I mean, billions of dollars of revenue mostly from Steam, as Ben mentioned.

Yep. 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. If there was a podcast that was about the build decision instead of the buy decision, we would really want to 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. Yeah. And they, you know, they really, you know, I don't think there's really any two ways about it. They out execute Facebook and Oculus over the next two years. Facebook ends up shipping the consumer version of the Oculus Rift before Valve by a week. So the consumer version of, of the Oculus rift before valve by, by a week. So the, the consumer version of the rift comes out in at the very end of March, 2016. Um, and then at the beginning of April, uh, valve ships the vibe, but again, with these two key innovations that Oculus doesn't have, and it's not until December December 2016. So just a few months ago now that Oculus finally brings out their touch controllers, which brings them closer to parody with, uh, with the hand

controllers of, of, of the Vive. Yeah. And you know what I mentioned earlier that the Crescent Bay woke me up to the idea that, that VR is a, uh, you know, the next tidal wave in technology. Um, I'd say the next step function was that was the first time I tried the five 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 tilt brush yes tilt brush yeah and then it was super cool it's like ms paint in vr is the only way to describe it um it was an independent company a couple developers and google ended up acquiring it oh nice nice nice 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 job simulator 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 and i'd say that that was the first time where like i think i was in that thing for like throwing an entire rolling cart full of dishes on the ground and having no consequences. And I'd say that that was the first time where like, I think I was in that thing for like a half hour. It felt like five to 10 minutes. And that was the first time where like, I legitimately didn't want to leave like that. That was the first time where I was like, Oh, people are going to get real addicted to this. Yeah. 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 it's worth it. You owe it to yourself. 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 Vive installed and and try out a few things, try out tilt brush. Uh, 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 try out, there's this, my favorite, favorite app and game is in VR these days is, um, by, by our friends over at rec room, really amazing company in Seattle. 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. But that's like the first time I played GoldenEye 64 as a kid and had my first shooter 3D video game experience. And Rec Room is so much more than that, but just that pure fun. It's great. Yeah. And the reason is, and we'll get into this, and I think this is part of Facebook's bet is, you know, Facebook, I think Zuckerberg, let me read the quote real quick. He's over and over

again said VR is going to be the most social platform. And I think the super cool thing about Rec Room is like, you're in there just hanging out. You're doing all sorts, you're in a room, you're playing paintball, you're, 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 and one thing i want to dissect later in the tech themes is like does that like do you agree that the the you know killer killer app of vr is is a social one. Um, but the cool thing about Rec Room is like when you, when you try it, you're like, wow, I really am just like hanging out in here and I could do this for hours with other people. Yeah. And that's what, you know, when I said it,

it reminded me, it reminds me of what it was like playing Goldeneye the first time, like the single player campaign in Goldeneye, like, you know, it's fine. It's whatever, it's good. 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 i spent in high school and college with my friends playing that you know that's what rec room is like and uh it really feels like a glimpse into the future yep all right listeners our next sponsor is a new friend of the show huntress huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to mid-sized businesses

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to Huntress. Hey, Acquired listeners. I'm jumping in with a quick update. In the next section, we talk about where Oculus is today and recent events involving the team. There was some pretty big news between recording and releasing this episode, so I'm here to tell you Oculus founder Palmer Luckey has left Facebook. On March 30th, Facebook confirmed his departure following a long stretch of Facebook being very quiet about Palmer. 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' developer conference. Now, back to our regularly scheduled programming.

Okay, so let's finish up history and facts. David, you want to take us to the recent events of the last six months to a year, and then we'll go on to acquisition category? Well, I think we've kind of done that. We can get this far. I guess I mean, personnel-wise. So Facebook, yeah, I mean, there's been some really interesting things that have happened as Oculus starts to merge more into Facebook. So Palmer Luckey is no longer the CEO of Oculus, but is still at Facebook working on things. That's actually Brandon. So Palmer was never the CEO.

Oh, right. Sorry. Sorry. Brendan Uribe stepped down as CEO. He's now managing Oculus's quote PC division, which is basically the rift. Right, right. And then Palmer similarly is at Facebook, kind of title lists. And so the way you can kind of think of what's going on at Facebook right now is Oculus is getting more integrated. There still the oculus group that makes the oculus rift facebook has more independent vr teams there's a pc vr mobile vr um and uh and you know obviously we 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 um in vr and uh and you know they're they're shipping the the rift but it's very clear that whereas with instagram and whatsapp

they stay very separate oculus is an acquisition where they're getting much tighter integration with the company and uh and it looks a lot more like a division than it does a separate company. And one huge marker of that is the whole team, or at least a good chunk of the team, moved from Irvine up to Menlo. Yeah. Oculus's headquarters is now in Menlo Park with the rest of the Facebook campus. But I think that's a perfect transition to acquisition category. 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.

I mean, this is a new product, a new platform, not part of the existing wave that Facebook is on that they're buying. And I think it was interesting that they initially kept, they tried to run the playbook of keeping the team totally separate and totally autonomous. And in particular, kind of at arm's length the way down in Southern California. But then that didn't work out quite so well as they got ended around it by Valve. And now they're moving to integrate it much more deeply into the rest of Facebook, the company. Disagree entirely. I love it.

I think it's a technology acquisition. I would say that the signaling initially could lead more toward business line of keeping it separate, of it being its own revenue generator. But to me, this is a defensive play on protecting the network that Facebook has and their existing business model. I think that for them, they looked at this and said, okay, VR is clearly the future. We need to make sure that we have a position on the dominant technology platform of the future. 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 and then having no leverage and making sure that we have a dominant position on that platform.

And Facebook has seen... I guess the point I'm making is they don't care about the business line of selling Oculus Rifts to people. And I think that they've looked around and seen, crap, we don't actually own the direct relationship with any of our users. They're in a slightly tenuous position where people are into Facebook. They're on it all the time. They're on it every day. It's an essential part of people's lives and provides a ton of utility. But they access it through either their Apple device, their Android device.

Facebook desperately tried to make their own phone. didn't work. 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 they're advertising customers monetize. 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, by someone else who of computing, that they aren't going to be upended by someone else who decides that, eh, we're not going to prioritize Facebook on the platform where all the users are. Ben, I think you hit the nail on the head. It's about owning the customer relationship at the point of access in the next wave,

which they don't right now. It's fun doing this episode right now, and in particular, after the Snapchat IPO, but it's hard to judge right now. Like, 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. But now that they're starting to integrate it more deeply, that feels like the right approach to me at this point. 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. Facebook needs to make sure that they are on every single platform 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. 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. 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. Like I remember being at Microsoft.

You end up with an iMessage situation, right? Totally. 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 an office, you hear the message that office is 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 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 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. And I would argue that they really need to figure out how to make sure that they're not prioritizing Facebook for Oculus. 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 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 the wave has not yet broken until like phones are just phones when 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 wave is VR, AR, MR, slash, slash, slash. Slash, slash, slash. But the breaking of the wave is clearly coming and Snap's working on it. Apple's working on it. Valve has a very successful, arguably more successful than Oculus product in the market. So what should Facebook do? 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. What if they didn't buy let's let's move into what would have happened otherwise what if they didn't buy oculus but they found a way to make sure that facebook was great on all of these platforms like how do they get the leverage to make sure that they have a first class relationship with customers of of vr or do they actually have to own one of them to like have an insurance policy that you know 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 restraint to never prioritize the Oculus business. Yeah. I don't know. 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? I mean, I don't know anybody that's ever succeeded at that. 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 and like Oculus needs to be really great. But we, but like the main business is Facebook. Like it, it mints money and it's going to continue to make money as long as we don't screw it up. Yeah. I mean, easy to say in theory, right? Like I've literally never seen that happen before. And I don't know that you could sell great employees on that, right? Like if you're, if you're the best VR developer, screw that I'm going to valve. Yeah. Well, okay. Here's a, um, here's a potential counterfactual one we've covered on this show, Android. So Google's a horizontal company, Google search

and Google services, Gmail maps, whatnot, work great on iOS as on Android, obviously. And I think it's pretty clear at this point, you know, like we talked about on that episode, the mobile wars are over and that everybody within Google is aligned on making those services work great across all platforms. And yet they still have Android. But now here's what's key about Android. I think to my mind, Google doesn't make Android phones. I mean, that's changing a little bit, but right. But like the whole strategy was get the software out there, get the operating system, let other people, let other ecosystem partners build a great hardware and get it in the hands of people. that we are going to be able to continue to deliver these great Google services to everybody across all platforms.

A, do you think that's a viable strategy? B, can Facebook do that? Totally a viable strategy. Very interesting. The main takeaway for me is Android itself doesn't make money. It prevents Google from having to give money to other people like Apple. They do give, as we talked about, a to give money to other people like apple um 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

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 they actually, it's not just like a straight payment. It's that Apple actually gets a cut of AdWords revenue. So it's like a variable rev share for AdWords that are served on searches on the iPhone. Yeah. Good to be Apple there. So I think that... Hey, it's good to be Google. You've got the best business model of all time. Yeah. 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, have third parties build the hardware. I mean, is, is, uh, is that what daydream is? Is Google sort of taking that approach with a daydream VR? Yeah. I don't know enough about it to say for sure, but I believe, I believe it is similar except that it's on Android phones that are powering it. So there is, there is that wrinkle. It's not like Daydream, as far as I know, I could be wrong, but I don't believe Daydream is going to work on iOS. I think you're right. So getting back to the other point that you're making, though, 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 making the hardware. Well, it reminds me a little bit. I hadn't thought about this until until you brought it up a couple of minutes ago, but I think it kind of comes back to Microsoft, too, right? Like that's what Microsoft did with the PC. Yeah. Which was build the operating system, give it to everybody, get it out there. You know, and, you know, Apple wasn't, you know,

that's great that Apple exists, right? Like, uh, we'll make, uh, we'll make office for, for Mac too, you know, and we'll cripple it, you know, but, but I think, you know, there, there are plenty of examples, whether it's Microsoft and windows or Google and Android of that type of approach working. It's when you then cross over into trying to be both vertical and horizontal that you get the Office for iPad situation. Yeah. I mean, I think it keeps coming down to this. 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. 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, but like it doesn't exist on its own to be Google's main revenue stream. And Facebook's just going to have to do the same thing with Oculus and hopefully there's less tumult on the way to get there. Totally. So what would have happened otherwise? I mean, we're kind of in this section right now, but where, you know, if Oculus doesn't land at Facebook, what happens to it? Well, um, 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 gonna blow oculus out of the water you know oculus probably only was able to hang on because it had facebook's resources so i think it's it's hard to imagine Oculus remaining an independent company, a fully independent company. Yeah. Without needing to, I mean, I guess as we've talked about with both Snapchat and Uber and Didi, 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. Think about how many years and how much effort Apple has invested in creating their supply chain. The idea that a startup would be able to do that within a competitive landscape is hard to imagine these days. Yep. Yep. And actually, here's a great quote from Palmer Luckey. He said, I'd say we are five years ahead of where we would have been without the acquisition, 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. There's a strong argument to be made.

We would never have gotten there in five or even 10 years. And there's a great point that the Facebook brand boosted the network effect of developers making stuff for it too. Yeah. And we've sort of talked about the evolution of the Rift hardware. You know, the DK1 was like one step past duct tape, but the DK2, but then, you know, the consumer version, like these are true good consumer products. Totally.

Even with a lot of money, would they have been able to create that? Yep. Okay. Tech names. Real quick, what about the flip side of that? What would Facebook have done in VR without Oculus? Well, Facebook still hasn't done much in VR. But I mean, that's the other thing that, you know, it's just so early, right? Even three years later after the acquisition, best guesses are, it's growing and growing quickly, 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. Compare that to like 6 billion daily active users,

6 billion with a B in mobile. So I think Facebook is still totally fine. Yeah. I think so too. Which is interesting to think about in grading the acquisition is they've so far paid $2.8 billion for a thing that they would have been completely fine without, but it's a long bet. Yep. Okay. Tech themes. So the, uh, running through my list of, of, I'll just say like check next to the ones that we've really already talked about, but you know, Facebook doesn't want to get left behind like they did with mobile check. We 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 the world a more open and connected place. Also VR is the future. So we therefore must mash these things together because, you know, our business must survive in the world where VR is the future. Or is it or do they actually have a good confluence and work together? Well, I think he's right. This is maybe foreshadowing my greeting i think he is both 100 right and facebook and oculus have executed poorly on it 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 which is the closest that i have seen to anything resembling you know normalcy and a true wave in what we're talking about. Cause like I said, you know, the wave is not quote unquote VR or AR or MR it's glasses or a camera. It's something that real people everywhere are going to use people who don't listen to this podcast. And, uh, so I think he's right. And I think if you just look, 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. So I think he's right. On the other hand, I think if you look

at the product strategy and the history over the last couple of years of what Oculus and Facebook have done, you know, they're they're behind because it's natural hand movements that are so important to that. It's walking around. It's the types of things that Valve has done with the Vive. 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. You need to make this something that people are going to be open with in the real world, you know, interacting with other people. Yep. Okay. So my, I think we've talked about a bunch of my themes too. The only one I would say, you know, that we just got a brief mention earlier in the episode, but, um,

really came out for me thinking about this and doing the research is Kickstarter, right? Like Oculus and the rift being one of the first, uh, not the first, but one of the first really breakout companies slash products slash ideas to come out of creative endeavors to come out of the Kickstarter platform. 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'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 anything that they want to write or say. You know, I think Kickstarter is just a really cool example of that and and led to oculus yep

i think it's a great point should we grade it let's do it all right so i uh i think you're 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 i think it's great 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 uh i think in the last couple years of where it's ended up i'm i'm gonna go with a c for this acquisition um with you know as as we've said before a high level of variance so when we revisit this acquisition in years you know, as we've said before, a high level of variance. So when we revisit this acquisition in years to come, very open to changing that. And I think it's

very likely it will change. But like, holy crap, they bought Oculus. And then a year later, a far superior, you know, piece of technology comes out. And it didn't seem that hard for someone else to pounce on it. And especially someone that was so interested in the Oculus in its development. And then on top of that all, I really disagree with Facebook integrating VR tighter. 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. People that work at Oculus should view themselves as working on a thing that makes sure Facebook doesn't get unseated in the future. But ultimately, Facebook is the business.

They should look at their competition as Snapchat, even though they work at Oculus. Yeah, totally agree. I think you've nailed it on this one. You know, the only, I'm tempted to, uh, quote Tom from, uh, our Tom, Tom Allberg from our Amazon IPO episode himself, quoting Jeff, which is just such a great line in tech that Jeff's saying, Bezos is saying that, you know, it's okay to fail at things. It's not okay not to try. Um, so I want to give Facebook and Mark Zuckerberg a ton of credit for, you know, trying here and, and seeing, you know, the potential in VR as a future medium, um, and pouncing on it early. On the other hand, he pounced really early and execution has not been

great since then. So for the same reasons as you've been, I'm going with a C on this one so far. Yeah. And maybe there's an 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 and like a risk of your business of reaching everyone is that you don't you you know you don't necessarily own that direct customer relationship and that just has to be okay like that just has to be baked into these like mega horizontal scale models yep because there's no way like could facebook have its cake and eat it too could is is there a world where the 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? I just don't see a world where that's possible. Well, what you're talking about is a monopoly on a direct customer relationship. And monopoly is a word that gets thrown around in tech a lot, usually in conjunction with network effects and the power there. 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, the, the means of ingress, you know,

so to speak, you know, they own it in, in a sense in that Facebook, you know, so to speak. 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. Right. I think it's just maybe hard or not, or maybe impossible. It's unlikely to believe that Facebook would be able to do that with VR in the future. Yep. Agreed. Okay. Quick follow-ups. So one, Snap. They're still a public company. They are still a public company. They have not completely imploded.

Their stock is trading below IPO price. Yeah. 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. The real story will come after they release their first quarter and probably a couple quarters of earnings, and we see whether they're able to reignite growth. Yep. Yep. Yep. Let's just hope that everyone

that bought in a very excited way on that first day does not become extremely pessimistic right now. And whatever. We're not picking stocks. We're not forecasting. We never time the market, blah, blah, blah. I think it's going to bounce back a little bit. And let's hope for Snap's sake that the people that bought in are sort of in it for the first kind of accessible IPO to them that was both large and something they were super familiar with. And people bought on emotion of, I like this company. And you don't want to see all those people have a super negative experience and lose out. Yep. Well, echoes of the Facebook IPO episode. Go listen to that one if you haven't already. I think that is some of our best work here on Acquired. Okay. Other hot take, Intel acquiring Mobileye. Ben, I hear autonomous cars are a thing. Forget VR. Yeah. Boy, it sure seems like it, huh? I think... Wait, is Mobileye a camera

company? In a sense. In a sense. It's more like an applied machine learning company it's really fascinating to me that uh you know so mobilize a israeli company and they build self-driving car technology and uh they were bought by intel for about 15 billion dollars 15 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, their core competency is the collecting and synthesizing of all of the training data and building a pipeline out of that so that 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 me that as this market gets so much attention so quickly, and it's so clear that this thing is going to happen, that by pointing your technology in the right direction and really starting to get market traction with the makers of these cars, if this company was a machine learning company, they would have sold for a 15th of what they sold for. Yeah. It's interesting. I think we, I think we might've unexpectedly on this episode touched on a really, really deep theme in technology, which is this vertical versus horizontal idea. Ever since we talked about it a couple of minutes ago, I can't stop thinking about it and thinking about Intel acquiring mobile eye and like, okay, yeah, we're going to be,

we're now going to sell this horizontal platform to all the car companies to enable 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, to compete in the, in the autonomous market, 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. I mean, it'd be very interesting to see this how this plays out rewind 20 years ago like tesla is apple they're like yep totally they're vertically integrating they're selling a you know high-end premium consumer product that's that's uh priced and experienced in a premium way and that they they capture a lot of value and the rest of the value

is captured by um an ecosystem that is based on intel uh that are basically component makers and it's like you know history repeats itself yeah well i think the question is and actually ben thompson wrote a great piece the smiling last week i believe the smiling curve about this question is can a combination of intel be the microsoft um not yeah yeah yeah and could intel be the microsoft right like can they is that what they're trying to do here is sort of like level up the stack yep fascinating yep yep fun stuff future episode intel self-driving os we will see uh see if that happens coming soon to a podcast client near you indeed speaking of podcast clients, one that you can listen to on your podcast client,

my carve out this week is the Pod Save America with Kara Swisher interviewing the gang from Pod Save America at South by Southwest. 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 uh called crooked media of pod save america pod save the world and other um left leaning highly cynical very funny uh podcasts and uh if you're into keeping up on 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 it's an awesome podcast like pod save america is incredibly entertaining and uh the kara swisher interview is phenomenal because she she might be the best interviewer alive like she is so good at yeah like thinking

about like what do i want to know what do i think my listeners want to know i'm gonna abuse you until i get those things out of you. And you're going to like it 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 starting from a place of like, look, I think you're really smart and I think you have a lot to share. Why don't you share those things with us? And there's this incredible mutual respect between the interviewer and the interviewees. And I just highly recommend it. We look up to her on Acquired and a lot that we can learn and hope to keep learning as

interviewers and podcast hosts and journalists 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. Great satire of the French and of Paris. But he wrote a piece called Asking the Question, Are Liberals on the Wrong Side of History in The New Yorker? And we'll link to it. It's really good. But one of my favorite elements of the piece, of which there are several, is sort of asking this question, 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 and you know what we do on acquired but goblin kind of makes the point that like because events turned out a certain way um because trump won the election because brexit happened etc or other things deeper in history like the human mind is such a you know this is kahneman and Tversky classic stuff is such a like storytelling machine, uh, that we seize onto that narrative that like, oh, well that was inevitable and it reflects this deep truth. But the reality is like, maybe it wasn't inevitable. Maybe, you know, it was a probabilistic thing. Maybe it was even a low probability thing that just happened to happen. And I love thinking about stuff like that. Interesting. Just because it happened,

it doesn't mean it was destined to. Exactly. And it doesn't mean that you should create or accept a gospel about the truth behind it because the truth is complicated. Yeah. Sounds very cool. Cool. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple. Yeah, Vanta is the perfect example of the quote that we talk about all the time here on Acquired. Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource

everything else that doesn't. Every company needs compliance and trust with their vendors and customers. It plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product. Vanta takes care of all of it for you. No more spreadsheets, no fragmented tools, no manual reviews to cobble together your security and compliance requirements. It is one single software pane of glass that connects to all of your services via APIs and eliminates countless hours of work for your organization. There are now AI capabilities to make this even more powerful, and they even integrate with over 300 external tools. Plus, they let customers build private

integrations with their internal systems. And perhaps most importantly, your security reviews are now real-time instead of static, so you can monitor and share with your customers and partners to give them added confidence. So whether you're a startup or a large enterprise, and your company is ready to automate compliance and streamline security reviews like Vanta's 7,000 customers around the globe, and go back to making your beer taste better, head on over to vanta.com slash acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO,

all acquired listeners get $1,000 of free credit. Vanta.com slash acquired. Well, that's all we've got. Listeners, thank you so much for joining us as always. If you've been a longtime subscriber, as we mentioned in the beginning, 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. And it helps us grow the show,

get more guests, and really bring Acquired to more people. So yeah, feel free to, if this is your first show, subscribe from your podcast client of choice. You can shoot us email at acquiredfm at gmail.com. Go to acquired.fm. Join us in the Slack. Gosh, I don't know what more I could plug. So I'm just going to call it here. Find us in VR. Yes. Signing off. Have a good one. Talk to you guys soon.