What did Facebook buy for $2 billion?

The acquisition was rushed, according to testimony heard during the ZeniMax lawsuit, leaving little time for due diligence or a detailed look at the VR industry as a whole. Facebook CEO Mark Zuckerberg thought Oculus was far ahead of the competition. Facebook may not have seen this as the acquisition of a company as much as the wholesale purchase of the VR industry.

Owning VR by setting the terms of engagement — as Apple created the smartphone business by inventing the iPhone — had to seem like a huge opportunity. $2 billion is a small price to pay for the future.

What went wrong?

The problem is that Oculus wasn’t ahead, not in any meaningful way. Valve and HTC released the Vive platform one week after the launch of the Oculus Rift, and included advanced motion controls that made the Rift’s wireless Xbox controller look antiquated at launch.

Valve and HTC also punished Oculus for a series of rookie mistakes when it came to developers and press. While Oculus often discouraged the press from purchasing Oculus development kits in order to cover the platform, Valve mailed a large number of Vive Pre development kits to press along with a selection of games with no embargo or limitations on video or social media use.

The result was strong buzz for the Vive and its controllers alongside a large number of stories about the system and its games. When the press and reviewers, myself included, had to put down the Vive controllers to pick up the Rift’s Xbox controller it felt like a large step backwards.

Oculus kneecapped its own efforts at building buzz for the Touch controllers by forbidding developers from sharing images or thoughts about the hardware on social media, nor were the press given access to development kits in order to cover games or the hardware.

The Vive also benefits from Valve’s ownership of the largest gaming software distribution platform in the market, which is a huge advantage as Oculus continues to struggle to match the features of Steam with Oculus Home.

Sony’s PlayStation VR platform is the best-selling tethered headset to date, having sold 915,000 units in four months. Neither Oculus nor HTC has revealed any sales or shipment numbers for their respective headsets, but many estimates put the number below half a million units for either headset, with the Rift trailing the Vive.

“HTC Vive is outselling Oculus two-to-one worldwide,” Epic Games founder Tim Sweeney said in an interview. “I think that trend will continue.”

Google has also released its own high-quality mobile VR platform, called Daydream, further adding powerful competition in the VR ecosystem. Oculus has the Gear VR platform, but it’s also partnered with Samsung, which limits the headset’s reach to owners of Samsung phones. Samsung is also about to release a wireless Gear VR controller that offers three degrees of freedom, mirroring Daydream’s controller.

If Facebook was hoping that Oculus was ahead of its competitors in terms of hardware or software, those hopes have been completely dashed as Oculus is often left playing catch-up to its competitors. And all this was before the real trouble began.

The controversies begin

Oculus lost a court battle over a lawsuit from ZeniMax media over the breach of non-disclosure agreements, leading to a $500 million judgment that will likely be locked up in appeals for the foreseeable future.

Oculus’ strategy to fight the Vive and PlayStation VR seems to be funding game development directly in order to gain a strong collection of Oculus exclusives — which are often offered to Oculus customers for free — but that move has backfired as the VR community often views this move as a bribe to keep games from the HTC Vive. Zuckerberg has stated that Facebook has invested $250 million in funding for Oculus content.

Oculus also makes money from the sale of software through Oculus Home, but those same games can often be purchased through Steam. The Rift is fully compatible with nearly all of the Vive’s games, giving customers another way to avoid the Oculus Home ecosystem.

The company’s problems are often basic: Oculus Connect 3 was a confusing, badly planned event where Oculus representatives often flatly told the press we couldn’t play certain games, to the frustration and sometimes anger of PR representatives trying to get us in to demo games.

Oculus founder Palmer Luckey was also caught funding attacks on Hillary Clinton as part of a group which itself had an uncomfortable amount of overlap with the industry’s GamerGate problem, a controversy that kept him from attending Oculus Connect at all. Luckey’s departure from Oculus was announced yesterday.

So what now?

That’s the question. Oculus recently dropped the price on the Rift and Touch controllers, and the margin on hardware is notoriously tight to begin with. It’s unlikely there’s much money to be made in hardware, although the surge in sales may strengthen the software market.

But it’s hard to make money on software when your platform lacks basic features like cloud saves — and when so many members of the community treat exclusivity with hostility. Many Rift users may opt to buy their games on Steam, especially since Vive games are compatible with the Rift platform.

So where is Oculus going to find profits? Facebook has poured money into the company, and at some point Zuckerberg has to begin asking when the investment is going to pay off. The Facebook CEO debuted some social features coming to the platform at last year’s Oculus Connect, but it’s important to remember that Facebook isn’t in the social media business, it’s in the advertising business. And players are likely to balk and run to competing platforms if too many intrusive ads find their way to Rift content.

Reaction to the discovery that Oculus was tracking your data for possible use in advertisements caused a furor last year, even if the language was mostly boilerplate. The lesson is that few VR enthusiasts are willing to give Facebook the benefit of the doubt when it comes to advertising or data collection. Right now virtual reality is one of the few places you can go that isn’t completely filled with ads, and early adopters may fight to keep it that way with more vigor than Facebook is anticipating.

So what kind of company is Oculus? Is it a hardware company? Is it a software company, or an advertising company? Does Facebook even know at this point? The Rift has suffered a series of setbacks and controversies since its launch into a market that was much more competitive than the company was anticipating, leaving Oculus’ image battered and lacking good news to share with the world.

If Oculus is going to survive, and if Facebook is hoping to make any money on its acquisition, it better be able to answer these questions sooner rather than later.