Skip to main content

Why it's bad for Facebook to gobble up Oculus

By Paul Saffo
updated 1:38 PM EDT, Thu March 27, 2014
A gamer wearing an Oculus virtual-reality headset.
A gamer wearing an Oculus virtual-reality headset.
STORY HIGHLIGHTS
  • Paul Saffo: Facebook's $2 billion purchase of Oculus is a bad deal for consumers
  • Saffo: Tech sector is seeing a shift from IPO model to acquisition model
  • He says it's harmful for Silicon Valley innovation ecology if tech giants grab up startups
  • Saffo: Imagine if Apple had been bought by IBM or Sony, would there ever be iPhone?

Editor's note: Paul Saffo is managing director of Foresight at Discern Analytics and teaches at Stanford University.

(CNN) -- Facebook's $2 billion purchase of startup Oculus, which makes virtual reality headsets, is bad news for small investors and Silicon Valley's innovation ecology. The deal means we will never have the chance to own Oculus stock.

This is the latest instance of a shift in the tech sector that reduces would-be investors to mere consumers.

For decades, Silicon Valley's culture was built around small startups that counted on "going public" -- listing their shares in an initial public offering. The resulting IPO provided working capital to the founders and allowed ordinary investors to buy into the dream -- and prospect of a financial upside.

Paul Saffo
Paul Saffo

Microsoft, Amazon, Yahoo and Google and others went this route. Ordinary investors could participate by holding a stake in the companies they liked.

This also made it possible for a steady stream of tech upstarts to grow into independent tech giants with diverse products and services. Early employees at successful startups would then use their new-IPO wealth to depart and launch the next wave of companies.

This IPO model began to erode after the dot-com bubble burst when the market became riskier. At the same time, the dot-com survivors were increasingly flush with cash and in an arms race to ensure growth. Buying early-stage companies was an easy way to gather new technologies, businesses, patents -- and top-notch entrepreneurial brains.

The shift came into sharp focus in 2006 when Google bought YouTube. Founded by three PayPal employees in 2005, YouTube was less than two years old when Google paid the then-unheard sum of $1.65 billion to turn it into a Google subsidiary.

This was good news for Google, but we will never know what YouTube might have become had it remained independent. Sure, investors can participate by owning Google stock, but might YouTube stock have done even better if allowed to fly on its own?

Grabbing companies before they go public also impoverishes the variety of products that come to market. Imagine if Apple had been acquired in the early 1980s during its infancy by IBM or Sony? Would there ever have been a Macintosh, iPod, iPhone or iPad?

Now that Facebook owns Oculus, will it allow users to wear their goggles when visiting virtual worlds in Second Life or watch movies from Sony Pictures? With Nest -- acquired recently by Google for $3.2 billion -- will iPhone users get the same level of interaction with their home thermostat as Android users?

While some companies like Amazon have shown remarkable restraint in allowing their acquired subsidiaries to operate independently, the temptation to tweak products for differential advantage is compelling, particularly when the price tag is in the billions of dollars.

Instead of an eclectic field of many companies of all sizes, the new landscape is becoming dominated by a few goliaths whose cherry-picking among the small startups all but eliminates the population of mid-sized companies with significant future IPO and innovation potential.

Worse yet, employees in the acquired startups who find themselves in secure, lavishly-paid positions at companies like Facebook are less likely to strike out on their own. And even if they do manage to break out and create a new company, their focus will be on the quick kill of getting acquired by a giant in a year or two, not on embarking on the multi-year road of creating a potentially world-changing product.

The future of tech sector dominated by the acquisition trend reminds me of the final scene of the movie "Raiders of the Lost Ark." After a nail-biting, continent-spanning race to find a mystical and vastly powerful artifact, the last the audience sees of the now boxed-up Ark is its disappearance into a vast warehouse of identical crates. We know the Ark will never see the light of day again and are left to wonder at what else might be hidden and gathering dust alongside it.

In the case of Oculus, we might enjoy the immersive pleasure of head-mounted displays, but even that will not be enough to keep me from wondering what might have been if Oculus, Nest and all the other startups gobbled up by giants like Facebook and Google had been allowed to grow into independent companies owned by ordinary investors like you and me.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Paul Saffo.

ADVERTISEMENT
Part of complete coverage on
updated 8:37 AM EDT, Tue October 28, 2014
Errol Louis says forced to choose between narrow political advantage and the public good, the governors showed they are willing to take the easy way out over Ebola.
updated 2:03 PM EDT, Mon October 27, 2014
Eric Liu says with our family and friends and neighbors, each one of us must decide what kind of civilization we expect in the United States. It's our responsibility to set tone and standards, with our laws and norms
updated 7:45 AM EDT, Mon October 27, 2014
Sally Kohn says the UNC report highlights how some colleges exploit student athletes while offering little in return
updated 3:04 PM EDT, Sun October 26, 2014
Terrorists don't represent Islam, but Muslims must step up efforts to counter some of the bigotry within the world of Islam, says Fareed Zakaria
updated 9:02 AM EDT, Fri October 24, 2014
Scott Yates says extending Daylight Saving Time could save energy, reduce heart attacks and get you more sleep
updated 8:32 PM EDT, Sun October 26, 2014
Reza Aslan says the interplay between beliefs and actions is a lot more complicated than critics of Islam portray
updated 7:19 AM EDT, Mon October 27, 2014
Julian Zelizer says control of the Senate will be decided by a few close contests
updated 8:12 AM EDT, Fri October 24, 2014
The response of some U.S. institutions that should know better to Ebola has been anything but inspiring, writes Idris Ayodeji Bello.
updated 5:01 PM EDT, Wed October 22, 2014
Paul Callan says the grand jury is the right process to use to decide if charges should be brought against the police officer
updated 12:19 PM EDT, Thu October 23, 2014
Theresa Brown says the Ebola crisis brought nurses into the national conversation on health care. They need to stay there.
updated 6:35 PM EDT, Tue October 21, 2014
Patrick Hornbeck says don't buy the hype: The arguments the Vatican used in its interim report would have virtually guaranteed that same-sex couples remained second class citizens
updated 12:30 PM EDT, Fri October 24, 2014
The Swedes will find sitting on the fence to be increasingly uncomfortable with Putin as next door neighbor, writes Gary Schmitt
updated 12:32 PM EDT, Fri October 24, 2014
The Ottawa shooting pre-empted Malala's appearances in Canada, but her message to young people needs to be spread, writes Frida Ghitis
updated 9:48 PM EDT, Sat October 25, 2014
Paul Begala says Iowa's U.S. Senate candidate, Joni Ernst, told NRA she has right to use gun to defend herself--even from the government. But shooting at officials is not what the Founders had in mind
updated 6:08 PM EDT, Thu October 23, 2014
John Sutter: Why are we so surprised the head of a major international corporation learned another language?
updated 5:54 PM EDT, Thu October 23, 2014
Jason Johnson says Ferguson isn't a downtrodden community rising up against the white oppressor, but it is looking for justice
updated 12:21 PM EDT, Fri October 24, 2014
Sally Kohn says a video of little girls dressed as princesses using the F-word very loudly to condemn sexism is provocative. But is it exploitative?
updated 4:06 PM EDT, Tue October 21, 2014
Timothy Stanley says Lewinsky is shamelessly playing the victim in her affair with Bill Clinton, humiliating Hillary Clinton again and aiding her critics
updated 10:14 AM EDT, Thu October 23, 2014
Imagine being rescued from modern slavery, only to be charged with a crime, writes John Sutter
updated 12:00 PM EDT, Tue October 21, 2014
Tidal flooding used to be a relatively rare occurrence along the East Coast. Not anymore, write Melanie Fitzpatrick and Erika Spanger-Siegfried.
updated 7:35 AM EDT, Tue October 21, 2014
Carol Costello says activists, writers, politicians have begun discussing their abortions. But will that new approach make a difference on an old battleground?
updated 9:12 AM EDT, Tue October 21, 2014
Sigrid Fry-Revere says the National Organ Transplant Act has caused more Americans to die waiting for an organ than died in both World Wars, Korea, Vietnam, Afghanistan and Iraq
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT