Facebook, Sony make a play for virtual reality

March 27, 2014, 11:06 PM UTC

FORTUNE — One of the big trends from the Game Developers Conference (GDC) in San Francisco last week was virtual reality. Oculus Rift, which was conceived by 21-year-old Palmer Luckey and raised $2.4 million in crowdfunding on Kickstarter back in July 2012, wowed convention attendees for the second year in a row. Oculus VR debuted its Developer Kit 2, which adds more immersive technology including OLED displays and positional tracking.

One of the companies Oculus VR impressed was Facebook, which had its own, much smaller, booth at GDC. “Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate,” Facebook (FB) CEO Mark Zuckerberg said in his statement announcing the social giant would acquire Oculus for $2 billion.

“Oculus might be the equivalent of what Glass is for Google (GOOG),” said Peter Warman, CEO of video game research firm Newzoo. “These companies are preparing for the day and age where physical screens will be substituted by a new intuitive way of interacting with content and people. As the biggest social company in the world, Facebook simply cannot take the risk of being too late to join this inevitable development, even though chances are high it will be many years before any serious money will be made.”

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Luckey has assembled a stellar team of creative minds to make virtual a reality, including id Software founder John Carmack, Gaikai exec Brendan Iribe, Activision exec Laird M. Malamed and Electronic Arts exec David De Martini. In addition to its Kickstarter backing by gamers, as well as early investors like former Epic Games design director Cliff Bleszinski, Oculus has impressed VCs. The company raised $16 million through angel and venture capital investments in June 2013 and an additional $75 million in December 2013 from Spark Capital, Matrix Partners, Formation 8, and Andreessen Horowitz.

“While Facebook might seem like a weird match for Oculus, it might actually be just the shot in the arm that the crew needs to bring their fantastic device to market,” said Bleszinksi. “Facebook will ensure that Oculus has the resources, funding, and support to not only make games happen, but for a myriad of applications. They also have the muscle to help the Oculus become its own platform, complete with an app-store style ecosystem.”

Even before Sony (SNE) made its own commitment to virtual reality with Project Morpheus at GDC 2014, Oculus VR had received orders for over 75,000 Oculus Rift development kits. (The consumer version of the product is still being developed.) Luckey believes that virtual reality will become mainstream naturally.

“Gamers have always wanted to be in virtual environments,” said Luckey at GDC. “There’s a reason virtual reality has been so entrenched in pop culture for so long. It’s because people have always wanted it.”

The Facebook deal brings virtual reality back into the spotlight. While gamers have been salivating over this technology for a couple years now, Oculus Rift wasn’t mainstream. Even Sony managed to get global media attention by showing its own PlayStation 4 prototype at GDC, which was on display just next door to the large Oculus Rift booth. Both booths had huge lines of game developers interested in getting a glimpse into the future of gaming.

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Richard Marks, who heads up the Magic Lab inside Sony PlayStation R&D, said the differentiator with this new wave of VR is that technology has finally caught up with the dream of virtual reality.

“You need quite a bit of graphical horsepower to drive the graphics to a quality that you can actually have it take up such a big field of view in front of your eyes,” said Marks. “The tracking technology has been very expensive in the past, but just over the last few years low-cost inertial sensors and low-cost cameras have made it possible to do this at a high fidelity.”

Sony has confirmed that Project Morpheus will not be shipping in 2014. And Oculus VR has yet to set a launch date for the consumer version of Oculus Rift, although consumers can purchase the development kit. While the applications for virtual reality technology beyond gaming are in their nascent stages, several industries are already experimenting with the technology, and Facebook plans to extend Oculus’ existing advantage in gaming to new verticals, including communications, media and entertainment, education, and other areas. Given these broad potential applications, experts believe virtual reality technology is a strong candidate to emerge as the next social and communications platform.

“Oculus Rift has a better chance of being used on a wide scale because of its compatibility with mobile devices and PCs, including Valve’s Steam Machines (which launch this summer),” said Warman. “In general, I still believe it is too early for commercialization of VR on a mass scale.” He adds that it will take another generation getting used to Kinect, Google Glass, and other types of devices before virtual reality will really take off.

Price point will also play an important role in the acceptance of VR. While early Google Glass technology was released for $1,500 to select early adopters, it’s expected to be at a much lower price point for its mainstream launch, Oculus Rift DK2 sells for just $350 to developers. And the final consumer price point is expected to be lower.

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Warman says that the potential market for Project Morpheus is directly related to Sony PS4 consoles. He estimates the maximum sales it could do in the long run is 20 million units worldwide, which is 25% of Sony’s installed console base. The Oculus, because of Facebook, has a much larger audience potential, but Warman said there are too many factors to forecast any type of sales projections at this point.

While Oculus and Sony are the two biggest players in the VR space, there is new competition. Startup Seebright was at GDC showing off its new prototype headset, which combines both virtual and augmented reality. A smartphone plugs directly into the device, and a small handheld controller allows for navigation through 3-D video games. John Murray, CEO and co-founder of Seebright, said the device, which blends optics, electronics, software, and ergonomics, will be priced so it’s affordable to everyone and accessible anywhere they go.

Sulon Technologies is also targeting Android, and later iOS, mobile users with its blend of virtual reality and augmented reality. The Cortex debuted at GDC 2014, and Dhanushan Balachandreswaran, founder and CEO of the company, promises a Star Trek holodeck experience for consumers.

“It does 3-D tracking in space, and the system understands your physical environment right down to the micro-millimeters,” said Balachandreswaran. “The technology behind it is similar to how the Google self-driving car works, but it’s customized for a low-cost solution to bring this into the home.”

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The Facebook deal also bodes well for startup Virtuix, which was backed by more than 3,000 Kickstarter members and raised over $1.1 million (its goal was $150,000). The company had its Omni virtual reality “natural motion interface” on display at GDC. The device works with Oculus Rift, allowing players to physically walk, move their body, and aim their gun within VR games.

The technology also works without VR, allowing the body to act as a navigation tool to explore games. While this omni-directional treadmill did not impress Mark Cuban or the other investors on Shark Tank, it has a loyal following. Jan Goetgeluk, CEO and founder of Virtuix, said gyms and fitness chains are using this technology, since it’s a new way for people to interact with virtual worlds and burn calories.

Technology is slowly moving toward the science-fiction VR pods described in Ernest Cline’s Ready Player One novel. The games on display at GDC varied from space dogfighting experiences like CCP Games’ Valkyrie and Frontier’s Elite: Dangerous to Vertigo Games’ World of Diving underwater simulation to special VR demos at Sony’s booth of Square Enix’s first-person adventure game Thief. But this transition, if it does happen, won’t occur overnight, or even over the next five years.

“I don’t think the concept of a screen will go away within a decade, but I do think it will be greatly reduced,” said Luckey. “Right now VR has limitations with resolution compared to a big screen, but once the resolution of VR goes up to where it’s either equivalent to that of a screen or to where even the human eye is, there’s no benefit to having a real screen when you have something that is taking much less raw materials, is easy to transport, and can simulate a hundred multiple screens all around you. I can’t see mainstream screens having nearly the foothold that they have today, if that comes to pass.”

Zuckerberg and his Facebook team certainly believe in a VR future, now it’s just a matter of watching the major players roll out this technology over the coming years.