Oculus, Facebook, VR

An attendee uses an Oculus virtual reality headset during the annual Facebook F8 developers conference in San Jose, California. Source: Reuters

Facebook reports less diverse revenue streams, shuts down VR content arm

DESPITE registering better than expected revenues in its first quarter of 2017, Facebook’s latest earnings report indicated the social media company is diversifying less and less, with growth coming mainly from its digital advertising business.

The shift is making the company much more dependent on the cyclical ad market, while it risks falling behind on maximizing its revenue streams – unlike its competitors such as Google, who has found a measure of success through its forays into hardware and software.

The company’s dependence on advertising is a long-term concern, but it has time to find other revenue paths while building its core ad business, said Clement Thibault, a senior analyst at Investing.com to Reuters.

“We have to remember it’s still a fairly young business. It’s not like they’re an old-fashioned business that needs to move soon.” – Thibault

Concerns Facebook was becoming increasingly dependent on its ad revenue have been around for some time, with the company noting its non-ad revenue was slipping due to the gaming shifting to mobile. Previously, Facebook raked in millions as part of a business model based on a percentage cut of virtual currency purchases.

On Wednesday, the company released its earnings, which indicated 98 percent of its first quarter revenue came from ads, compared to the 84 percent registered in 2012. Now, the social network reported its non-ad revenue sources had shrunk to US$175 million in this year’s first quarter.

The report also notes the company had made US$8.03 billion in revenue, and its user base has grown to 1.94 billion users. Analysts surmise the company would achieve two billion users by the second quarter.

SEE ALSO: Facebook now has 5 million advertisers and wants more SMEs on board

Facebook also made headlines when announcements came out that the company is shutting down its Oculus Story Studio, the original VR content arm set up after it bought the Oculus VR hardware company for US$3 billion in 2014. CEO Mark Zuckerberg said he believed the “360-degree panoramic view” medium, mediated by headsets, would “become a part of daily life for billions of people”.

And yet, despite the recent successes of Oculus’s VR films – Lost premiered at Sundance film festival, while Henry snatched up an Emmy – and the increasingly pervasive use of 360-degree visuals across media platforms, Facebook’s non-advertising products, including Oculus VR headsets and Workplace office software, currently generate little revenue.

The studio’s shutdown will not result in the loss of jobs, according to Zuckerberg, as many of Story Studio’s makers have been offered jobs across Facebook’s ecosystem, but the arm will now focus on supporting external content makers who can build on top of Oculus’s existing technology. Around US$50 million will be allocated to fund non-gaming VR content, said Jason Rubin, the company’s vice-president of content, in a blogpost.

Rubin said Oculus is “still absolutely committed to growing the VR film and creative content ecosystem”.

Facebook COO Sheryl Sandberg said during a conference call with Reuters in February the company was diversifying revenue by expanding its base of advertisers across geographic regions and industries.

The shuttering of Oculus’s Story Studio is a sign Facebook is struggling to innovate and cultivate its non-ad revenue streams. Many of its attempts to diversify away from a user-centric business model have largely failed to return on the company’s investment.

The company’s failure stands in stark contrast with Alphabet Inc.’s (Google parent company) efforts. Alphabet’s non-ad revenue posted a 49.4 percent jump to US$3.1 billion on the back of its cloud services and Pixel mobile handsets. Those two businesses now make up 13 percent of Google’s total revenue.  

SEE ALSO: Google hurries to mollify advertisers following backlash over YouTube ads

Some companies diversify through acquisitions, but most of Facebook’s purchases such as Instagram and WhatsApp have been in adjacent markets.

Chief financial officer David Wehner said in a conference call with investors on Wednesday Facebook was not breaking out Instagram revenue as a separate line in financial reports because Instagram ads are sold through the same interface as Facebook’s.

Additional reporting by Reuters.