Virtual reality is still searching for a way to pull in the masses, with Facebook aiming to win big by prioritising social networking.
That $2 billion Facebook (NASDAQ:FB) paid for Oculus — the virtual reality company it bought in 2014 — well, it was more like $3 billion. In a testimony during an ongoing lawsuit involving Oculus, Facebook CEO Mark Zuckerberg revealed that his company paid an additional $700 million to retain Oculus employees and another $300 million for the team to hit certain milestones.
WHAT’S MORE, HE ADDED THAT FACEBOOK WILL PROBABLY INVEST ANOTHER 3 BILLION
What’s more, he added that Facebook will probably invest another $3 billion in virtual reality over the next decade in an effort to get the technology into the hands of hundreds of millions of people. Zuckerberg is unabashedly a huge believer in virtual reality, calling it “the next big computing platform” after smartphones and tablets. But virtual reality device sales have lagged behind initial expectations. Should investors worry that the company is making a big bet that won’t pay off?
The hit new product of 2016 that never was
There was a lot of hype around virtual reality headsets going into 2016. Facebook was set to release the Oculus Rift — its high-end standalone headset — early in the year, and it would build on the success of Gear VR, its collaborative project with Samsung. HTC and Sony(NYSE:SNE) also entered the market with high-end devices. Google — the Alphabet subsidiary — entered the lower end of the market late in 2016 with its DayDream Viewer, which works with the new Pixel smartphone.
But sales failed to live up to initial expectations. While Oculus products fared relatively well, the Sony PlayStation VR and Google DayDream did not. Research group SuperData initially expected Sony to sell 2.6 million PlayStation VR units in 2016 but revised that estimate down to less than 750,000. Likewise, Google Daydream sales estimates were slashed from 450,000 to 261,000.
THE PLAYSTATION VR SALES ARE MOST DISAPPOINTING
The PlayStation VR sales are most disappointing. The biggest gripe with high-end devices such as Oculus Rift or HTC Vive is that you need a relatively high-end computer to power them. Sony looked to take advantage of its existing PlayStation 4 user base to power PlayStation VR. Its low sales indicate that a powerful computer isn’t the only thing holding back VR headset sales.
Zuckerberg admitted that virtual reality isn’t where he wants it to be yet. “It’s going to take five or 10 more years of development before we get to where we all want to go,” he said in his testimony. That echoes comments he made during Facebook’s first quarter earnings call last year: “This is very early, and we don’t expect VR to take off as a mainstream success right away.”
Still, he added, “Eventually we believe that VR is going to be the next big computing platform, and we’re making the investments necessary to lead the way there.”
$3 billion of investments
If virtual reality is going to be the next great computing platform, it’s going to take a lot of work to get it there. During the company’s fourth quarter 2015 earnings calls, Zuckerberg said, “VR has the potential to change the way we live, work, and communicate.” But right now, it’s only changing the way we view videos and play a few video games.
FACEBOOK HAS ALREADY DEDICATED 250 MILLION TO DEVELOPING NEW CONTENT
To that end, Facebook has already dedicated $250 million to developing new content. Comments from the company’s third quarter earnings call indicate that most of that amount will go toward developing new software instead of videos. Oculus users already watch lots of video — two million cumulative hours as of the first quarter last year.
Whether that software is simply games or more social applications, as Zuck says VR has the potential for, remains to be seen.
How will this affect Facebook?
While $3 billion sounds like a lot, consider that over a decade, that’s just $300 million per year. Facebook’s free cash flow over the past four quarters totaled $8.7 billion, and it has $26 billion in cash and liquid investments on its balance sheet.
Also worth noting is that Facebook’s core ad revenue is already so large that investors probably won’t notice any material impact from Oculus sales in the near term. CFO Dave Wehner told analysts at the beginning of last year that VR is “not going to have a material impact on revenue in 2016.” I’d expect a similar sentiment in 2017. But if Facebook’s investments in Oculus pay off, and it truly does become “the next big computing platform”, the revenue from VR could eventually make a sizable contribution to the company’s top and bottom lines.