Who Will Win the Virtual Reality War?

Facebook kicked off a new wave of virtual reality buzz with its recent name change in October 2021 to Meta – as in the metaverse, a 3D virtual world originated from Neal Stephenson’s excellent novel Snow Crash. The name change signaled a shift away from the beleaguered social media platform and towards a new emergent business where Meta could use its cash hoard and early acquisition of Oculus to become the dominant player. Meta backed up their name with significant investments into VR research and development towards a virtual world (or store) that can connect the world over games, work, and NFT art.

Trends for VR and virtual reality reached their highest level in four years in the past couple of months (best all-time, short of the trailer release for Ready Player One in December 2017). Search volume for the Oculus Quest surpassed that of hotly sought consoles PS5 and Xbox. VR headsets reportedly sold in large amounts this past holiday season in another annual increase for the segment. Meta almost doubled its sales of Oculus VR headsets from 2020 from 3.5 million units to nearly 7 million units. Since Christmas, daily active users of Oculus have been up by 90% as VR app developers have been enjoying an incredible recent surge in demand for their products.

All of this adds up to Meta as the dominant early VR hardware developer – the company has the best selling VR headset in the Oculus Quest 2 and billions of cash available to spend and the intention to do so -- what can be more intent than its changed name in a nod towards the virtual future? Owning the VR headset market share won’t encompass all the money to be made in VR in the future, but it will likely be one of the most profitable positions. Consider Apple and Google, the two most dominant smartphone players. Would you rather be an app on their platform? Or would you rather be the entire ecosystem able to enforce a 30% revenue share from all purchases made in the metaverse? Software developers will make many billions in the VR industry, but no one stands to have the most dominant position than the one that can win the headset war.

It appears likely that we are in the nascent stage of VR hardware, similar to the early 2000s era of cell phones. Nokia was early to the mobile phone market and subsequently controlled 40% of the mobile market share by the 2007 release of the iPhone. Since that time, iOS and Android have eaten up all of the market formerly held by Nokia, Sony Ericsson, Blackberry, LG, and Motorola. The two combine to hold nearly 100% of the global mobile operating system market. A similar consolidation in the VR space isn’t inevitable but seems probable – the competitors vying for the top spot have all the resources to gain monopolistic power in the field by buying out start-ups and competitors and branching out to other business models.

For instance, we currently have a few potential different case models for the various VR hardware coming down the pipeline. The newly announced PSVR2 is entirely for gamers, with most likely little in the way of other uses, while the Quest 2 is at least partially becoming a hub for productivity applications such as workspace apps (like Immersed). I would guess the much-rumored Apple VR headset will have a more creative bent about creating digital art and perhaps even social hubs for congregating. Current rumors and second-hand sources have recently stated Apple is focusing on shorter-term usage than the always-on metaverse, as well as a price point in thousands – all of which adds up to a bent on creatives and professionals.

It makes sense for companies to focus on different use cases while the virtual market is in the early stages. It does not seem to make sense for the developer of a well-selling headset to not grow its market share by incorporating what works for the other headsets. VR headsets seem to have uses that should be largely redundant over time and focused on the same quality improvements like resolution and technical power. There may be more competitors in the VR headset market than in the duopoly between iOS and Android, but expect a couple to reign supreme and dominate the market through the same anti-competitive practices that Apple and Google have employed to get to their throne.

Currently, the list of potential winners of the headset war appears to be pretty short. Only Meta, Apple, Valve, HTC, and Sony seem to be in the game after Google seemingly dropped out after the failure of its Daydream headset. Apple is the only member of that group that hasn’t released anything, but rumors abound about a potential headset out as early as this year. Meta, HTC, and Sony are the top three competitors by a large margin (DPVR and Pico round out the top five), while Valve may have given up on its VR ambitions.

I wouldn’t count anyone out, even (especially?) Google, but it does seem like Meta, Apple, and Sony may be the elite long-term bets in the market. The money that Meta and Apple have in particular should give them a strong position in research and development, and for anything they can’t do themselves should be enough to acquire almost any company, and certainly any start-ups in the space. Meta is already trying to corner the VR market by buying up several app developers of successes on its Oculus App Store – the FTC launched a probe of Meta’s most recent purchase of Within.

“Meta’s first five VR app acquisitions went through without a hitch because they were too small to trigger a cursory review by U.S. anti-trust regulators. But those regulators are slowing down the $400 million-plus Supernatural deal, according to two people with knowledge of the situation. Shortly after Thanksgiving, the Federal Trade Commission opened an in-depth probe of the acquisition, meaning Meta may not be able to finalize the acquisition for another year, assuming the agency doesn’t formally challenge the deal in court, causing additional delays.”

Sony has about 16% of the market cap of Meta, but I include it because of its strong consumer electronics background and apparent moat in entertainment consoles. Of course, Apple has roughly the market cap of Sony in cash, and Facebook is not entirely far off either. Still, it is doubtful that an acquisition of that size could pass through anti-trust legislation in either Japan or America regardless of the current landscape of poor enforcement. In Sony’s corner, the company recently unveiled its PSVR2, the long-awaited sequel to the best-selling VR headset, until the Quest 2 surpassed it in 2021. The PSVR2 appears to be the most feature-rich headset so far and is likely to be the most affordable high-end headset – for PS5 users at least. Including the cost of the PS5, which is required for VR use unlike the Quest 2, makes the PSVR2 a much pricier option for consumers. The demand for the PS5 is currently robust, but due to supply shortages, the console is still only in around 14 million households. That is a potential limiting factor in the number of PSVR2 headsets that can be sold that other headsets do not hold.

I would bet on Sony competing on the best hardware, but likely to lack software support for the headset compared to its competitors. Sony has never been particularly a software company, and tying the headset operating system to the PS5 may not be competitive to a ground-up approach to VR. Meta has been in the game longest with Oculus and has a solid chance at the complete hardware and software package, but I also wouldn’t feel very comfortable betting on its metaverse integration. Meta hasn’t had many successful product launches in a long time, and they may not be able to compete in the long run with the developers at Sony and Apple. Sony and Apple have successful histories of integrated hardware and software with their devices, although I doubt anyone buys a PlayStation because of the operating system.

As for Apple’s case, well… it’s the most valuable company in the world with a $3 trillion market cap. And, they’ve been in this position before – the slow roll, attempting a product that can push a decent product to great. Like the mobile touchscreen, Apple wasn’t the first to market but rather the first to develop the minimum acceptable version able to convince a large crowd of its advantages. I think an Apple VR/AR headset could very well achieve similar success – the company certainly has the software and hardware chops to make it happen. However, the expected focus on high-end luxury experiences and creative development likely means a mass-market Apple headset is still quite a way off. The reports that Apple is focusing on “bursts of gaming, communication, and content consumption” rather than a metaverse is encouraging for my usage, but also lacks the strong growth messaging of a platform like Meta, which appears to intend to become a gatekeeper to the virtual reality ecosystem.

I didn’t cover augmented reality glasses such as Microsoft’s HoloLens mostly because it currently seems like there may be an opportunity for both a fledging AR and VR market. AR seems to have more productive real-world uses, while VR has a leg up in entertainment and computer workspaces. One may overtake the other, in terms of one headset or glasses interchangeably switching from AR to VR, but they also have such different physical functions that we may always prefer the immersive experience of VR for entertainment.

Virtual reality is here for a while. How long is that? Unknown. Although, with consumers’ love of screens and the lack of other excitable options to replace them, it seems plausible that VR will continue until the release of a Neuralink-esque brain-machine interface that could project images directly into your visual field. VR may never be as significant a change as the smartphone -- nearly every American not only carries a smartphone, but they are also crucial to everyday living. Still, the platform’s popularity will grow in the videogame and computing workspace industries as resolution and computing power increase over the next few years.