As Facebook quietly prepares to dominate virtual reality

AAccording to The Virgin, almost 20% of Facebook‘s (NASDAQ: FB) employees work exclusively in virtual reality (VR) and augmented reality (RA). In addition, the company has been acquiring small VR studios for years, and more recently BigBox VR (creator of Population: one, el Fortnite of VR) and Unit 2 Games (creator of Craya, a Roblox(real VR gaming platform), for undisclosed sums.

These ongoing investments in talent acquisitions and studies may seem strong for a business segment that accounts for less than 3% of Facebook’s frontline. But Mark Zuckerberg’s ambitious vision for virtual reality encourages a purchase that probably won’t stop soon. Is Facebook ahead of the game or will your Oculus VR company stop moving the needle?

Image source: Getty Images.

The future of virtual reality games

Zuckerberg has been talking about RV more than usual lately, in part thanks to the accelerated adoption of the Oculus Quest 2 VR headphones (according to Facebook, but the company does not explicitly report figures on the RV hardware sold). The CEO’s first main point of conversation in Facebook’s latest earnings report was VR and AR, predicting that “augmented and virtual reality will bring great value, both in people’s lives and in the economy in general “.

His enthusiasm for technology is not unjustified: Fortune Business Insights predicts that the global RV games market will reach $ 45.2 billion in 2027 (up from 5.1 billion in 2019). This translates into a compound annual growth rate (CAGR) of 31.8%, compared to a CAGR of only 5.3% of the global gaming console market during the same forecast period.

How Facebook advanced

Facebook’s strategy for dominating VR games is starting to be a solid foundation of technology and talent from developers. In the classic Facebook fashion, its main tactic has been to acquire existing VR software and hardware companies.

Since acquiring Oculus VR for $ 2 billion in 2014, the company has made significant progress in improving its VR hardware to better suit customer needs. The current Oculus Quest 2 is a standalone headset (meaning no cables break or become entangled while playing) and does not require any external devices (such as a console or PC). On the other hand, Sony‘s (NYSE: SONY) wired PlayStation VR headsets require a PlayStation console. The low-end wireless hardware of the Quest 2 combined with its lower price than any other major headset on the market gives Facebook a competitive advantage in terms of hardware.

But even the best VR headsets are useless without great games, which makes Facebook’s VR studio acquisitions crucial to building your VR ecosystem. With the acquisition of small but high-performing studios, Facebook is earning revenue from already popular VR games on Oculus and retains the best software developers to create exclusive content on the Oculus platform. Given the company’s standard four-year stock option buying schedule, studio developers like BigBox or Unit 2 are unlikely to jump in to work for a competitor anytime soon.

Why go ahead

If you’re familiar with Facebook’s business model, you’re probably wondering when ads come into play. The company has announced that it will begin testing ads on select Oculus platform games, but it is still up in the air what exactly the advertising experience will be like once testing begins and how VR gamers will react.

If the company can integrate ads without breaking the immersive gaming experience, it will help developers earn more revenue (thus attracting more developers to the Oculus platform) and could even make the games more realistic. For example, the actual ads that appear on TV screens and in game billboards would not break the immersion of gamers in their gaming world, although they would generate revenue for developers and Facebook.

Beyond attracting developers for top-notch content, Facebook has a unique advantage in attracting consumers as well: its large user base on social media. No other VR headset can offer such easy accessibility (low price, no console purchase) and such high potential for networking effects.

For example, it would be much easier for a friend to influence the purchase of a $ 300 all-in-one VR headset than a PlayStation console. i headphones, which would add up to more than double the cost of Quest 2. Make no mistake: Sony is a leading competitor in the VR gaming space and has shipped most VR hardware units so far, but the effects of the The company’s network is: it could be limited to existing PlayStation owners (about 15.7 million monthly active users, between the PS4 and PS5).

Facebook’s 2.8 billion monthly active users have much more potential to add value to the Oculus platform because of the large volume of players, especially when it comes to popular social RV games like Population: one, Craya, i Beat Saber Multiplayer (developed by another study acquired by Facebook, Beat Games). Social gaming experiences are intrinsically more valuable with more players.

While some VR multiplayer games are cross-platform (i.e., an Oculus player can play with a PS VR player), Facebook is likely to tighten its exclusive content offerings to attract and retain players. As long as the company deploys ad content in a relatively organic way for Oculus gamers, Facebook is poised to succeed in quickly gaining market share in virtual reality games.

What to look for?

While Facebook’s virtual reality gaming revenue is not explicitly reported (yet), the company’s “other revenue” business segment is primarily Oculus. In Facebook’s first quarter 2021 earnings report, this segment grew 146% year-over-year to $ 732 million, implying an impressive growth rate for the company’s RV business. In addition, Quest 2 has become the most widely used VR headset on the popular Steam gaming platform, and according to many estimates, Quest 2 sells at least twice as fast as PlayStation VR, despite lagging behind. in the current global market share.

Keep an eye on this “other revenue” segment in future earnings reports, as well as the difficult figures reported by the company on RV gaming revenue. The most prudent investors may also want to wait for Facebook to complete the in-game ad testing process before investing based on the company’s RV growth potential. It certainly poses a risk to user growth if your ad content doesn’t run smoothly.

It’s impossible to dive into all the points of Facebook’s value and growth history in a single session, but the stocks seem pretty valued given their growth potential; even FB is rated “undervalued” by Morningstar. The company’s wide economic gap in terms of social games is unmatched thanks to a large number of users and extensive user data, and these competitive advantages can easily translate into profits and market share for your business. of Virtual Reality Games

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