During Facebook’s Q4 2020 earnings call today, CEO Mark Zuckerberg said that Quest 2 “is on track to be the first virtual reality headset”, noting that the device has seen an increase of 156 % in the company’s non-advertising revenue.
In previous calls, Zuckerberg has generally underestimated the company’s XR business as a forward-looking investment that was not expected to pay for years. His tune changed especially in the company’s latest earnings call, where he told investors that Facebook’s XR venture is “one of the areas I’m most excited about about our progress in 2021.”
Although Facebook has so far not confirmed how many Quest 2 units have been sold, Zuckerberg was excited about the sales of the headset and said he believes it is “on track to be the first virtual reality headset.”
It is not entirely clear what he means by ‘mainstream’, although we have one good guess. At Oculus Connect 5 in 2018, the company’s annual XR developer conference, Zuckerberg explained that he believed that 10 million VR users was a major milestone for the company in creating a sustainable ecosystem for VR developers.
Image courtesy of Oculus
The big question is what is it necessary to be profitable for all developers to build these big efforts for VR? To get to that level, we think we need about 10 million people on a given platform. This is the threshold where the number of people using and buying VR content makes it sustainable and profitable for all types of developers. And once we get over this threshold, we think the content and the ecosystem are just going to explode. It is important that this threshold is not ten million people in different types of VR. Because building a game for Rift does not necessarily work on Go or PlayStation VR. So we need 10 million people [one] platform.
Although Quest and Quest 2 have probably not yet sold 10 million units, Zuckerberg’s confidence that Quest 2 could become the ‘first mainstream virtual reality headset’ suggests that the 10 million unit threshold may appear within reach.
“In previous quarters, I talked about our long-term virtual reality goals,” Zuckerberg told investors, “but I think the results of this quarter show that this future is here.” He further believes that “more than 60 Oculus developers earn millions in revenue, and that’s more than twice as much as a few months ago.”
Zuckerberg also said that Quest 2 was ‘one of the hottest gifts of the year,’ and that it played a key role behind the company’s $ 885 million Q4 revenue without advertising. Sheryl Sandberg, chief operating officer of Facebook, said in the call that it was a year-on-year increase of 156%, specifically noting that it was “due to strong Quest 2 holiday sales.”
Image courtesy of Facebook
Some math behind the envelope can give us an estimate for Quest 2 unit sales in Q4. The company earns $ 855 million in non-advertising revenue, which includes both Oculus and Portal products. Since Sandberg points to Quest 2 as a major driver for growth without mentioning Portal, we can probably get at least 50% of the revenue from Oculus headphones.
From there, we can think that 75% of the headpieces sold are Quest 2, with the soon to be terminated Rift S making up the other 25%. We would also think that 75% of the Quest 2 units are the 64 GB model while 25% are the 256 GB model.
The assumption of these assumptions yields 1,000,000 Quest 2 units, but it needs to be linked back with a portion to offset the revenue from Facebook’s sales of content sales and first-party accessories.
Looking to the future, Zuckerberg has confirmed that Quest 2’s sequel is already under development.
‘We continue to work on new [VR] hardware too. The new hardware will fit on the same platform, so the content working on Quest 2 must be forward-compatible [with the new hardware], so that we will build one larger installation base around the virtual reality headers we have. ”
While this will not surprise anyone who pays attention, it stands in stark contrast to Sony – whose PSVR has long been at the forefront of VR headset sales – but it refrains from announcing any plans to ‘ to build a next – gen headset.
Facebook also made no secret of its plans to build an AR headset; the company shared a look at an early prototype last year. On the call, Zuckerberg confirmed plans to first start wearing smart glasses before launching full-fledged AR glasses in the future. He also mentioned Apple as a likely competitor in the AR landscape.
‘[…] If we move in the long run to build the next computer platform, I think we’ll see it [Apple] as more of a competitor [in AR] also.”
However, it is not clear whether Facebook has information about Apple’s XR plans, or that Zuckerberg refers to recent reports suggesting that Apple will launch its own headset next year.
