Untethered Oculus would be too late to make Facebook a VR leader

Facebook has high ambitions for its acquisition of virtual reality (VR) headgear maker Oculus. Reports indicate it aims to launch a low cost wireless headset which will not need to be tethered to a handset or PC, which it believes could popularize VR in the same way that the iPhone made mobile apps ubiquitous.

Currently, VR has far more limited applications or appeal than the smartphone’s app store, but Facebook sees this as a chicken-and-egg issue – the more accessible VR technology is, the more uses will be found for it, well beyond its current heartland in gaming. And creating demand via better devices could be a trigger for mobile operators to upgrade their networks to support the low latency and high bandwidth needed for some VR activities. So for VR optimists, this could inject new usage and growth throughout the mobile value chain, providing a much-needed boost for service providers and device makers.

For Facebook itself, the aim is to assert greater control over the emerging new generation of web interfaces, chipping away at the dominance of Google and Apple in that arena; and of course, to drive usage of services it can monetize. It is betting that VR and augmented reality (AR) will move into the heart of the user experience once new devices, user interfaces and connectivity make this practical – becoming embedded in everyday interaction rather than a separate and niche activity.

That will require a significant change in the type of devices which can support VR (AR has already been addressed to a large degree on smartphones). Most people do not want to wear a headset in public, or spend $1,000 on a specialized helmet. There are cheaper headgear options which turn smartphones into VR players, like Samsung’s $130 Gear VR; or more expensive ones, like Facebook’s own $400 Oculus Rift, which link to PCs to support VR gaming.

Facebook’s new planned headset will sit between these two, at about $200, but will not need a PC or phone, according to sources who spoke to Bloomberg. It will ship next year and, according to Facebook insiders, create a new category with far broader popular appeal. Initially, the sources expect it to target the current VR applications – immersive gaming and some forms of video – but also to extend rapidly into the service closest to Facebook’s heart and wallet, social networking. Users could carry the lightweight device in their pocket or bag and use it to watch movies or interact with friends just as they would with a smartphone.

Here is the Facebook agenda – to sideline the Apple/Google-driven smartphone and insert another device and user experience, one which it drives, into everyday life. There are many uncertainties besetting this idea – not least that most specialized devices have been subsumed into the smartphone rather than the other way round. Once navigation, digital photography and video streaming became mainstream, the dedicated gadgets were cast away and the smartphone makers harnessed new chip and connectivity technologies to expand their own devices’ functions still further.

But Facebook CEO Mark Zuckerberg believes in VR as a device game-changer, and at last year’s developers’ conference, he talked up a “sweet spot” for a device that sits between the Gear VR and the Oculus Rift.

Currently, Oculus Rift is in fourth place in the VR headset market, behind Samsung (which has 22% share according to IDC analysts), Sony and HTC. IDC says 2.3m VR and AR headsets shipped in the first quarter of this year and it expects to see triple-digit growth in the second half of the year, though of course the rumored Oculus device will miss that surge, and this year’s holiday season.

Oculus has about 5% of the total, but thanks to Facebook, it has a broad developer base and the chance to push into mainstream applications like social media. The Bloomberg sources also pointed to a concerted effort to get the headset, and the experience, into China, where Google struggles against local rival Baidu. Oculus is said to be planning a China-specific version of the new device, branded by Xiaomi (Hugo Barra, who now runs the Oculus VR unit, was previously a Xiaomi executive).

Facebook and Xiaomi are not commenting on the reports, and nor is Qualcomm, which is reported to be providing the chipset, but if the product is to emerge next year, Facebook will be talking to content developers very soon to ensure the launch is accompanied by a bulging app store.

That is a significant challenge for Oculus to overcome: the VR app store wars. Facebook and popular gaming distributor Valve are fighting proxy wars in their respective app stores, Oculus Home and Steam. The app store is where the real money is to be made, and Facebook has poured millions into VR game development to flesh out its burgeoning Oculus ecosystem. These game exclusives should draw more gamers into the Oculus ecosystem, but haven’t yet. While Oculus Rift has received consistently positive reviews as a platform, it’s seen by many gamers as a closed platform, while HTC Vive and its Steam store are considered open. Regardless of the truth in that assumption, conventional gamer wisdom dictates it makes more sense to drop big bucks on HTC Vive instead of Oculus Rift. The sales numbers show it’s been just enough to tip the scales out of Oculus’s favor.

A new app store policy, then, may help the new device, if and when it arrives. But it may already be too late, especially if Samsung, Sony and HTC see significant growth during the holiday rush. Though one reason for Oculus’s low market share has been the cost of its headset (once $600, now down to $400) – a problem which the new device would address – there are other factors at work. After all, HTC’s Vive VR headset sells for a whopping $800 – on top of the $1,000 for a PC with enough resources to power the headset – and yet HTC has been able to sell more units than Oculus and now has double its market share. A report from SuperData Research released at the beginning of 2017 estimated Oculus had sold 243,000 headsets, but HTC Vive had sold 420,000.

Zuckerberg had hoped to temper expectations for VR by saying he expects it won’t take off for another 10 years. That might be true for the social applications of VR – which naturally align more closely with Facebook – but while he waits for social VR apps to come to fruition, Oculus is being left in the dust by competitors.

There are other indications of Oculus’s poor performance. Earlier this year, Oculus announced it was closing nearly half of its Best Buy store demonstration booths, since the booths were going days without any visitors.

So what’s holding it back? And can Oculus regain that market share? Oculus has suffered a series of setbacks since launch. Supply chain issues introduced a few hiccups into shipments in 2016; and having addressed those, Oculus then received a dose of backlash after it was revealed that one of its founders, Lucky Palmer, was funding a group in support of Donald Trump. Oculus has also faced litigation from the developer ZeniMax Media, delivering another black eye to the platform.

And the company has had some trouble keeping up with its main competitor, HTC Vive. The world of VR is very clearly bifurcated between serious gaming applications, the kind that need high-powered PCs to run on, and casual gaming and novelty applications, the type that consumers are running on their smartphones. Oculus Rift sits squarely on the high end side of the VR spectrum, which means it competes more with PlayStation and Vive than Samsung and Google.

This is why a low cost Oculus-branded device could shift the goalposts – but may be coming to market too late to shake up the gaming space. If it has significantly different user experience, more geared to non-gaming usage and social media, it may indeed create a new category and attract a new breed of users. But in the VR market as it stands, Oculus has lost the initiative under Facebook’s stewardship.