Coming out of the holidays, there is a larger increase in attention on the growth of VR than we have ever seen. For the first time ever, holiday search volume in the US for the Oculus exceeded all other major gaming consoles (PlayStation 5, Nintendo Switch, and Xbox) (Source).
Between Christmas and New Years, there were ~2m downloads of the Oculus Quest App, the mobile companion for Oculus VR devices including the Quest 2. This is 2.5x the downloads of the previous year (Source). At the CES tech conference this week, new VR/AR devices were announced by Playstation, Lenovo, HTC, Panasonic, Canon, and others.
As a team, this flurry of activity in VR sparked the internal debate of: “Is 2022 VR’s breakout year?”. For the purpose of this discussion, we define “breakout year” as the year when at least 25% of households have a headset and are using it at least once per month (for reference, >50% of households in the US have a gaming console). As of today, we estimate that <5% of households in the US have a headset and most owners of a headset are definitely not using it once per month.
Unit sales are growing: In 2021, Oculus sold more headsets than Microsoft sold Xbox’s at 8.1m and 8.0m, respectively (Source). At 8.1m units sold, Oculus sold 80% more units in 2021 than 2020, reflecting an 89% CAGR since 2018. Interest in VR/AR continues to grow, and over a third of Americans already use AR or VR products at least once a month (Source). The Consumer Technology Association, which organizes CES, predicted last year that more than 100m Americans will become first-time VR users in 2022.
New product optionality and accessibility: While Oculus is by far the most popular VR headset on the market today, some of the biggest tech companies in the world have also started to release their own headsets. For example, the HTC Vive Flow (marketed as a strong lightweight option) and the Varjo Aero (a premium powerhouse) were released late last year and catered towards different areas of the market. At CES, new VR/AR hardware was also announced by Sony, HTC, Panasonic, TCL, and Canon. On top of this, Meta announced Project Cambria, a next generation VR headset (XR Today). Continued R&D is a great signal for VR and will create optionality for consumers.
Dedicated content development: Content variety has been one of the major pain points of VR adoption. However, we anticipate that there will be an influx of developers moving to create quality VR content for the first time in 2022.
More money is being used to incentivize development in VR. In Q4 2021, Meta announced their $50m XR Programs and Research Fund which will be used to invest into “programs and external research” over the course of two years. The amount of VR content made by AAA-studios has also been lacking, yet developers are starting to focus more on VR. For example, historically, access to VR-adapted titles such as Grand Theft Auto and Red Dead Redemption was provided by modders (Source). Also, Sony announced during CES that they would be developing Horizon: Call of the Mountain, a new made-for-VR game that will take players inside the world of Horizon (Source).
Immersion in the “metaverse”: While we believe that access to the metaverse should be hardware agnostic, VR has the ability to augment a consumer’s experience of virtual worlds. Utilizing standard gaming hardware devices such as PC, mobile, and console lacks the feeling of “presence” and “immersion”.
Adoption is objectively still low: In comparing users across a company’s hardware ecosystem, dedicated VR user numbers are a small fraction. For example, analysts estimate that Sony sold 5.5m headsets between FY19 and FY21, which would be the equivalent of only 12% of the Playstation console units that were sold during this time (Source). Estimated Oculus users over the past 5 Years make up <3% of Meta users in NA and Europe (Source).
Hype around unit sales comparisons to consoles is misguided: While it may be true that Oculus sales were comparative, if not greater than Xbox sales in 2021, both Xbox and Playstation sales have been severely affected by supply chain issues since their 2020 release. Sony and Xbox have noted that their supply chain issues will likely continue to affect supply into 2022.
Hardware developments have not solved for session time: VR session time is historically lower than that of other gaming platforms. The average VR session playtime in 2020 was 32 minutes (not daily), a 30% increase year-over-year (Source) while the average gamer plays an average of 72 minutes per day. While also affected by limited engaging content, VR session time is primarily limited by hardware, which can cause dizziness and disorientation, loss of spatial awareness, eye soreness, and nausea. Currently, it is recommended that users take 15 minute breaks every 30 minutes of playtime (Source).These limitations will continue to impact long-term engagement with VR until these hardware limitations are solved.
Shortage of content: Oculus, the VR headset with the most purchases, has a limited content library. As of September 2021, there were only ~300 apps in the official Oculus Quest Store compared to the ~500 apps in Oculus App Lab, a distribution platform that allows devs to distribute apps directly to consumers via direct links or other platforms like SideQuest, without requiring store approval or sideloading.
While the amount of content on these platforms is growing, it is small relative to the amount of content on other platforms. Steam has >50,000 games (Source), Playstation has >5,000 games across both PS4 and PS5 (Source), Xbox has ~2,600 games (Source), and Epic Store has ~650 (Source).
Meta has severely limited the amount of content that makes it to the official Quest store through its strict content guidelines. As of September 2021, only 1 known app had been approved to be moved from the App Lab to the Quest Store. This will prove to disincentivize developers from building on their platform if they aren't able to get their games to the official Quest store. This also signals that VR content will trend towards exclusively gated content library by publishers (like we see between the Xbox and Playstation today), which is further signaled by Sony’s announcement of Horizon: Call of the Mountain as a PSVR 2 exclusive.
Conclusion: While we see the growth in unit sales and investment into hardware and content development as strong bullish signals, we do not think that 2022 is the breakout year for VR. In order to create a sustainable growth flywheel, we believe that we need to see serious content development and release (which takes 6-24 months), then consumer buy-in, adoption, and engagement which leads to feedback which can then inform both hardware and content development and growth. We do not anticipate this to occur until at least 2023, if not 2024. We are, however, bullish on the VR industry as a whole and plan to invest in its growth ahead of that breakout moment down the road.