Facebook (NASDAQ:FB) recently hired Hugo Barra, the former international VP of Chinese smartphone giant Xiaomi, as its new virtual reality chief. The announcement came just a week after Barra abruptly left Xiaomi after heading its overseas expansion for three and half years.
Prior to joining Xiaomi, Barra was the VP of Android at Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google, and oversaw the operating system's growth between 2010 and 2012. Looking ahead, what can Barra's move to Facebook tell us about Xiaomi's future in phones and Facebook's future in VR devices?
What Barra's departure means for Xiaomi
Barra's departure is bad news for Xiaomi, which lost its crown as the top Chinese smartphone maker last year due to fierce competition from domestic rivals like Oppo, Vivo, and Huawei. Last November, Barra admitted that Xiaomi wasn't making a profit on its smartphone sales, but that software and services revenue might eventually offset that slowdown.
Xiaomi's total sales were flat in 2015, and the company recently stopped releasing annual sales figures. It also reportedly won't attend the Mobile World Congress in Barcelona this year. These red flags all indicate that Xiaomi, which was valued at $46 billion in 2015, likely grew too fast and couldn't capitalize on its brief reign at the top of the Chinese market.
Therefore, Xiaomi might need to focus on strengthening its core Chinese market before aggressively expanding into overseas markets like Brazil, Mexico, and Russia. Barra's departure to lead Facebook's VR efforts is also interesting, since Xiaomi has been expanding into the same market. The company launched its Cardboard-like Mi VR Play and the pricier Gear VR-like Mi VR last year, but it's unclear if Barra was involved with those devices.
But Oculus VR is also in trouble
Barra will take control of Oculus VR, which Facebook bought for $3 billion in 2014, during a challenging time. First, game publisher Zenimax is suing Facebook for $6 billion, alleging that much of the Oculus Rift's technology was built on its intellectual property and code. Zenimax claims that John Carmack, who served as the CTO of Oculus VR while working at Bethesda's id Software, enhanced the Rift with Bethesda's technology and the assistance of other Bethesda employees.
Second, demand for the Rift has been sluggish, due to its $600 price tag and its need to be tethered to a high-end gaming PC -- which can cost about $1,000 more. Steam's most recent survey indicates that just 0.12% of its users owned the commercial version of the Rift, and research firm SuperData estimates that Oculus only sold 355,000 units last year.
By comparison, Sony (NYSE:SNE) was expected to sell about 2.6 million PlayStation VRs, and Samsung (NASDAQOTH:SSNLF) was expected to sell 2.3 million Gear VRs. Even Google's new Daydream platform was projected to fuel sales of 450,000 compatible handsets. Those numbers clearly indicate that consumer demand for cheaper devices linked to smartphones or gaming consoles could continue outselling higher-end devices tethered to pricier PCs -- which would be bad news for Oculus.
The Oculus ecosystem needs an architect
Facebook's hiring of Barra likely has more to do with his time at Google than his time at Xiaomi. That's because Facebook is currently trying to make Oculus Home, which is available on Rift and Gear VR, a next-gen VR app ecosystem which can counter Google Play and the iOS App Store. Just like Google, Facebook retains a 30% cut of Oculus app store sales.
Oculus has already added virtual rooms for chatting with friends, an area for playing social games with other users, and a VR "apartment" for organizing and launching apps. While those features sound revolutionary, Oculus Home often fares poorly in head-to-head comparisons against Steam VR, which integrates more smoothly into a user's existing library of PC games.
Since Barra helped shape Android through its 3.0+ to 4.0+ incarnations, he could potentially help Oculus Home finally evolve into a full-fledged app ecosystem. That would widen its moat against Google, which is trying to establish its own next-gen VR ecosystem with its Daydream app. It would also build the foundations for a VR version of Facebook, in which users visit their friends in VR environments.
The key takeaway
Investors shouldn't assume that Barra's resignation from Xiaomi was due to its recent struggles, since he stated that his departure had more to do with his "health" and his desire to be closer to his friends and family in Silicon Valley.
They also shouldn't assume that Barra can turn Oculus Home into a formidable rival to Steam VR and Daydream. However, Barra's new position indicates that Facebook is serious about expanding Oculus as a new computing platform -- and rivals like Google should keep a close eye on that growth.