Facebook (NASDAQ:FB) CEO Mark Zuckerberg recently set a long-term goal of reaching a billion users with its virtual reality business. That ambitious target would make VR rival smartphones, which reached 1.5 billion users last year, a mainstream computing platform.
Zuckerberg should set some long-term goals for Oculus, which Facebook acquired for $3 billion three years ago, but a billion users sounds far-fetched. Let's take a look at how Facebook's VR business has fared so far to understand why reaching a billion users could be a pipe dream.
An unimpressive start
Back in early 2016, Facebook estimated that it could sell 600,000 Rift headsets by the end of the year. But it missed that target by a wide margin, with research firm SuperData reporting shipments of just 240,000 for the year.
Three major problems held the Rift back. First, its stand-alone price tag of $499 (now $399) was too high for most mainstream consumers. Second, the Rift needed to be paired with a decent gaming PC, which would cost at least $500. Lastly, the Rift was tethered to the PC with cables, and required motion-tracking sensors to track a user's movements.
Customers simply weren't willing to spend $1,000 on a cumbersome setup simply to experience cutting-edge technology. Instead, interested customers preferred Samsung's (NASDAQOTH:SSNLF) Gear VR, a $129 headset which was simply paired to its flagship phones. SuperData notes that Samsung dominated the market last year with 4.5 million Gear VR shipments.
That's why Facebook recently introduced Oculus Go, a $199 stand-alone headset which requires neither a PC nor a smartphone. It also introduced new features, like the Oculus Dash virtual workspace and Spaces app, which connects friends with VR avatars. This streamlined approach seems much cheaper and more appealing than the Rift, but it's still unclear if VR can win over mainstream consumers.
Why VR headsets aren't the next smartphones
Last year, Zuckerberg claimed that it would take ten years for VR to achieve mass market adoption as "the next major computing and communication platform." Unfortunately, recent forecasts and surveys indicate that it could take much longer.
Research firm IDATE DigiWorld estimates that the total installed base of VR headsets will rise from 10.9 million this year to 61.6 million in 2020. That year-over-year growth looks healthy, but those numbers are closer to shipments of gaming consoles rather than PCs or smartphones.
For example, Sony's (NYSE:SNE) PlayStation 4, the top-selling gaming console on the planet, shipped 63 million units worldwide within the past four years. Sony also offers a VR headset, the PlayStation VR, for its console gamers. But SuperData reports that Sony only sold about 750,000 units last year -- so the VR device is still widely considered an optional accessory instead of a new computing "platform."
Facebook might have bet on the wrong horse
Claiming that VR will reach a billion users also ignores comparisons with augmented reality, which projects digital objects on real-world environments. Tech M&A advisory firm Digi-Capital sees VR becoming a $25 billion market by 2021, but AR becoming an $83 billion one.
AR devices can reach a much larger market than VR devices, because they enhance the real world instead of locking users in a virtual space. This makes AR headsets -- like Microsoft's (NASDAQ:MSFT) Hololens and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) second-generation Google Glass -- more practical for enterprise and remote assistance uses.
Microsoft and Google also both dominate their own computing platforms -- PCs with Windows and smartphones with Android -- which makes it easier to expand their ecosystems to include AR features. That's why Microsoft is gradually adding AR features to Windows 10 with software updates, and why Google recently launched ARCore, a new platform for developing mobile AR apps. Apple (NASDAQ:AAPL) also recently introduced a similar kit called ARKit for iOS devices.
Facebook also dipped its toe in the AR market with AR Studio, but the platform is mainly used for Snapchat-like filters and masks, and pales in comparison to its investments in VR. Therefore, investors would be right to assume that AR apps -- which can run on mobile devices and headsets -- might reach a billion users long before VR ever does.
The bottom line
Zuckerberg believes that VR will become a major computing platform. I believe that it might become a decent gaming and entertainment platform, but it might only appeal to hardcore gamers or tech enthusiasts.
Therefore, I don't expect Oculus to become a major source of revenue for Facebook in the foreseeable future, and I doubt that its VR platform will reach a billion users within a decade. Instead, I expect Microsoft, Google, and Apple to take the lead in AR, which would have broader real-life applications than self-contained VR experiences.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Facebook. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.