Facebook's (NASDAQ:FB) takeover of Oculus VR in 2014 sparked a fierce land grab across the virtual reality market, as companies like HTC, Samsung, Sony (NYSE:SNE), and Alphabet's Google all launched their own VR headsets.

Unfortunately, mainstream consumers weren't as excited about the devices. Shipments of VR headsets fell year-over-year for four straight quarters through the second quarter of 2018 according to IDC, and many VR start-ups folded. However, the industry's losing streak reversed in the third quarter of 2018 with 8% growth in shipments, which likely continued in the fourth quarter.

Sony's PS4 and PSVR.

Sony's PS4 and PSVR. Image source: Sony.

Research firm SuperData recently reported that VR headset sales rose 30% to $3.6 billion in 2018, with two headsets -- Sony's PlayStation VR and Facebook's Oculus Go -- dominating the holiday quarter with 700,000 and 550,000 shipments, respectively. Facebook only shipped 160,000 of its pricier Oculus Rifts, while HTC shipped 130,000 Vives.

How did Facebook and Sony rise to the top?

Many consumers considered top-tier VR headsets like the Oculus Rift and HTC Vive to be too bulky and expensive. The Rift and Vive also had to be tethered to high-end gaming PCs, which limited their markets to a niche group of hardcore PC gamers.

Meanwhile, Samsung's Gear VR, Google's Cardboard, and Cardboard-like devices let users quickly convert their smartphones into cheap headsets, but these lower-fidelity experiences quickly burned out batteries, and the transitions between mobile and VR modes were time-consuming.

Therefore, Facebook realized that the "sweet spot" for the VR market was in cheap stand-alone devices that weren't tethered to PCs or phones. That's why it launched the Oculus Go, a wireless headset that didn't require a smartphone, for about $200 last year. It plans to follow up the Oculus Go with a more powerful stand-alone headset, the $400 Oculus Quest, this spring. SuperData expects Facebook to ship 1.3 million Quests this year.

Facebook's Oculus Go.

Image source: Oculus VR.

Sony has a captive audience with over 90 million PS4 consoles shipped worldwide, so it launched its PSVR headset as an accessory. This move eliminated concerns about high-end PCs, and consoles -- which are generally set up in larger areas than PCs -- offered gamers more room to move around.

The PS4 is the top-selling current-gen gaming console, so developers eagerly launched new VR games and added PSVR-exclusive features to their existing games. The reasonable $300-$350 price tags for the PSVR bundles -- which included the headset, camera, controllers, and one or two games -- also made it the cheapest high-end VR gaming option. SuperData also notes that "steep Black Friday discounts" gave the PSVR a big sales boost at the end of the year.

But a long way from moving the needle...

Facebook and Sony have established early leads in the VR market, but their VR users still account for tiny slices of their core markets.

The 1.1 million Oculus Go devices Facebook has shipped since last May account for less than 0.05% of the 2.3 billion monthly active users on its social network. Sony's 1.3 million PSVR shipments in 2018 accounted for just 1.4% of its installed base of 92 million PS4s. Simply put, Facebook and Sony could double their headset sales this year and still wouldn't move the needles for their core businesses.

But looking ahead, SuperData still expects annual revenues from XR (extended reality) devices to surge more than five-fold, going from $6.6 billion in 2018 to $34.1 billion in 2022 -- indicating that Facebook and Sony's tiny VR businesses could still have plenty of room to run.

If Facebook tethers more users to its VR devices, it can expand its social ecosystem by moving users away from PCs and phones toward VR/AR spaces. If Sony sells more PSVRs, it could widen its moat against Microsoft, which reportedly scrapped its VR headset plans last year. Over the long term, Sony and Facebook's VR headsets could help them stay ahead of the tech curve while expanding their digital ecosystems.

 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool owns shares of Microsoft. The Motley Fool has a disclosure policy.