Facebook (NASDAQ:FB) is ramping up the production of its Oculus VR headsets by up to 50% this year, according to the Nikkei Asian Review, with a target of two million devices. That's an ambitious goal, since Facebook's newest headset, the stand-alone Oculus Quest, only hit 705,000 shipments last year, according to SuperData.

Facebook remains the market leader in VR headsets with a 35% share, according to TrendForce, and the Nikkei report implies it will double down on the growing market with new headsets. Let's dig deeper into those plans, and whether or not they'll expand Facebook's ecosystem and diversify its core business away from online ads.

A gamer plays Beat Saber on Facebook's Oculus Quest.

Image source: Oculus VR.

The evolution of Facebook's VR strategy

When Facebook acquired Oculus six years ago, the VR company developed pricey headsets that were tethered to high-end PCs. Its first commercial headset, the Rift, mainly attracted hardcore gamers and developers when it launched in 2016.

Meanwhile, most mainstream users got their first taste of VR through cheaper Cardboard-like accessories for smartphones. These devices offered more freedom than PC-based VR headsets, but they were ultimately limited by a phone's processing power. Constantly putting smartphones into the headsets and removing them was also a cumbersome process.

To address those limitations, Facebook launched the stand-alone Oculus Go, which wasn't tethered to a PC or phone, in 2018. The Go wasn't as powerful as the Rift, but it attracted more users and reportedly topped two million shipments the following year.

The Go's success paved the way for the Quest, a pricier and more powerful stand-alone headset that added six degrees of freedom (6DOF) for more complex VR actions, which launched last May. In addition to running stand-alone games, the Quest could also run PC games via a USB cable.

In June, Facebook announced it would discontinue the Oculus Go to "double down" on improving the Rift and Quest. That announcement, along with the recent acceleration in its hardware production, suggests Facebook could launch successors to the Rift S (which succeeded the original Rift) and the Quest later this year.

A woman plays Beat Saber on the Oculus Quest.

Image source: Oculus VR.

Building a platform for VR content

In May, Facebook revealed it sold over $100 million in VR content for the Quest over the past year. That announcement implied each Quest owner bought over $140 in content for their $400-$500 headsets, and that Facebook's plans for building a sprawling VR world for video games, media, and social interactions were gradually taking shape. Like other app stores, Facebook retains a 30% cut of its Oculus content sales.

Facebook's core advertising revenue rose 17% annually to $17.4 billion last quarter and accounted for 98% of its top line. But its "other" revenue, which mainly consists of Oculus and Portal devices, surged 80% to $297 million, "driven primarily by sales of Oculus products."

That seems like a drop in the pond for Facebook, but CEO Mark Zuckerberg declared that the Quest not only "surpassed" his sales expectations during the conference call, but he wanted to "make more of them faster."

Extending its lead in the VR market

Sony (NYSE:SNE) and HTC are Facebook's two largest rivals in the VR headset market. But Sony, which recently ramped up production of its PS5, isn't a direct competitor since its PSVR headsets are only designed for PlayStation consoles.

HTC launched two stand-alone VR headsets, the Vive Focus and Focus Plus, over the past two years. But instead of challenging Facebook in the mainstream market, HTC is marketing those headsets to enterprise users.

HTC recently revealed a new prototype stand-alone headset called Proton, but it's unclear if the device will target mainstream or enterprise users. For now, HTC remains committed to the high-end PC gaming market with its new Cosmos headsets. Facebook might launch a new Rift headset to challenge HTC in that slimmer market, but launching a new Quest headset could build upon the mainstream momentum of its previous stand-alone devices.

The bottom line

The VR market is still a nascent one, and Facebook's Oculus sales won't reduce its dependence on ads anytime soon. But Facebook is clearly dedicated to extending its first mover's advantage in this market, and planting those roots today could assert its dominance over the next-gen computing platform in the coming decades.