Facebook (NASDAQ:FB) recently introduced the Oculus Quest 2, its third stand-alone virtual reality (VR) headset. The Quest 2 costs $299, $100 less than the original Quest, and will start shipping in 22 countries on Oct. 13.
The Quest 2 sports a higher-resolution screen, a faster processor, and a lighter frame than the original. It can play the same games as the original Quest, as well as PC games via the Oculus Link cable.
Facebook's announcement wasn't surprising, since a Nikkei report in July claimed the tech giant would ramp up its production of Oculus headsets by up to 50% this year with a target of 2 million devices. But the upcoming launch of the Quest 2 could significantly expand Facebook's lead against its rivals in the nascent VR market for three simple reasons.
1. Facebook enjoys a first-mover's advantage
Six years ago, Facebook acquired Oculus for $2 billion in cash and stock. The acquisition raised eyebrows, since Oculus hadn't launched a single commercial product yet. Its high-end headset, the Oculus Rift, was still a pricey device aimed at developers instead of consumers.
In 2016, Facebook launched Oculus' first consumer headset, the Rift CV1. The device cost $600 and needed to be tethered to a high-end gaming PC, but it gave Facebook a first-mover's advantage in the VR headset market.
Facebook capitalized on that early lead to expand Oculus' portfolio with the Rift S, which succeeded the CV1 last year, and its Go and Quest stand-alone headsets -- which didn't need to be tethered to PCs.
That expansion enabled Facebook to top the VR headset market with a 35% share last year, according to Trendforce. Sony (NYSE:SONY), which ranked second, doesn't directly compete with Facebook because its VR headsets are tethered to its PS4 consoles.
2. Facebook has cornered the market on stand-alone devices
SuperData estimates stand-alone VR headsets accounted for 49% for all VR headset sales last year. Within the stand-alone market, the Oculus Quest only faced a few smaller competitors -- most of which used Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) discontinued Daydream VR platform.
The Quest seemingly struck the right balance between phone-based VR headsets, which offered less immersive experiences, and PC-based VR headsets, which required cumbersome cables and high-end hardware. The Oculus Link also allowed gamers to quickly alternate between stand-alone and PC-tethered games.
At this rate, it will be tough for any new competitors to enter the stand-alone headset market. Facebook reportedly shipped 705,000 Quest headsets last year, according to SuperData, but its rumored production goal of 2 million headsets this year -- and its decision to align its entire headset business behind the Quest 2 by discontinuing the Go, Rift S, and first-gen Quest -- suggests its shipments could easily double in 2020.
3. A low price tag and pent-up demand
Back in late April, Facebook CEO Mark Zuckerberg claimed the Quest "surpassed" the company's expectations, and said he wished the company could "make more of them faster" throughout the COVID-19 crisis.
Facebook's decision to ramp up Oculus production -- then slash its price to $299 -- indicates it plans to make up for lost time. The Quest 2 is still $100 more expensive than the weaker stand-alone Go, which lacked six degrees of freedom (6DOF) movement, but customers were clearly willing to pay $399 for the first-gen Quest's beefier hardware and 6DOF capabilities.
Facebook can likely take a loss on each Quest 2 headset for two simple reasons. First, it can easily offset those losses with the growth of its core advertising business. Second, it can recoup those costs by retaining a 30% cut of VR content sold on the platform. Back in May, Facebook announced it sold over $100 million in VR content for the Quest over the past year -- which implied each Quest owner bought roughly over $140 in content for their headsets.
Therefore, Facebook will likely sell the Quest 2 at a loss to plant the seeds for the growth of its VR ecosystem -- which could eventually support Zuckerberg's long-term goal of turning VR into a full-fledged computing platform for over a billion users.
The key takeaway
The Oculus Quest 2 won't significantly reduce Facebook's dependence on ads, which still accounted for 98% of its revenue last quarter.
But it will likely extend Facebook's lead in the VR headset market, and put it in pole position to profit from the growth of the VR market -- which could still grow at a compound annual growth rate of 21.6% between 2020 and 2027, according to Grand View Research.
If Facebook continues to refine its headsets and expand its VR platform of games, media, and social experiences, it could greatly extend its reach beyond PCs and mobile devices and widen its moat against its tech ecosystem rivals.