Facebook (NASDAQ:FB) recently agreed to buy BigBox VR, the developer of the popular multiplayer game Population: ONE for an undisclosed sum. Population: ONE is a "battle royale" game similar to PUBG and Fortnite, but it's optimized for virtual reality headsets and emphasizes climbing, jumping, and flying.

Those unique features have made it one of the most popular games for Facebook's Oculus VR headsets since its launch nine months ago. The entire studio will join the Oculus division, where it'll presumably oversee Population: ONE's development and create new VR games.

A person uses an Oculus Quest 2 headset.

Image source: Oculus VR.

BigBox represents another addition to Facebook's lineup of VR game studios. It bought Beat Games, the developer of the musical game Beat Saber, in late 2019, then acquired Downpour Interactive, the developer of the VR shooter Onward, this April. Let's see why Facebook is expanding its VR gaming ecosystem, and if investors should expect these investments to boost its revenue anytime soon.

A tiny but growing business

Facebook bought Oculus VR in 2014, then launched the first commercial version of its Oculus Rift headset in 2016. But at the time, the Rift needed to be tethered to a high-end PC with cables.

As a result, the Oculus headsets remained pricey niche devices until Facebook launched the Quest, its first stand-alone VR headset, in 2019. The Quest was a lightweight wireless device that didn't require a PC or phone, so players could finally move freely as they played VR games.

The Quest 2 fared even better after its launch last October, and SuperData expects Facebook to ship at least 3 million headsets this year. That might seem like a small figure, especially compared to traditional gaming consoles, but it would make the Quest 2 the clear leader in stand-alone VR headsets.

Last May Facebook announced it had surpassed $100 million in content sales for the Oculus Quest in the first year. In September, it updated that figure to $150 million -- and noted that 35 Quest games had generated over $1 million in revenue. At the end of 2020, Facebook said more than 60 Oculus developers were generating revenue "in the millions."

Facebook retains a 30% cut of a developer's revenue on the Oculus platform. Therefore, it's smart for Facebook to buy top studios like Beat Games, Downpour, and BigBox and keep 100% of their revenue instead. Those studios could also develop more hit games for Facebook in the future.

But will these efforts boost Facebook's revenue?

Facebook generated 97% of its revenue from ads last quarter. The "other" segment -- which includes Oculus, its Portal smart screens, and payment fees -- accounted for the remaining 3% of its top line.

Based on those percentages, Oculus might seem insignificant. But if we examine the growth of Facebook's "other" business over the past two years, we can clearly see how the two Oculus Quest headsets boosted the segment's revenue.

Metric

FY 2019

FY 2020

Q1 2021

Other revenue

$1.04 billion

$1.80 billion

$732 million

Growth (YOY)

26%

72%

146%

Data source: Facebook. YOY = Year over year.

Facebook's Portal smart screens haven't gained much traction in the smart speaker and screen market against Amazon and Alphabet's Google, so we can safely assume most of the segment's growth came from Oculus.

The key takeaways

Facebook's VR business looks tiny today, but Fortune Business Insights expects the global VR market to expand from $3.1 billion in 2019 to $57.55 billion in 2027. We should take those rosy forecasts with a grain of salt, but they indicate Oculus could still have plenty of room to grow.

Over the next few years, investors should expect Facebook to continue launching new Oculus headsets and acquiring top developers. Over the next decade, those investments will likely bear fruit and support the growth of a market-leading VR hardware and software business, which could significantly reduce the company's overall dependence on targeted ads.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.