Meta Platforms (META 0.03%) has been partnering with Qualcomm (QCOM 1.21%) for years to develop virtual reality (VR) applications, and the two companies have now taken another step to strengthen their relationship.
On Sept. 2, Qualcomm and Meta announced at the IFA 2022 trade show in Berlin that they have signed a multiyear agreement under which the former will be making custom chips to power Meta's Quest devices. Qualcomm will be using its Snapdragon XR extended reality platform to make customized chips that will go into future Quest VR headsets.
It is worth noting that Qualcomm already powers the Meta Quest 2 headset, and this long-term collaboration means that the chipmaker is now well placed to tap into a huge opportunity. Let's take a closer look at the details of this partnership and see how it could favor both tech giants in the future.
Qualcomm can win big from the fast-growing VR headset market
IDC estimates that the demand for VR headsets is set to take off over the next few years. The market research firm forecasts VR headset shipments to hit 13.9 million units in 2022, up 26% over last year. By 2026, IDC sees annual VR headset shipments of nearly 35 million units. That's not surprising as VR headsets will be the gateway to the metaverse for users looking to transport themselves into virtual worlds to work, play, socialize, study, or collaborate with the virtual avatars of other users.
As it turns out, Meta is currently the leading player in this market with an estimated share of 90% thanks to its popular Quest 2 VR headset that uses Qualcomm's Snapdragon XR2 platform. So, Qualcomm already has a foot in the door in this fast-growing market. And now, its status as a supplier of custom chips to market leader Meta for its future VR headsets and other products bodes well for Qualcomm's Internet of Things (IoT) business.
Though Qualcomm doesn't spell out how much revenue it gets from selling chips based on the Snapdragon XR platform, it includes sales from this product line in the IoT segment. The good news is that the company's IoT segment has been doing very well. Its revenue was up 31% year over year in the third quarter of fiscal 2022 (for the three months ending June 26, 2022) to a record $1.83 billion.
Qualcomm serves multiple verticals through its IoT business, such as industrial applications, consumer devices, wireless connectivity, and robotics. The impressive growth of this segment indicates that the chipmaker is doing well in these areas, and the VR platform is likely to be another key cog in the IoT business' future growth thanks to Qualcomm's Meta partnership.
Meta Platforms will aim to maintain its headset dominance
We have already seen that Meta is the dominant player in the VR headset market with a near monopoly-like position. This indicates that its reliance on Qualcomm's chips for powering its VR headsets has paid off nicely so far. And that's the reason why Meta now needs Qualcomm more than ever before new competition from the likes of Apple arrives.
Meta CEO Mark Zuckerberg said that developing custom chips for VR headsets in association with Qualcomm will allow the tech giant to push the envelope and "build more advanced capabilities and experiences for virtual and augmented reality." It is not surprising to see why Zuckerberg is focused on enhancing the VR experience for users.
The company's revenue from the Meta Quest store has quadrupled in three years. The store was launched in 2019 and passed $1 billion in cumulative revenue in February 2022. It is worth noting that the average monthly revenue from the Meta Quest store hit $51 million in February this year from $12.4 million in mid-2020.
This suggests that Meta Quest users are increasingly spending more money on games, applications, and other VR-related content. That's why it would be important for Meta Platforms to maintain its dominant position in the headset market -- there is a massive content opportunity that the company could tap.
The VR software market could generate nearly $5.5 billion in revenue by 2027 as compared to this year's estimates of $2.4 billion. The overall VR market, including sales of both software and hardware, is expected to clock annual growth of 15% through 2030.
As such, there is a big incentive for Meta to hold on to its pole position in the budding VR headset market considering the impressive end-market opportunity on offer, as success here could give its growth a nice boost in the long run.
