Apple (AAPL 1.45%) posted a weaker-than-expected earnings report on Feb. 2, which it largely attributed to supply chain disruptions for the iPhone 14 and its sluggish sales of Macs and Apple Watches. The company offset some of those declines with the growth of its services business.
However, during the conference call, Apple didn't mention its long-awaited mixed-reality headset, which will likely launch this year. Many investors expect the device to diversify Apple's top line away from the iPhone -- which accounted for 56% of its sales in its latest quarter -- and enable it to challenge Meta (META 3.91%) in the nascent virtual reality market.
Image source: Getty Images.
But can Apple successfully expand into the VR market when Meta has only taken a few expensive baby steps over the past few years? Let's review what we know about Apple's headset and whether Apple will learn from Meta's mistakes.
What do we know about Apple's VR headset?
Apple has already rolled out augmented reality (AR) and virtual reality (VR) tools for iOS and iPadOS developers over the past few years. Its ARKit enables developers to access the depth-sensing cameras and sensors on iPhones and iPads to create AR apps, while its newer RealityKit adds more game-oriented features (like input control and multiplayer features) to those apps.
Those building blocks should make it easier for developers to create fully immersive AR apps for Apple's brand-new headset -- reportedly called the "Reality Pro" -- and run a new operating system called xrOS. Unlike Meta's Quest VR headsets that enclose their users in computer-generated environments, the Reality Pro is expected to be a mixed-reality device that can switch between AR mode, which digitally augments a user's surroundings, and full VR mode. It also, purportedly, can be used as an external display for Macs and will rely entirely on hand gestures instead of physical controllers.
Therefore, Apple's Reality Pro sounds more similar to Microsoft's (MSFT 2.44%) HoloLens -- which costs about $3,500 and is used for niche enterprise purposes -- than Meta's consumer-facing Quest headsets, which start at $399 (Quest 2) and top out at $1,500 (Quest Pro). However, Apple's Reality Pro could cost $3,000, even though it will presumably be aimed at mainstream consumers. Apple still has plenty of pricing power, but that would make the Reality Pro twice as expensive as its highest-end iPhone 14 Pro and nearly match the price of its top-tier M1 Max MacBook Pro.
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Will Apple learn from Meta's mistakes?
Apple's AR and VR strategies will likely differ from Meta's. Meta is selling its VR headsets at a loss to tether more users to its metaverse playground, Horizon Worlds. Unfortunately, that strategy doesn't seem sustainable.
Last June, Meta claimed it had sold nearly 15 million Quest 2 headsets worldwide. But as of last October, Horizon Worlds only hosted about 200,000 monthly users, or 1% of its headset buyers, according to leaked internal documents obtained by The Wall Street Journal. Meta's Reality Labs segment, which houses its VR hardware and software, racked up a staggering operating loss of $13.7 billion in 2022 while only generating $2.2 billion in revenues.
Apple doesn't sell its hardware as loss leaders, so the rumored $3,000 price tag for the Reality Pro should easily cover its production and marketing costs. Unlike Meta, Apple probably won't recklessly burn billions of dollars on its headset.
Apple also probably won't build a massive first-party metaverse platform like Horizon Worlds to host its users. Instead, it will likely encourage its ARKit and RealityKit developers either to create new xrOS apps or roll out new mixed-reality features for its existing services, like Apple TV+, Apple Music, Apple Arcade, and Apple Fitness+.
Apple ended its latest quarter with a whopping 935 million paid subscribers across all its services, giving it a tremendous audience for introducing its new headset-oriented features. Meta ended 2022 with 3.74 billion people monthly using its family of apps (Facebook, Messenger, Instagram, and WhatsApp), but it hasn't figured out how to break down those silos and pull those social media users into its virtual reality ecosystem yet.
Apple could disrupt the VR and AR markets
Apple didn't invent the first MP3 player, smartphone, tablet computer, or smartwatch, but it disrupted those markets with the iPod, iPhone, iPad, and Apple Watch, respectively, by learning from the mistakes of earlier movers. If it's following the same playbook with the Reality Pro headset, it could eventually disrupt the fledgling VR and AR markets.
Meta clearly made a lot of mistakes in its quest to conquer those markets first, and I believe Apple will learn from those blunders as it tries to build a more sustainable and profitable mixed-reality business. If that happens, Apple can finally expand its hardware business away from the iPhone while supporting a new ecosystem of mixed-reality applications.
