During Facebook’s Q4 2020 earnings call today, CEO Mark Zuckerberg said that Quest 2 is “on track to be the first mainstream virtual reality headset,” noting that the device drove a 156% increase in the company’s non-advertising revenue.
In past earning calls, Zuckerberg has generally downplayed the company’s XR business as a forward-looking investment that isn’t expected to pay off for years. His tune has shifted notably in the company’s latest earnings call, where he told investors that Facebook’s XR business was “one of the areas that I’m most excited about our progress heading into 2021.”
Although Facebook hasn’t confirmed how many Quest 2 units have been sold so far, Zuckerberg was upbeat about the headset’s sales performance, saying he believed it is “on track to be the first mainstream virtual reality headset.”
It isn’t entirely clear what he means by “mainstream,” though we have one good guess. At Oculus Connect 5 in 2018, the company’s annual XR developer conference, Zuckerberg explained that he believed that 10 million VR users was an important milestone for the company to reach in order to make a sustainable ecosystem for VR developers.
The big question is what is it gonna take for it to be profitable for all developers to build these large efforts for VR? To get to that level, we think that we need about 10 million people on a given platform. That’s the threshold where the number of people using and buying VR content makes it sustainable and profitable for all kinds of developers. And once we get across this threshold, we think that the content and the ecosystem are just going to explode. Importantly, this threshold isn’t 10 million people across all different types of VR. Because if you build a game for Rift, it doesn’t necessarily work on Go or PlayStation VR. So we need 10 million people on [one] platform.
So while Quest and Quest 2 likely haven’t sold 10 million units yet, Zuckerberg’s confidence that Quest 2 could become the “first mainstream virtual reality headset” suggests the 10 million unit threshold may appear within grasp.
“In previous quarters I’ve talked about our long-term future goals when it comes to virtual reality,” Zuckerberg told investors, “but I think that this quarter’s results show that this future is here.” He further shared that “more than 60 Oculus developers are generating revenue in the millions, and that’s more than twice as many as a few months ago.”
Zuckerberg also said that Quest 2 was “one of the hot holiday gifts this year,” and was a major driver behind the company’s $885 million Q4 non-advertising revenue. Facebook’s Chief Operating Officer, Sheryl Sandberg, said on the call that this was a year-over-year increase of 156%, and specifically noted that it was “due to strong Quest 2 holiday sales.”
Some back-of-the-envelope math can give us a ballpark estimate for Quest 2 unit sales in Q4. The company earned $855 million in non-advertising revenue, which includes both Oculus products and Portal products. With Sandberg pointing to Quest 2 as a major driver for the growth without mentioning Portal, we can probably safely figure at least 50% of the revenue was from Oculus headsets.
From there we might figure that 75% of the headsets being sold are Quest 2, with the soon-to-be-discontinued Rift S making up the other 25%. Similarly, we’d figure that 75% of Quest 2 units sold are the 64GB model, while 25% are the 256GB model.
Plugging in those assumptions yields 1,000,000 Quest 2 units, though that would need to be dialed back by some portion to account for revenue from Facebook’s cut of content sales and first-party accessories.
Looking to the future, Zuckerberg confirmed that Quest 2’s successor is already in development.
“We’re continuing to work on new [VR] hardware as well. The new hardware will fit the same platform, so the content that works on Quest 2 should be forward-compatible [with the new hardware], so that we’re going to build one larger install base around the virtual reality headsets that we have.”
While this won’t be a surprise to anyone who has been paying attention, it does stand in stark contrast to Sony—whose PSVR has long held the lead in VR headset unit sales—but has refrained from indicating any plans to build a next-gen headset.
Facebook has also made no secret about its plans to build an AR headset; the company shared a look at an early prototype last year. On the call, Zuckerberg affirmed the plans to start first with smartglasses, before launching full-blown AR glasses further in the future. He also called out Apple as a likely competitor in the AR landscape.
“[…] longer term, as we move toward building the next computing platform, I think we would expect to see [Apple] as more of a competitor [in AR] as well.”
It isn’t clear though if Facebook has some inside info on Apple’s XR plans, or if Zuckerberg is referring to recent reports suggesting that Apple will launch its own headset next year.