Meta is opening a store as VR headset sales make play for mainstream

A good number of teenagers have virtual reality headsets, but have they starting using them in a way similar to smartphones? So far, the answer is no.

One-quarter (26%) of teens say they own a virtual reality headset, a level of VR device ownership that is higher than many expected, but with just 5% of teens saying they use the technology on a regular basis, the level of engagement remains “uncompelling,” according to the recently released Piper Sandler research report, “Taking Stock with Teens: Spring 2022.”

Usage of VR headsets is low due to a number of factors, from costs yet to come down into the range of most consumers, to an insufficient range of applications. But the latter shouldn’t present a problem to the eventual rise of a VR-enabled metaverse, since the metaverse may very well be the solution to that adoption problem. In terms of applications, there really isn’t that much out there yet, certainly nothing that has captured major interest.

Gaming, already at $200 billion in annual revenue with an estimated three billion players globally, is a natural on ramp for Gen Z and subsequent generations who will have exclusively grown up in the digital world. It is a target of Meta’s big tech rival Microsoft, which is spending close to $70 billion to acquire Activision Blizzard. A recent study of Gen Z gamers by Razorfish and Vice Media Group found that 20% of their entertainment/leisure budgets will be earmarked for in-game purchases over the next five years.

But to date, there are only a small number of VR games (just 3% of users on the popular gaming platform Steam have a VR headset).

Concerts and sports also have significant potential, but no real driver yet exists for either of these. Even education, where immersive class “field trips” to anywhere in the world are part of the collective imagining about VR’s benefits, has yet to take off in significant ways.

The metaverse is certainly the biggest application space for VR on the horizon, so perhaps the “Field of Dreams” approach — if you build it, they will come — can work. 

Certainly, Facebook parent Meta Platforms is betting on it as part of efforts to diversity beyond the ad revenue from its Facebook family of apps, including the core app, Instagram and WhatsApp, which accounted for 97.5% of revenue in the most recent quarter, close to $28 billion.

“Everybody’s talking about the metaverse,” Nicola Mendolsohn, Meta’s global business vice president, told CNBC from the sidelines of the Milken Institute Global conference last week.

But the revenue contribution for its Reality Labs division – the part of the company that’s designing products for the metaverse — was $695 million. Reality Labs remains a money sink, if a big bet on the future for the company, posting a loss of $2.96 billion in the first quarter results, compared with a loss of $1.83 billion in the first quarter of 2021. Executives indicated the while expenses will come in a little lighter than previous expectations, this unit will continue to be an area of expense growth. The company has devoted over $10 billion to build the metaverse.

The cycle between investment and “meaningful enough revenue growth” to be profitable is going to be long, according to the company. “I think it’s going to be longer for Reality Labs than for a lot of the traditional software that we’ve built,” Mark Zuckerberg, Meta CEO, said on the recent earnings call.

“We are making large investments to deliver the next platform that I believe will be incredibly important, both for our mission and business comparable and value to the leading mobile platforms today. Now I recognize that it’s expensive to build this. It’s something that’s never been built before.”

Amid the heavy spending, some experts say it’s possible that a major breakthrough occurs soon.

There has been significant innovation in VR already, says Sarah Ostadabbas, assistant professor of electrical & computer engineering at Northeastern University, so much so that she thinks widespread adoption may indeed be “just one or two killer applications away.”

“With high latency and poor headtracking, previous VR was basically useless,” she said, and added that Oculus has “already overcome these biggest limiting factors.” 

On Monday, Meta will open its first physical store and showroom for VR headset technology, where customers will be able to purchase the Quest 2 headset. It is also gearing up for a higher-end headset, currently referred to as Project Cambria and to be released later this year.

A case can be made that, given these tech advancements, the design side is where there is room for growth, a territory usually owned by Apple (long rumored to be developing a headset).

“It’s been rumored for years that Apple will release industry-disrupting AR/VR hardware,” said David Lasala, team lead, interactive development & XR technology at New York University.

But he says among active players right now, the clear front runner is the Meta (formerly Oculus) Quest 2. The second would probably be the Valve Index. Other headsets of note include the Lynx and Pico Neo. Also worth mentioning: Pimax, Varjo, HTC Vive, and there are still some Windows Mixed Reality activities.

But since Meta isn’t primarily a hardware company, there is significant freedom in the niche to let the best VR developments be used.

“I think they want to build the platform (OS),” Ostadabbas said. “Google got scared when Meta and other social networks locked them out, so they jumped on cellphones to avoid being kept out of these major sources of information. Similarly, Meta has found out the hard way what smartphone providers can do to hurt their business model with one policy change.”

Recent privacy restrictions on ad targeting from Apple and Google smartphone operating systems have cost Meta billions in ad revenue. The company’s CFO estimated the Apple changes could cost it $10 billion in revenue this year.

There are cautionary tales about owning the hardware, such as Google Glass, which has found only limited enterprise and industrial applications to date, and 3-D televisions.

Zuckerberg said on the last earnings call that “the best experience will be on virtual and eventually, augmented reality platforms, and especially on our platform like Quest,” but he added that the company plans to make it easy for people to enter the metaverse from more platforms, and “even without needing a headset.”

Whoever wins the hardware battle, if the tech works for consumers, there’s still the question of what people are going to actually be doing in the metaverse, and, really, what’s the point of all of it? Skeptics see hype and rebranding, and not much beyond that. A lot of the hype can be cut through by one word: presence.

“Aside from the immersivity, one of the most interesting differences between the metaverse and the internet is presence — your avatar,” Ostadabbas said.

While sitting in a meeting in the shape of a purple octopus may seem silly (because it is) there is something to be said for the underlying concept. “The internet is a source of information and people explore massive amounts of information without ever leaving a mark. Until you comment, you are invisible. With the metaverse, your avatar means that consumption requires presence, and so even exploration is active and interactive,” she said.

With presence comes Meta’s other promise (pulled along from its Facebook days): community, a word that has seen a lot of its meaning devalued by social media, but there is promise here too within the metaverse in the shape of community without any constraints as to real world geography. Most community building throughout life is tied, for the most part, to a fairly thin range of possibilities (school on one side of thirty, work on the other). “In the best scenario, someone figures out how to recreate this community experience in the metaverse and people’s lives are improved through a greater sense of belonging,” Ostadabbas said.

The centerpiece of Meta’s approach is the social platform called Horizon Worlds, and it has said that after building out “the experience, the next focus will be on growing the community.”

At its best, this will allow people to discover themselves more profoundly than ever before, according to Lasala — grow and heal, make art and learn. Grander claims can be made too, though they remain dubious. “I imagine if half the world’s population was meeting and working in VR versus commuting, it could slow the climate crisis,” he said. “But I have not done a deep dive into the carbon footprint of server farms and silicone productions compared to vehicles, so this might be wishful thinking.”

The worst case is easier to figure. Meta is convinced that the business model of today is the bridge to the business model of tomorrow. “It’s a new paradigm for computing and social connection,” Zuckerberg told Wall Street analysts and investors on the recent earnings call. “So over the next several years, our goal from a financial perspective is to generate sufficient operating income growth from family of apps to fund the growth of investment in Reality Labs, while still growing our overall profitability.”

But the metaverse could all very well be just “a cynical money grab used to monitor people at an even deeper level, with AR headsets allowing construction of deep social graphs and recording of interactions in a way previously not possible,” Ostadabbas said.

The algorithms whirr along, creating increasingly controversial stratification of people to amp up clicks and ad revenue, and if this is a business model that sounds familiar, it should. It’s the internet of Facebook and Alphabet, except this time around you’re a purple octopus in an Oculus. In fact, as Horizon rolls out across all platforms, the business will include some shorter cycles “that might resemble a little bit more what we’re used to with apps,” Zuckerberg told Wall Street analysts.

The company received recent blowback from creators for plans to charge high fees for virtual asset transactions.

Mendelsohn stressed that the company’s history is rooted in successful transitions.

“I’ve been at the company almost nine years. We’ve made some very strong pivots before,” she said, alluding to the shift from PCs to mobile, and the shift to Instagram Stories.

The fully realized version of the metaverse is, she said, “some years off,” but she added that it’s a continuum of where the company is today, and clients like Wendy’s that are already using video and ad products, and launched a world in Horizon Worlds with virtual restaurants last month.

“This is laying the groundwork for what I expect to be a very exciting 2030s,” Zuckerberg said.

—By Trevor Laurence Jockims, special to CNBC.com