Despite pandemic-related hardware shortages, Facebook’s virtual reality business exploded at the start of 2020. The company revealed yesterday that it made $297 million in non-advertising revenue during the first quarter of 2020. That was “driven largely by sales of Oculus products,” rather than other products like Portal.
The number is a full 80 percent higher than Facebook’s non-ad revenue in 2019’s first quarter, suggesting that the niche VR industry could be on the rise. But it also reflects a short window of incredible demand, which makes these staggering numbers a little harder to interpret.
Facebook’s Oculus Quest was one of the first VR devices that was both full-featured and fairly easy to use, and Facebook aspired to make it the first mass-market headset. Its wildest goals haven’t been realized, though. CEO Mark Zuckerberg aspired to getting a billion people in VR when he introduced the prototype, and he’s since acknowledged that could take a very long time. The Quest’s first few quarters produced solid but not extraordinary growth, ranging from 26 to 43 percent even during the headset’s first holiday season.
This sudden leap was probably driven by something outside Facebook’s control: Valve announcing Half-Life: Alyx in November 2019. Easily the most high-profile VR game ever released, Valve promoted the potential killer app alongside the company’s own $999 Valve Index hardware.
Suddenly, Half-Life fans needed a VR headset, and if they didn’t want to pay a thousand dollars for it, Oculus was the next place to look. The company had two alternatives selling for just $399: the Quest with the newly released Oculus Link system, which turned the relatively low-powered device into a high-end PC headset, and the Oculus Rift S, a dedicated PC headset. (The two options might also account for Facebook referencing “Oculus products” instead of singling out the Quest like usual.)
The Quest and Rift S both sold out in the months preceding Alyx’s March 23rd release, along with practically every other VR headset. Without hard numbers, it’s been tough to gauge whether a shortage indicates big sales or simply low supply — and the Quest’s ongoing production issues make it even harder. But the 80 percent jump in revenue makes it clear that Oculus was shipping a lot of headsets during that time, even if it wasn’t enough to meet the spike in demand.
On an investor call on Wednesday, Zuckerberg hinted that shortages are holding back sales. “Quest has surpassed our expectations,” he said. “I wish we could make more of them faster during this period.”
Zuckerberg offered an additional explanation for the increase: the pandemic-related shelter-in-place orders that have closed public spaces across the globe. “As people can’t go out and into the world as much, the ability to have technology that allows us to be physically present or feels present” gets more important, he says. “Whether that’s Quest or Portal or any of the software that we’re building around video presence, that stuff has certainly seen especially large spikes in usage. It’s possible that this accelerates some of the trends around things like virtual and augmented reality.”
These numbers — which cover January through March — probably don’t reflect that very well. The novel coronavirus outbreak was declared a pandemic in mid-March, and many shelter-in-place orders started closer to April. Much of China was locked down during January and February, but Oculus doesn’t ship the Rift S or Quest there. COVID-19 took many nations by surprise, and it’s unlikely people were preemptively stocking up on headsets for anything but Alyx.
Facebook’s non-ad sales are still minuscule compared to its ad revenue, of course. The company made over $17 billion in that category, and even with a recent downturn in advertising, Oculus (and Portal) sales numbers won’t be catching up anytime soon. But if Oculus products see big leaps during the rest of 2020, that would be huge news for Facebook and VR enthusiasts alike. Sales over the next few months — past Alyx’s release hype and during a widespread lockdown — will tell us more about the pandemic’s effect on headset demand.
As usual, Zuckerberg described VR as a “long-term vision” that hasn’t reached its peak, but he was tentatively optimistic. “I’m not sure what’ll happen there long-term,” he said. “But in the near term, I’m pleased with how Quest is doing and I wish we could make more of them.”
Oculus’ success last quarter comes with a lot of uncertainty. Will Alyx’s popularity keep people jumping into VR as more headsets become available, and will other games fill the demand for new content? Will supply chains stay stable enough to keep the Quest and Rift S in stock? Will people want to spend hundreds of dollars on a headset during the current economic free-fall? And even if VR as a whole keeps growing, will other companies introduce new headsets to compete with Oculus — like an upcoming Valve device that could be less expensive than the Index? Even so, this helps bolster the evidence that the Alyx launch was a big deal for VR sales. And for an industry that’s been slow to take off, even a temporary bump is good news.