- Facebook has announced that its virtual reality headset Oculus Rift will start shipping in March.
- The device will cost about $200-$250 more than leading console gaming devices.
- The all-in cost for Oculus Rift will, however, be much higher due to the cost of PC and graphics required to power the device.
- This might severely limit sales until Facebook can figure a way of bringing down those costs.
Virtual reality was once the stuff of science fiction, but might not remain that way for much longer. Facebook (NASDAQ:FB) has finally announced that its much-hyped virtual reality set, the Oculus Rift, will start shipping in late March at a cost of $599. The VR headset, which is considered the early market leader, will come with an Xbox One controller from Microsoft (NASDAQ:MSFT), a remote, and a couple of games.
Oculus Rift will therefore cost about $200 more than Xbox One and $250 more than Sony’s PlayStation 4. That does not seem to be too high a price to pay for a considerable step up to the arcane world of VR gaming. But that’s only part of the story. The all-in cost of Oculus will actually clock in around $1,500 after you factor in the cost of a PC powerful enough to drive the headset (Facebook recommends high-end GPUs from Nvidia). Now that price tag is eerily reminiscent to that of another failed gimmick that came from the tech world less than two years ago--Alphabet Inc-C (NASDAQ:GOOG) Google Glass.
Ok, maybe it’s not fair to compare Oculus Rift and Google Glass since the two products perform vastly different functions. But the cost of a complete set of equipment required to play with Oculus is likely to become a big deterrent to its mainstream adoption. One of the primary reasons why Google Glass became a commercial failure was because it did a poor job proving its value proposition to potential buyers.
Asking somebody to fork over $1,500 for a rather hideous optical computing device designed to perform some rather mundane task is simply asking for too much. Nevertheless, many people conceded that they would have considered trying out Google Glass had Alphabet offered the product at a much lower price point.
Oculus Rift certainly offers a much better value proposition than Google Glass. It’s a high-end VR headset that is considered one of the best in the market currently. But the price for the complete set of hardware is simply out of reach for the average gamer. $1,500 might be fair game for a hardcore gaming enthusiast. But I bet the average person will be happy to pay $20 for Google Cardboard which offers a good enough VR experience for almost anybody with a smartphone. Cardboard is not as restrictive as some VR equipment since it works well with many smartphone models. Its VR experience might be nowhere near what Oculus provides, but is still good enough for the price.
Perhaps Facebook can learn some lessons from Microsoft and its gaming consoles. Xbox One cost $499 at launch, but Microsoft was forced to severely cut its price while adding new features to entice people to buy. Now you can get a 1TB Xbox One console for just $349. The problem with Oculus is that the biggest cost component is not tied to the headset itself but rather to the PC and graphic cards required to power it. Facebook could cut the price of Oculus by as much as $200 but the overall cost of the entire set of equipment will still remain prohibitive for the average gamer.
The VR opportunity for Facebook?
The size of virtual and augmented reality market is currently pegged at just under $1.5B, or ~1.5% the size of the video game industry which is currently worth $92B. KZERO, a consulting firm for companies operating in the virtual gaming space, estimates that the industry will grow slowly to reach $2.4B by 2018. What’s intriguing about the company’s estimates is that the market is projected to hit a peak by 2017 then start declining as more players enter the market and price of devices start falling.
Assuming Oculus Rift grabs 30% of this market, it means that Facebook might realize just $720M from VR headset sales by 2018. If Facebook maintains a 35% CAGR over the period, VR gaming sales will contribute ˂2% to its top line. That’s hardly enough to move the needle for the company.
Facebook paid $2B for Oculus, and will probably have incurred another $500M in development and other related costs by 2018. It might therefore take Facebook at least six years just to break even on Oculus Rift if current growth projections play out.
There is no good reason for investors to get excited about Oculus Rift. The price point of the headset itself is reasonable, but the cost of other associated components and accessories is too high. Maybe Facebook will partner with companies like Nvidia, AMD, or Intel in the future to offer considerably cheaper high-end PCs and graphic cards required to power Oculus Rift. But until then, mainstream adoption is likely to remain too low to make a tangible impact on Facebook’s top line.