Facebook VR – Wii the second.

Oculus should not need advertisements

• The rapid push back against the idea of advertisements in VR is a clear signal that this monetisation model will not work in this instance but given where Facebook is, this model is not needed.
• The Oculus Quest 2 is showing signs of being this generation’s version of the Nintendo Wii which launched in 2006.
• The Nintendo Wii was hopelessly underpowered compared to its console rivals and was resoundingly mocked for its blockish and pixelated graphics.
• However, its rivals stopped laughing when it sold in massive volumes partly due to its slightly lower price but mainly because it introduced a novel way to play that worked extremely well and that users loved.
• The Wii was the first console that used accelerometers in the handset to mimic the movement of a racket which added a whole new dimension to games like tennis.
• The games were great fun to play and as a result, the system sold in large volumes despite being arguably well behind the curve in video games.
• Facebook Oculus Quest 2 may be on the verge of repeating this history as the Quest 2 is not the most advanced VR headset available.
• However, it is one of the cheapest at $299 and it can operate both independently as well as tethered to a PC.
• Most importantly, the Quest 2 makes improvements in terms of usability meaning that it is more comfortable to wear, creates less disorientation, and has a series of very entertaining games to play.
• The result is that Oculus Quest 2 has shipped far more volume than Facebook or anyone else expected with around 1m in Q4 2020 and slightly less than that in Q1 2021.
• This means that by the end of 2021, there could be more than 5m units in use around the world which should be more than enough to stimulate further developer interest.
• More apps mean more users which means more developers and so on which is how the virtuous circle works.
• This is crucial as Oculus appears to have managed to get this positive momentum with users and developers that no one else has really achieved in VR.
• This means that Facebook now has a head start in VR and if the momentum continues, it has a chance to become the leading VR platform as VR comes into the mainstream.
• This gives Facebook a number of monetisation options, none of which require the use of advertising on the platform.
• If the platform gains in popularity, Facebook has the option of monetising by increasing the price of the hardware to make a better margin (like Apple does) or by charging a subscription to access certain features and content on the device as Microsoft and Sony do.
• It is only when Facebook does not control the platform eg iOS and Android smartphones where its options are much more limited and it has to rely on advertising.
• Hence, I think that Facebook will quickly kill these advertising experiments because the last thing it needs to do right now is to enrage its user base just as the momentum is beginning to build.
• Facebook has a big opportunity with this platform, and it makes more sense to sit tight and look to monetise it more effectively once it has really established itself as a leader in the VR market.
• For the foreseeable future, this is going to remain a rounding error in Facebook’s accounts and so its ability to move the share price will be very limited.
• Hence, it is the underlying advertising business that really matters to investors, and I think that this is already fully valued in the share price.
• Like Apple and Google, positive surprises bring small rallies while tiny misses are likely to be severely punished creating a risk-reward balance that I don’t think is very favourable.
• I continue to look elsewhere.