Virtual reality’s commercial rift

The age of virtual reality is upon us. Well, Facebook evidently believes that after spending $2bn acquiring Oculus VR. It has generated a level of frothy excitement not seen since some of the early console launches, triggering widespread debate over whether it represents the future of gaming – with one leading industry figure suggesting it will be bigger than smartphones – or just another fad.

Rather than wandering down this well-trod path, let’s explore a different angle on Oculus: its commercial opportunity and how Facebook might, or might not, generate a return on its sizeable investment.

When Facebook bought the VR start-up, it purchased a company that was effectively at a pre-revenue stage. Kickstarter pledges and direct dev kit sales do not provide a direct correlation to consumer interest, as Ouya has amply proven. However, what is even more unusual for a transaction of this magnitude is that Oculus has yet to establish its primary revenue model.

Where Sony will be able to drop Morpheus quite easily into its existing commercial and technical ecosystem, Oculus does not own the underlying platforms, PC and Mac. It does not have an existing games licensing business it can extend to support virtual reality, nor does it have any existing games hardware on the market whose sales could be significantly bolstered by the launch of a VR headset peripheral.

Oculus has talked about multiple potential models: mark-ups on consumer hardware sales, development kit sales, licence fees and operating a software marketplace. The company intends to use Facebook’s financial resources to sell the hardware at cost, at the outset at least.

This effectively leaves charging content creators and hardware partners either directly via up-front licence fees or indirectly via a share of consumer sales. The former is simply not going to generate $2bn in value but the latter might – in particular via content sales. To achieve this, Oculus could turn its Share distribution platform into an iTunes-like discovery and sales platform for Rift headset owners, but this strategy faces multiple hurdles.

Rival rifts

Oculus may be the only major player in the PC virtual reality market at present, but any material consumer uptake of the Rift will undoubtedly trigger more market entrants.

In fact, it is easy to see the VR headset market eventually becoming commoditised, incorporating a broad range of form factors and performance differences, much like monitors. This may even suit Oculus, which could license its platform, as it has for Samsung’s Gear VR.

The problem here is that the PC market has a long history of undermining proprietary standards via the creation of open ones and it is feasible that third-party VR hardware and software may have to fragment further to support multiple standards and maximise their market reach.

As yet, there are no barriers to developers distributing and selling their Rift-compatible software directly to consumers or via third parties. Many have already begun to do this through Steam, their own websites and a growing number of specialist Rift sites. Some sites have even begun to build their own commercial market places with the intention to sell Rift software direct to consumers.

Steam for VR

With support for the Rift ranging from basic compatibility through to made-for-Rift software, Oculus cannot simply implement restrictions for the consumer version forcing developers to sell through its own marketplace. Instead it will need to become a ‘Steam for VR’ platform, building a consumer community and up-selling Rift software to them.

Mandatory exclusivity will have to be confined to its own software and this may well be the only significant USP that Oculus ends up with. It appears to recognise this and is known to be developing games internally.

Much like Oculus’s commercial model, the rationale for Facebook’s purchase of Oculus is still hazy, although its interest is clearly long-term and primarily outside of games. It has mentioned VR’s potential use with social interaction, education, medicine and other forms of entertainmen. At present, Facebook is in only one of these markets and entering the others represents a gargantuan challenge.

Add to this the likelihood of increasing competition and, again, the importance of content exclusivity and it is clear that the $2bn Facebook has already spent so far looks like being the start of what is likely to be a significantly more expensive journey.