PSVR 2 Outsold Original PSVR in First 6 Weeks, Sony Confirms

What do you mean “everyone else did”? Many Quest games that aren’t directly from Meta exists solely because Meta incentivized developers to port them for Quest.
Of course I’d love to see bigger and better games, and we’ll see what they show in about a week.
But even if we don’t – the bottom line here is that Quest 2, even after price raise, 100% delivers quality VR experience worth the money. The same can NEVER be said about any PC+VR configuration to date.

metaverse vaporware.

Quest is surviving because Meta is willing to eat billions in development and operating costs, which is why some developers that made it onto the official store are making a living. The 2022 price increase by 1/3rd only stopped Meta from losing money on every Quest sold based on hardware production costs alone, a practice console makers ended years ago, every generation after PS3 sold hardware with at least a small profit.

Gaming consoles make their money from selling a lot of software to a lot of active users, but on Quest too few users are buying too few software titles to compensate for more than a small fraction of the other costs, as too many Quest stop seeing use after a short while. Meta isn’t expected to make any money anytime soon, so claiming that Quest is thriving is a stretch. Growing yes, not automatically dooming developers at least sometimes, being self sustainable no.

So after 10 years of consumer VR, which initially hitched a cheap ride on smartphone displays and gaming GPUs, Quest is clearly (still) on Meta life support too. Only that, compared to PCVR lacking a committed and deep pocketed sponsor, this life support is pretty much guaranteed to continue for years, no matter the costs, even if the patient itself wouldn’t be able to survive on its own. And if gaming console (active user) numbers are required for a fully sustainable consumer VR ecosystem that can also pay for the now necessary expensive custom hardware development and operations, Quest/VR may never get off the life support due to lack of interest from the general public. And in the future its best/sole chance may be to be switched from Meta life support to XR sidekick, surviving on technology developed and payed for by a potentially more popular AR.

This isn’t a question of believing, we have numbers. In October 2022 Meta said the Quest store had generated USD 1.5bn in revenue since its launch in 2019. Simplified 30% of that goes to Meta. A little bit more due to 1st party titles like Beat Saber, and a little bit less due to promotions etc. being payed from those 30%, but roughly they made USD 450mn from software sales. They have now sold around 20mn Quest 1/2/Pro, so the average user generated 450/20 = USD 22.5 in software profits for Meta. Initial sales price for a 64GB Quest 2 was USD 299, with a production price of close to USD 350, with the price increased to USD 399 for the now 128GB base model in August 2022, when around 15mn Quest 2 had been sold.

So (ignoring differences with Quest 1/Pro/Business editions etc.) we have 15mn Quest sold at USD 50 below and 5mn at USD 50 above production costs, giving us USD 500mn loss alone from selling the hardware. This loss includes no development cost, no service costs, no operations, no advertising, no expensive software license deals like RE4, no retail margin, those all go on top. All profit ever generated from software was still not enough to even cover only the direct loss caused by hardware subsidies so far, though this balance slowly tips thanks to the price increase.

Compare that to a company like Sony, who’s gaming sales didn’t generate USD 1.5bn since 2019, but USD 25.5bn in 2021 alone, so about 50x as much per year, 40% of which was DLC and micro-transactions. Sony of course has a much bigger install base, so far almost 140mn PS4 and PS5 were shipped, so seven times as many as Quest HMDs. But this still means that the average Playstation user generated more than seven times as much yearly revenue as a Quest user, in a year where the PS4 was eight years old and the PS5 was unobtanium. The large base of course allows Sony to distribute any development costs much better, while Meta cannot distribute development cost at all, because so far software revenues haven’t even covered past hardware subsidies and a lot of running operational costs would have to be covered first.

So you don’t believe […] that the Quest is already making a profit and self sustainable? [..] I think you are too pessimistic.

Regarding business prospects I don’t believe, I do the math instead And I don’t put much weight on unspecific, relative marketing statements like “retention on Quest 2 is much better than on Quest 1”, when they don’t include how horrible retention was on Quest 1 to quantify how much less horrible it is on Quest 2, the fact that they say “better than Quest 1” instead of “good” speaks for itself. Or that the ecosystem is “way past the chasm”, when they forget to explain if crossing the chasm might simply mean that more than half of the 50 best selling software titles released on Quest in the last 12 months managed to break even, so now these studios can afford to develop more apps instead of going bankrupt.

There is a big difference between fuzzy claims like “way past the chasm”, “much better acceptance”, “very positive feedback”, “satisfying preorders” and a solid “Quest 2 made enough money for Meta to pay for the development of Quest 3 without losing money”. The main difference being that the latter is definitely not true, not by a long shot. Meta’s announcements are often full of positive news, aggregate numbers and the occasional success story, but usually lacking any hard numbers that would actually prove that developing (for) Quest is a financially viable idea.

It is for at least a couple of dozen well selling Quest store titles, but we don’t get numbers for the remaining 500. Just the known numbers for 1 app generating USD 100mn+, two more USD 60mn+ and 40 USD 10mn+ means the top 40 apps/8% took at least 40% of all generated revenue, leaving on average less than USD 2mn for the rest, most certainly not evenly distributed. I’d say it is a safe assumption that half of the titles on the Quest store never broke even. We know for certain that this is true for pretty much all of the 1500+ App Lab apps, where only a few like Puzzling Places and Demeo made the jump to the official store with decent sales, and even fewer like Gorilla Tag were already very financially successful before that.

If there were hard numbers indicating that the Quest is anywhere near self-sustaining, we would have heard about them. Instead we only hear that some have found success and will therefore continue, but just because software development will no longer collapse all by itself doesn’t mean the ecosystem is sustainable, let alone covering all the other costs generated in the past and necessary for the future.

TL;DR: My next attempt to avoid writing another novel and instead quickly get to the point that Meta currently can’t make a profit, that this actually doesn’t matter and that the Quest 3 won’t change it because the needs of VR enthusiasts simply are different from those of a mainstream audience, has failed again.

Okay, let’s do more math about a very optimistic present: if we ignore the whole subsidization and look only at the new Quest 2 sold at USD 399, we get USD 50 per Quest sold plus the previously mentioned USD 7.5/year that each Quest user has spent on the store so far. Let’s also assume that the latter number will now jump up by 300% due to more Quest having been sold and more software available , and completely ignore that Meta themselves said that the latest wave of new Quest buyers is engaging a lot less with the platform than the first waves of VR enthusiasts and upgraders from Rift and Quest 1 did. And also assume that a Quest 2/3 is supported and used for three years, after which the user will buy the next model. This will hopefully qualify as very optimistic even from your perspective. Meta now gets USD 50 from the hardware and USD 90 from software for each Quest, broken down over three years of usage this means ~USD 47 per user per year.

Let’s be even more optimistic and assume that the trend turns from currently slowing sales to overdrive and they manage to sell 40mn Quest 3, and you end up with a whopping 1.88bn revenue share for Meta per year. This has to cover for retail margin, software maintenance, promotion, service and of course salaries, office space and equipment for their employees. Let’s again say that Meta employees are very cheap and each only cost the company USD 100,000 for salary, benefits, travel, office etc. every year, and half the earnings are available for the employees. This way you could pay 9400 people, almost as many as worked at MRL last year. For the Quest alone, they probably need only 1/4th of these, so let’s reduce the affordable employee count for breaking even by 75%.

This way Meta would actually make USD 235 profit from Quest per year. Yay! Assuming doubling the hardware sales, quadrupling the software sales, ignoring any past development and any ongoing non-Quest research costs, reducing head count by 75%, and having the remaining employees cost less than half of what they would actually cost. Judge for yourself if this is a realistic scenario.

Creating mass market consumer hardware for a not yet established marked is f&%$ing expensive, which is why we only expect this from companies like Meta, Google, Apple and now ByteDance/TikTok with enough billions to roll out a global launch, while others had to retreat to niches. It costs billions that the company has to pay in advance and will only ever get back if the product is a huge success, sold in very large numbers, and the company makes a lot of revenue from either selling much more than the competition, producing much cheaper or selling more to every single customer. Meta’s current problem is simply the low number of active/software buying users, meaning all cost has to distributed over a small number, but at the same time they cannot raise the prices to include the required large margins like HTC in the professional market without losing most of the user base they already payed a lot for. Just looking at the total revenue from the Quest store (which is completely negligible compared to those from Sony, Apple or Google) and not at the same time looking at least at the recurring cost simply doesn’t give you any idea about profitability.

We are talking about the same thing, you just assume that the future is a lot brighter than the past. I have been discussing the fact that VR has basically shown linear growth for years with people who insist since 2016 that we are really on an exponential curve and usage will explode very soon. Which so far hasn’t happened.

Where we actually agree is that profitability is in no way important right now for Meta. They knew it would take at least a decade to make back their money if things went well, and more if they didn’t went smoothly. They have a lot to gain if XR becomes a platform with billions of users, and if that happens, all the initial costs won’t be an issue. MRL may burn USD 10bn per year, but mobile gaming alone made around USD 220bn in 2022.

Meta losing money on XR is fine with them and even their investors. Huge drops of Meta’s shares didn’t happen due to them burning cash on XR research, but when they reported that users were now engaging less with Facebook and Instagram, where they make all their money. And Meta’s announcements about the viability of the ecosystem come from that perspective: we are now at a point where VR is large enough that established AA or even AAA studios might start developing VR games not only as test projects, but actually expecting to sell enough to make a profit. This is new, a chasm was actually crossed and consequently we may see more non-indie development on VR. But there is still a long way from “larger studios can make enough profit on a platform requiring heaps of money to maintain” to “profit from projects by larger studios is enough to not only support the studios, but also to pay for platform development and maintenance“, even if you cut all non-essential development.

Of course, the revolution could start tomorrow or right now, the Quest 3 could turn everything around, but I don’t know what type of magical improvement would trigger it. Quest 3 will be twice as fast, still only 1/3rd the 2016 PCVR GPU entry level, and the main new feature seems to be Mixed Reality. Even if it got all the features of the Quest Pro plus double the speed plus a true depth sensor at half the price, there are still no particularly convincing reasons why those who shunned VR so far should even want MR, or what it would be really used for beyond convenience. I doubt that the Quest 3 will have anywhere the same impact as the Quest 2, which was a huge leap forward at an incredible low price of USD 299, as Meta assumed that lowering the bar would get the masses onboard. It didn’t, and now the Quest 3 will mostly be an incremental update with a sometimes useful MR gimmick at a much higher price. That doesn’t exactly scream revolution, which would probably require a much bigger leap like actual useful AR with smooth integration into the users daily life and not costing USD 3000 like the Apple HMD.

The whole thread started with me arguing that the problem with VR isn’t any particular technical issue, but the VR experience itself and the lack of interest from the general public. Every other problem, including Meta not yet making money due to lack of active users and larger developers ignoring VR due to lack of potential customers are due to the lack of mass market attraction. Yes, I agree that Meta is doing a lot of things right, though no, I expect that Apple is “far closer than everybody else” and will show us a device that a lot of people who would have never touched VR will actually want, only that barely anybody will be able to afford it. I am thankful for a lot of what Meta has done and will do, and am pretty sure that we would have never gotten this far without them.

I am still extremely annoyed about their emphasis on MR, not because passthrough isn’t very useful, but because IMHO they hype it because they need a marketing alternative to AR to point to, as their HMDs will not be able to deliver actual AR for years for numerous reasons the most important that their gaming focused customer base wouldn’t accept the exorbitant high prices this would currently cost. As a result people who didn’t care about the Quest 2 won’t care about the Quest 3 either, because it doesn’t do anything particularly useful or address problems most people actually care about.

One of the “best” features of the Quest Pro for many was the option to remove the face gasket and see their environment/children/pets/furniture. Much more important than the passthrough and technically much simpler, but of course significantly lessening the immersion and thus widely criticized by enthusiasts. Which is part of my reason why I think that the problem of VR is the VR experience itself: most people simply don’t want the solitary, gaming oriented experience that VR enthusiasts look for and that current VR HMDs try to deliver, so discussing if VR hasn’t gone mainstream because a low FoV is not good enough or because there are simply not enough good games you can get lost in for dozens of hours IMHO misses the point: for VR to go mainstream, it needs to cater to the needs and wishes of the mainstream and provide some actual use, not just improve the experience the enthusiasts aim for and assume that at one point that will convince all of the others. In reality they will look at a 4K 144Hz super immersive haptic feedback Counter Strike with full body tracking, shake their head and play Candy Crush on their phones while hanging out with their families on the sofa watching Netflix. Or maybe on their 5th generation Apple AR headset that makes Candy Crush even less (socially) intrusive than looking down on their phone, because Apple actually understands what most people do NOT want.