The State of Virtual Reality

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Hi Everyone. Happy New Year! We’re excited to bring you even more content on the business of games in 2022. As we mentioned in our year-end round-up, we’re always on the look out for new contributors, consultants, and advertising partners. If you’re looking to make a change this year and want to start working with our team in 2022, please reach out, we’d love to chat. With that, let’s dive into today’s issue…

Naavik Exclusive: Roundtable #29 & Crypto Corner #7

This week we have a double header from both The Metacast Roundtable and Crypto Corner:

In this week’s Metacast Roundtable, the team sits down to recap the rollercoaster that was 2021 in games. Fawzi Itani, Ryan Foo and Florian Ziegler join your host Nicolas Vereecke to look back at the year and share their biggest learnings.
In this week’s Crypto Corner, Khaled Alroumi, Anton Backman and Sebastian Park join Nico to take a deep dive into the complexities of Blockchain Games and high level competition + esports.

You can find us on Spotify, Apple Podcasts, Google Podcasts, our website, or anywhere else you listen to podcasts. Also, feel free to shoot us any questions here.

Listen to The Metacast

#1: VR Roundup: Rec Room, PSVR2, and Oculus

Coming out of this holiday period, one of the big stories is VR. It’s one of those cyclical and seasonal narratives, where sales predictably spike around the holidays. Aside from the consumer perspective, though, the narrative is redeveloping (from 2017 hype) on the institutional side. It’s worth examining a few of the key news items from this past month, so I thought I might compile a roundup of what I’ve been reading.

The Macro

Oculus reached the #1 spot on the Apple app store. This is unsurprising given the holiday spike and it’s worth keeping track if retention and user acquisition continues its uptrend.
Omdia Research projected that 12.5M consumer VR headsets were sold in 2021, with content spending exceeding $2B. While that represents ~1% of total video game revenue in 2021, they forecast the value of the consumer VR market to grow to $16B in 2026. This is a signficant acceleration and representative of consumer demand / content supply/
From Snap to Sony, there are a lot of incumbent and emerging players in this market. We’re seeing varied approaches to build in closed ecosystems (Apple, rumored) and more open ecosystems (Meta with VROS, built on top of Android).

VR isn’t a Story Without Mentioning Meta — XROS vs. VROS

Meta has made its ambitions in VR wildly clear. Notably, they spent $10B on Reality Labs this past year and plan to spend more over the next couple years. The IDC estimated that Meta sold between 5.3M and 6.8M Quest devices in 2021, representing about half the VR hardware market and doubling what it sold in 2020.

The latest news with Meta is that the company has chosen to fork VROS, the Android OS, rather than choose to build their own OS: “Meta uses an open-source version of Google’s Android operating system to power Meta’s existing Oculus Quest VR devices. But Meta wanted to create an OS from scratch to power them and future devices, a project that became known internally as XROS… Instead, the company has told some staff it would continue to modify an open-source version of Android, which Google developed for smartphones but which other companies have used to power various devices, the people familiar with the matter said. Meta’s modified version of Android, known internally as VROS, powers existing Oculus VR headsets.”

On the surface, it’s a surprising decision. Ever since their $2B+ Oculus acquisition, writing a new OS from scratch has been an important goal – missing out on owning the phone OS catalyzed a race to the next platform, XR. However, it’s worth considering this decision in context of other incumbents and upstarts in the space – specifically Apple.

From Ben Thompson’s daily update: “You can be sure that Apple is going to be making its own operating system, which will be deeply integrated with its chips; by extension, it is safe to assume that Apple, whenever it launches its VR and/or AR glasses, is probably going to have superior performance (this does not mean Apple will have superior glasses or a superior experience; performance is part of both but not everything).” So, rather than try to beat Apple at a game of performance (unlikely), Meta is leaning in on a modular ecosystem strategy.

Reiterating Thompson’s thoughts: Why would Meta choose to leverage VROS rather than XROS?

It already has all the significant parts of the stack (networking, etc.). I.e it can ship its product today vs. waiting years to develop and ship its tech like Apple
Android is open source, so Meta can rebuild, remix, and fork the code as needed, and repackage it for others to use.
There is modularity for the tech, extedning to a variety of platforms and developers.

But, most importantly, Meta operates at a point of leverage from both the hardware and software side. That is, it can create a superior consumer experience on both ends of the spectrum. Hardware is untethered, affordable, and independent of the OS. Through the acquisitions of Unit 2 Games, Crayta, Bigbox VR, Downpour Interactive in 2021 alone, Meta features an impressive list of content, too. It’ll have teams working on both, with a core team supporting the developer experience. Meta sees AR and VR as being core to “the next generation of online social experiences”. Which brings us to another headline.

Rec Room Raised $145M at a $3.5B Valuation

From the TechCrunch announcement: “Rec Room is a “social gaming” company in a couple of regards: The key to its growth, interestingly, has been not just the ability to create games and play those created by others and to join in rooms to play together (which is perhaps the most obvious “social” aspect), but the ability to provide a well-used, virtual social space for users to hang out beyond gameplay.” Sounds relevant to Meta, doesn’t it?

Rec Room has tripled its valuation since its last round in March 2021. Coming from an outside perspective, I’m curious by the numbers. Rec room has 2M people “playing and creating content” and has 37M users in total; yet, it’s unclear to what degree of engagement the 37M really has. Most of the institutional excitement around Rec Room stems from Roblox’s record year (current ~$50B market cap) and IPO.

Perhaps this is an unfair chart to show, but it illustrates the sheer (albeit current) difference in size between Roblox and Rec Room. Sure, Rec Room is Roblox but “three-five years ago”. Where will it need to be to match IPO metrics? Is there potential to grow against a dominant commerce, developer, and player ecosystem? According to Sensor Tower data, Rec Room grew 496% YoY as compared to Roblox’s 16% (a noteworthy callout is that this a 1.5M vs. 15M user difference but the deceleration in MoM growth is an important consideration).

All that said, Rec Room has a unique approach in its focus on VR and that’s what makes it an interesting company to think about – when we covered their previous raise, 75% of Rec Room users were on non-VR platforms, but we now expect more people to be on VR now given the positivity around Quest (still likely less than 50%). And yes, I’d be remiss not to mention that a lot of the excitement around this funding round is it could be an acquisition target for Meta: “Will Zuckerberg buy or build?”

Two Approaches

We touched on how Meta’s play into modularity will extend accessibility to developers and participants of VR. This is also core to the ethos of Rec Room, which is to provide a place for people to create and hangout outside of the bounds of gameplay, necessarily. The two recent news announcements feel like they’re related in this way, but a third, Playstation’s announcement of PSVR2 comes in contrast.

While Meta pursues a long-term open ecosystem play, PlayStation’s goal is to continue pumping out original content for its own devices, even suggesting hybrid experiences where games are played in and out of VR depending on the moment. For good reason. Meta has ~8M Oculus Quest 2 devices in circulation, while Playstation has over ~115M of its devices in circulation with predictably higher engagement. This bodes well for a supplemental peripheral added to the PS ecosystem.

By far, the best take I’ve read comes from Jamie Feltham’s post in UploadVR: “In the meantime, what PSVR2 can do is wave the flag for high-end VR experiences as future formats continue to prove themselves out. It promises to offer a destination for gamers that want higher fidelity than what’s on offer with Quest and deliver titles from beloved developers and franchises. More than anything PSVR2 will be, to me, a device about instant gratification. It might have a wire connected to it but the actual prospect of PSVR2 is significantly — and in many ways refreshingly — simpler than what others are aspiring to. This is a device that’s distanced from (though not necessarily free of) the courtroom dramas and privacy concerns that Meta and others have already brought to VR. There’s no Facebook account connectivity to worry about and, even with that requirement on the way out for Quest, that’s a significantly bigger deal to some than that wire is. And, crucially, no PlayStation executive has yet used the word “metaverse”, though I’ll concede that it’s early days.”

His point is that in the short-term, current VR users will flock to wherever the best content is. Where that seems to be in the current zeitgeist is in games. Sony has a sense of brand identity whereas Meta, in all its controversies, does not: gamers vs. more generalized, casual VR users. Long-term, as hardware specs converge, what sort of experience will people look for? First-party content with strong IP? Or social and UGC content in the form of Rec Room, a potential cornerstone of a burgeoning OS? Long-term, it’ll likely be mix of both but it’s important to lock people into an ecosystem from now. (Written by Fawzi Itani)

🎮 In Other News…

💸 Funding & Acquisitions:

OpenSea raised a $300M Series C at a $13.3B valuation. Link
Rec Room raised $145M at a $3.5B valuation. Link
Embracer went on another acquisition spree to close out 2021: Perfect World Entertainment, Digic, Dark Horse, Shiver Entertainment, and Spotfilm Networx. Link
Kixeye Studios, a Stillfront studio, acquired Rise of Firstborn. Link

📊 Business:

China’s regulations puts 14,000 companies out of business. Link
Roblox plans to relaunch its app after regulatory barriers and competition. Link
Twitch and FB Gaming viewership grew, 45% and 47% YoY, respectively. Link
According to Sensor Tower, eight mobile games surpass $1B in player spending. Link
Why Montreal is a video game hub. Link
Sony announced its next generation of VR on PS5. Link
Nvidia expands its omniverse. Link