The moment of truth gets closer -

Posted: 02.03.16

Too early to call it DOA, but definitely among the walking wounded

The good news and bad about being a first mover is everyone looks to you as a bellwether—the leading sheep of a flock. 

As reported elsewhere in this issue, Facebook’s CEO and founder—and Luckey Palmer’s patron saint—Mark Zuckerberg, was asked during Facebook Q4 2015 earnings call whether he was happy with Rift pre-orders, and what the upstream shipment level looked like. He said, “Yes, I am happy. I don’t show much joy, but I’m happy. Sorry [laughing]. It’s going to be gaming for the beginning. I mean, that’s the initial market.” He, and the CFO, declined to give any details, and the CFO said, “… It’s not going to be material to our financials this year.” 

Facebook did $5.84 billion in Q4; that’s up 52% from the same period last year. To be material, VR stuff (Rift, Samsung license, touch controllers, etc.) would have to bring in at least $500 million a quarter, and it’s pretty obvious that isn’t going to happen for a long time, if ever. Assuming the average sale of Rift with controllers is $700, the company would have to sell 29 million HMDs a year, or less, depending how much revenue the Samsung license brings in, so let’s say 20 million. Looking at it another way, if the profit on a Rift system was 15%, the company would have to sell $13.3 trillion worth of them to pay back the $2 billion Facebook paid for Oculus. Given what raiders like Carl Icahan did to Qualcomm, and Xerox, what do you think would happen to Oculus if he started buying Facebook shares? WHERE THE hell am I?

Oculus’s CEO Brendan Iribe told CNBC at CES that Oculus could produce “many tens of thousands into the hundreds of thousands [of Rifts] no problem this year …” That’s not much. 

During Facebook’s Q3 2015 earnings call, prior to the headset opening for pre-orders, Zuckerberg set expectations for first-year Rift shipments in the “hundreds of thousands of units,” comparing the development of the VR industry to that of the early smartphone market. Zuckerberg also said, “What I want to stress here is that these kinds of new platforms take a long time to develop.” 

I think they are nervous. Despite Luckey’s admonitions (from the beginning after the acquisition) that it would take time, the press and wannabe competitors wouldn’t accept that and hyped it up. The investors heard the hype and now are asking Facebook, WTF? Which is totally unfair, except Zuckerbeg had to give some razzmatazz to justify giving away $2 billion of the company’s shares (and thereby diluting the existing shareholders), so he’s “invested.” 

Zuckerberg’s overzealous enthusiasm for what he thought was the shiny new thing has put the company, and the fledgling industry, in an embarrassing position, which, of course, the rabid press will jump on trying to out shout each other with sensational headlines in their quest for advertising dollars. 

I know how to save the VR market 

It’s being overhyped, and that will ultimately drive consumers away—I have a plan 

Commentators from all corners— financial, technical, gaming, and the general press—have complained or ridiculed the cost of Oculus’s new HMD, and the expensive system needed to support it. It’s been speculated that the first 10,000 pre-orders for the new Rift are collectors, people who will never take the unit out of its original wrapping and then will sell it on eBay in 5 or 10 years. If true that’s fine, its fits my plan perfectly. 

I suggest all the invested parties— Oculus, HTC, AMD, Nvidia, and a few others—re-position the dedicated display VR HMD as the crème de la crème —the Bentley of gaming. They advertise it this way: This is not for all players, only those with discriminating taste, and sufficient discretionary income. The rest of you, move along, there’s nothing for you to see here. 

By making it a limited edition, premier, and uber product, volumes don’t have to be big, no one can criticize the developers or the industry for not hitting 100s of millions of consumers, and still they can attract enough buyers to justify the continued investment needed in working out the kinks. 

As it stands now, if you ask anyone who is really deeply involved in VR, they will tell you it’s just not ready yet—close, but not yet. Resolution is still too low, depth of field problems, latency, sensors are not fast or accurate enough, and there aren’t enough of them, eye-tracking is needed, not just two-axis head tracking, visibility of hands and feet, and of course mobility, safe mobility. It’s going to take time and R&D dollars to work all that out. But, if the press hypes it, and then trashes it and scares away potential buyers, the ROI won’t be there for companies like AMD, Intel, Nvidia, HTC, and others to invest. If that happens, then it’s over, boys and girls. So to prevent that from happening, we need to make it a special, premium elite class–only product. The enthusiasts and the rich will buy it, and that will be enough to feed the R&D budgets of the suppliers.