The Network Effect in the Virtual Reality Ecosystem
The field of virtual reality has quickly moved from a pipe dream to a viable technology over the course of the past decade. The global industry for virtual reality was valued at 15.8 billion in 2020, and is predicted to grow by around 18% in 2021. Many spot great promise in the technology, and are moving to secure a place in the industry- most obviously Facebook, who have rebranded their company to Meta and have been investing significantly in the technology. Mark Zuckerberg expects these investments to cost them $10 billion in profit in 2021 alone, so why would they go to so much trouble? A significant part of it has to do with the network effect, and the subsequent value Facebook sees in capturing a large portion of potential VR users.
Facebook currently sells the Oculus Quest 2 for $399. This price is considered by many to be an almost absurd value, undercutting every other headset of similar quality by a significant margin. There is almost no doubt that Facebook fails to recoup the manufacturing cost, so clearly they think there is something else worth gaining.
For the majority of VR headsets, the amount of buyers does not have a direct effect on its usefulness – almost every headset uses SteamVR, an “open” VR software that is by design compatible with every headset. Oculus is unique in that it is a walled garden system- Games on the Oculus store are only designed to be played on Oculus headsets, and many social features are only available when interacting with other Oculus users. If Oculus’ userbase was small, this would actually be a downside, discouraging users from using a product they couldn’t talk to their friends with. Thanks to Facebook’s investments and Oculus’ low price, however, this hurdle has been overcome – Oculus made up 2/3rds of the global shipment of VR headsets in the first quarter of 2021, and is now easily the majority PC/standalone headset in the western market. Through this investment, the network effect is now working in their favor; they have a significant advantage, independent of their price, that all other headsets on the market don’t- or can’t- have.
Facebook has decided to invest into virtual reality early on to capture a large portion of the western market and utilize the network effect to its advantage. Because they currently make up the majority of the VR market, they can afford to add systems that are Oculus-exclusive without alienating their current users. Furthermore, the exclusivity gives Oculus a direct benefit over other products when new users are considering it, beyond just its price. In the future, if Facebook sees fit, they could increase the price back to reasonable levels, and users would still choose Oculus more often than not, solely due to the benefits of the network effect afforded by its exclusive systems and current market domination.
Sources:
https://www.grandviewresearch.com/industry-analysis/virtual-reality-vr-market
https://www.facebook.com/zuck/posts/10114017541176911
https://www.bbc.com/news/technology-54178376
https://www.idc.com/getdoc.jsp?containerId=prUS48041621