As you may have heard, Meta announced Q1 earnings last week. And the results were better than the previous quarter, when it announced negative user growth for the first time for its flagship property, Facebook. To its relief, user growth moved back into positive territory in Q1.
Counterbalancing that positive news were widening losses in Meta Reality Labs’ (MRL), which houses AR, VR, and all-things metaverse. There, the message to investors was (paraphrasing), stick with us while we build, and cement a central position within, computing’s next era.
Back to the good news, MRL top-line revenue is growing. Specifically, it brought in $695 million in Q1 (mostly Quest 2 sales). This is up from $534 million in Q1 2021 revenue (year-over-year). It’s down from Q4 (quarter-over-quarter), but that’s expected given the standard holiday surge.
But our big question is how this translates to Quest 2 unit sales, and where this put its installed base. Equally meaningful, how close is Meta to the 10-million installed-base target that ignites a network effect according to Mark Zuckerberg? We’ve predicted it will hit that mark this year.
So what do MRL’s figures tell us about Quest 2 unit sales? Like past Data Dives we’re breaking down the figures, but with a different approach this time, given a new earnings format. We no longer have to rely on proxies such as reverse engineering Meta’s “other” revenue category.
Given that Meta now breaks out MRL revenue, this calculation can be more precise. Diving in, Reality Labs brought in $695 million in Q1 as noted. Based on Meta’s Q4 and 2021 FY disclosures in January, we know that software (VR game and app sales) makes up about 23 percent of that.
With that, Q1 software revenue comes to about $159.85 million*, making hardware $535.15 million. As we’ve estimated, headset sales are about 92 percent of that, the rest being first-party accessories like head straps and face shields. That brings us to $492.34 million for Quest 2 sales.
Considering an average unit price of $329** this means that Meta sold approximately 1.496 million Quest 2s in Q1. This is on pace with 6.5 million units for the full year, projected by our research arm ARtillery Intelligence. But what does that mean for the cumulative installed base?
*This figure represents the Oculus Store’s gross revenue, before developer payouts, which are usually 70 percent after taxes.
**Quest 2 base model (64GB) is $299 while the 256GB model is $399. This averages out at $349, but we’ve reduced the estimated hardware ARPU to $329 due to weighted sales for the base model (common for new hardware). Third-party reseller markups aren’t included.
Flirting with 10 Million
To calculate Quest’s installed base, we can go back to the results of the last time we did the above exercise for Q4 2021. At that time, the Quest 1 & 2 estimated installed base was 7.36 million units. Together with the above 1.496 million, it brings the cumulative total to 8.856 million.
The installed base in practical terms could be a bit less, given that the above includes all Quests (including Quest 1) sold to date. That’s a little more than 3 years’ worth of cumulative sales, while the VR hardware replacement cycle is… about 3 years. Older hardware cycles out.
That’s all to say that some of those early sales for Quest 1 may be replaced by newer Quest 2 units. Those replaced units may still be in use or gathering dust in a closet. For the sake of this exercise, we’ll consider them part of the official installed base, given that Meta likely does.
Boiling this down, it means that Meta is roughly 1.14 million Quest 2 headsets away from its 10-million milestone of in-market units (again, including Quest 1). That means it will hit this target sometime in Q2, if it hasn’t already. The question is if it announces the milestone or keeps it quiet.
Stepping back, why is 10 million important? According to Mark Zuckerberg, that’s the critical mass to jumpstart an ecosystem. A nine-digit sum attracts developers en masse. Content creation surges then attracts more users, which further attracts developers, and the flywheel spins…
Cruise Ship Construction
Back to Meta’s earnings, it got a slight rally in public markets, given the return to positive user growth for Facebook… its core business. Not only does it represent the lion’s share of Meta revenue but it fuels and funds MRL, which in turn propels the broader AR & VR sectors.
Put another way, the AR and VR worlds have Facebook’s advertising business to thank – whether they like it or not – for positive sector gains in the aggregate. In a broader sense, MRL has been painted in interweb punditry as an ill-timed passion project, given Meta’s other issues.
But it could actually be the opposite. Considering maturing global growth due to Facebook’s size, and the challenges from Apple’s app tracking transparency (ATT), now is precisely the right time to start building lifeboats. The metaverse and MRL are more of a cruise ship.
Moreover, Meta’s investments in hardware like Quest 2 and rumored operating system make it a bonafide platform. And there, it’s less beholden to the uncertainties of piggybacking on others’ platforms – namely iOS and Android. Meta has learned this lesson the hard way.
Meanwhile, amidst all the handwringing in the tech press, the silver lining for Meta is that MRL’s top line is growing at a healthy pace. Its losses are still considerable, but the more important part in a long-game sense (Meta’s jam) is that cruise ship construction is underway.