Headlines in the AR and VR worlds last week were dominated by Quest Pro. Beyond the much-anticipated and highly-leaked cousin of the Quest 2, orbiting news from Meta Connect included Microsoft gaming and productivity integrations, as well as highly-demanded avatar legs.

But buried in all that excitement was a key health indicator for VR: its content ecosystem. Specifically, Meta revealed new stats for Quest game revenues. This isn’t just to flex muscles to Wall Street (though that’s one piece) but to dangle a financial enticement to content creators.

Highlights include $1.5 billion in spending on apps since Quest 1 launched in May 2019. There are now 400 apps in the Quest Store, one-third of which (roughly 132 apps) grossed more than $1 million in lifetime sales. 55 titles have exceeded $5 million and 33 have exceeded $10 million.

Zeroing in on a few exemplars, The Walking Dead: Saints & Sinners exceeds $50 million in lifetime revenue on the Quest Store (double its combined revenue on other platforms). A handful of apps are also seeing big releases such as Bonelab‘s $1 million in sales in less than an hour.

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Data Dive

Building on these figures, can we extrapolate annual VR content revenue? To get there, we can first do a thought exercise to square the above revenue ranges with Meta’s more precise disclosure that it has reached $1.5 billion in aggregate lifetime app sales. Here’s what we know:

  • 33 titles: $10 million+
  • 55 titles: $5 million+
  • 132 titles: $1 million+

There’s likely some overlap here, otherwise known as double counting. For example, the 33 titles exceeding $10 million in lifetime revenue could be included in the 55 titles that exceed $5 million (technically accurate), which in turn is included in the 132 titles that exceed $1 million.

De-duplicating the figures, we end up with

  • 33 titles: $10 million+
  • 22 titles: $5 million – $10 million
  • 77 titles: $1 million- $5 million

If we add these up using the lower end of each range, we get a revenue floor of $517 million

(33*$10,000,000)+(22*$5,000,000)+(77*$1,000,000) = $517,000,000

More accurately, if we use the middle of each range (and $25 million for the top tier), we get $1.02 billion

(33*$25,000,000)+(22*$7,500,000)+(77*$2,500,000) = $1,017,500,000

So what accounts for the delta between $1.02 billion and the $1.5 billion in lifetime app revenue that Meta disclosed? The gap is due to any degree of error in the above estimates plus the long tail. The latter is 2000 App Lab games and apps that made less than $1 million each.

As for how this translates to Meta’s annual app revenues, we can amortize $1.5 billion in content sales over 3.5 years. Factoring in 25 percent compound annual growth rate, we end up with 2022 Quest Store revenues just below $550 million (which aligns with our quarterly estimates).

If we then estimate that Quest has 60 percent of VR content revenue – the rest going to Valve and Sony – this puts 2022 annual VR content revenues on pace to reach roughly $915 million. Add game subscriptions and in-app purchases and we could push past $1 billion.

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Chicken & Egg

Back to the part about enticing and incentivizing creators, they’re a key step in reaching VR’s flywheel effect. Hardware volume is also a key step as larger installed bases attract content creators. Meta invests heavily in accelerating both sides of that chicken & egg equation.

Or as Mark Zuckerberg puts it:

”The big question is what is it going to take for it to be profitable for all developers to build these large efforts for VR? To get to that level, we think that we need about 10 million people on a given platform. That’s the threshold where the number of people using and buying VR content makes it sustainable and profitable for all kinds of developers. And once we get across this threshold, we think that the content and the ecosystem are just going to explode. Importantly, this threshold isn’t 10 million people across all different types of VR. Because if you build a game for Rift, it doesn’t necessarily work on Go or PlayStation VR. So we need 10 million people on [one] platform.”

On the hardware side, some signs point to that 10-million threshold being crossed. Meta accelerates that process by subsidizing VR headsets like Quest 2. And it pours billions per quarter into R&D for underlying capabilities to engineer more attractive devices, a la Quest Pro.

On the content side, Meta continues to invest in game studios which accelerates content creation through capital infusions. Those investments also signal exit opportunities to VR creators. That incentivizes more of them to launch… and exit-hungry venture funding to propel them.

Meta’s content revenue disclosures validate that the wheel is turning. We have a ways to go, but real money is being made today with at least some VR content. As that incentivizes more content, consumers are drawn to the Quest ecosystem… along with device evolution itself.

These hardware and software advancements are needed to push VR closer to mainstream scale. And as they ratchet up together in step, VR could start to approach some of the promises and projections made in its circa-2016 hype cycle. These things always take longer than expected.

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