Mark Zuckerberg's testimony in a Texas lawsuit is revealing just how costly the virtual reality arms race has become. Even as products from Facebook's (FB) - Get Facebook, Inc. Class A Report and Alphabet's (GOOGL) - Get Alphabet Inc. Class A Report Google hit the market and Pokemon Go captivated mobile users last year, the revenue streams from VR are just developing.
Taking the stand in an intellectual property suit by game maker ZeniMax Media that seeks damages of as much as $2 billion, Zuckerberg on Tuesday revealed that Facebook's purchase of Oculus VR was significantly more expensive than investors realized. ZeniMax first brought the suit a few months after Facebook agreed to acquire Oculus in 2014, alleging that Oculus executives improperly took code and other intellectual property from ZeniMax. The suit was eventually amended to include Facebook as a defendant.
The $2 billion price tag announced in 2014 already seemed high for a company without a commercially available product. On Tuesday, Zuckerberg disclosed that Facebook paid another $1 billion or so in employee retention and extra compensation on the company's performance. Further, he said that Facebook plans to invest another $3 billion in virtual reality and noted that it will take a long time before the technology evolves to a satisfactory level.
"I don't think that good virtual reality is fully there yet," Zuckerberg said in his testimony. "It's going to take five or ten more years of development before we get to where we all want to go, where there's both that great experience that is affordable enough for everyone to be able to use, and where you have the software
experiences, like the social experiences...that people want to use."
Many companies are gunning for position in the virtual reality market. UBS analyst Eric Sheridan noted in a recent report that a wave of products, including Facebook's Oculus Rift, HTC's Vive, Gear VR from Samsung and Oculus, Sony's (SNE) - Get SONY GROUP CORPORATION SPONSORED ADR Report PlayStation VR and Google Daydream View, all hit the market in 2016.
The actual returns on those products undershot forecasts by investment bank Digi-Capital, however.
Companies that Digi-Capital tracks generated $3.9 billion in virtual reality and augmented reality sales in 2016, less than the $4.4 billion that the company expected.
"Let's start with less than happy times," Digi-Capital CEO Tim Merel wrote in a blog post. Important products such as Facebook's Oculus Rift and HTC's Vive had issues delivering on pre-orders, he noted. Gear VR dropped support for Samsung's Note 7 after the device's disastrous recall.
On the bright side, Merel added, sales from Pokemon Go boosted numbers and presented a legitimate augmented reality success story.
Meanwhile, the market is waiting for the first product from much-hyped VR/AR hardware and platform developer Magic Leap, which counts among its investors Alphabet's Google, Qualcomm (QCOM) - Get QUALCOMM Incorporated Report, and Chinese Internet giant Alibaba (BABA) - Get Alibaba Group Holding Ltd. Sponsored ADR Report . CEO Rony Abovitzits says the debut of its headsets will come this year. "Our first system will be the first step towards a really cool dream. Of flying squirrels and sea monkeys and rainbow powered unicorns," Abovitz blogged.
While the plan remains vague, Magic Leap is well-funded. In 2014, as Facebook acquired Oculus, Magic Leap raised close to $600 million in a pair of rounds that included Google, Qualcomm, Hollywood studio Legendary Entertainment and others. In early 2016, Alibaba led a $793.5 million investment in Magic Leap, bringing the company's valuation to $4.5 billion.
While VR may yet prove to be the rainbow-powered future of computing that will present new business models and profits, for now it's a potential money pit.