The Relationship and Necessary Balance Between AR/VR Hardware and Software

Over the past five or so years, the dynamic between Augmented Reality (AR)/Virtual Reality (VR) hardware and software has shifted from one side to the other. Hardware players could push the envelope with cutting edge offerings in the hopes that the software and content ecosystem would be strong enough to show off the devices properly. Those with the capability to deliver both hardware and software could sell hardware at low or negative margins to build an installed base and boost content revenues. Pure software vendors had a choice in partnership and a go-to-market between those, with no clear winner for any particular approach.

A couple notable updates here have shed some light on potential approaches going forward, at least for the large multi-platform vendors. Microsoft is rumored to have dropped plans for a HoloLens 3, in favor of expanding platform capabilities to enable metaverse, specifically cross-platform interoperability. Meta’s record-breaking (not the good kind) earnings day was a mix of market overreaction and some concerning metrics for the company—namely Facebook users plateauing for the first time since its creation. However, all metrics touching AR/VR, which fall under Reality Labs, were positive. Meta recently reported over US$1 billion in VR content revenues. Reality Labs revenue was US$2.3 billion, over 100% Year-over-Year (YoY) growth. The company is confirmed to be releasing a high-end update to Quest 2 in the next one to two years.

Meta’s Oculus Quest 2 has been record-breaking in a good way, with millions of shipments in 2021, dwarfing other VR hardware vendors. The first stop for those new users is Meta’s content ecosystem, although it’s not the only option, and the Quest’s likely loss-leader pricing seems to be paying off. Microsoft’s abandonment of the HoloLens 3 is only rumor for now, and abandonment could look more like repositioning/reallocating without fully dropping hardware ambitions. However, if the company is abandoning HoloLens in favor of pushing content and ecosystem opportunities, it would align with broader market expectations pushing towards Metaverse ambitions.

Stating that both a notable hardware user base and content for that user base to utilize is necessary is not a groundbreaking idea, but, even so, it has almost exclusively not been the case for AR and VR over the years. VR hardware has been mature but lacked compelling content—AR use cases have had a playground on mobile devices for years but lacked a hands-free Head-Mounted Device (HMD) environment to play in outside of some enterprise-class hardware. Metaverse is as reliant on hardware as siloed AR and VR software and content—although hardware form factors can be more varied with smartphones, PCs, and more operating in conjunction with immersive HMDs. Immersive hardware is reaching an inflection point of maturity, and adoption will follow, both within and without the metaverse.

There is no one-size-fits-all market approach, especially as ambitions become more horizontal and inter-connected. However, more mature hardware can simultaneously offer greater capability and lower overall prices over time. For those with the resources to play both in hardware and content, outright ignoring one side will almost never be the best approach. Meta has stated its ambition to not be a singular platform, Metaverse in name only, but instead a cooperative entity among many. For the company, solidifying a market leading hardware position bears fruit in all platform aspects going forward with more users, more content, and more platforms willing to cooperate, and so on. Microsoft should see the market in a similar way, just with slightly different current product to sell. Rather than secondarily pushing a social media platform and advertising, Microsoft pushes enterprise contracts and Azure.

For a more unique example, a company like Sony has an incredible opportunity to be the only console gaming VR player on the market. Microsoft has not expressed interest in bringing VR to the Xbox, and while Nintendo technically supports VR with Nintendo Labo and the Switch, it is not a full-fledged VR offering. Sony, with a dominant console position and no competition, will see almost guaranteed success in the space with more capable console hardware in PS5 and VR hardware in PSVR2. Gaming remains the killer consumer VR use case, and high-end PC VR gaming is expensive. Meta Quest is helping to bring overall costs down, but Sony’s PSVR was the first true console VR gaming offering, and PSVR2 will again see a nearly captive market. Sony’s first party content ecosystem is significant, and its third party ecosystem has been growing steadily as well. It’s rare that a company has such a clear opportunity in the immersive space. Rather than competition in console VR, expect to see platform companies clamoring to partner and get their content into the PSVR ecosystem.

Market segments that in the past were perhaps ignored because of incumbent strengths—like Sony and console VR—are now in the spotlight instead as partnership and integration targets. This is something to consider even for those already playing across segments, like with Microsoft or Meta finding new boosts for existing product and revenue streams. Shifting focus too heavily away from hardware, or shifting too early, endangers the entire go-to-market without assurances partners will supplement the hardware user base. Similarly, focusing too heavily on hardware development at the expense of platform expansion and/or partnership building will create content scarcity that was the death knell of early VR. Partner, partner, partner is a necessary element of the metaverse, but is also paramount for the buildup in the meantime.