Facebook's bet on virtual reality runs into real reality

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(Bloomberg Gadfly) -- If at first you don't succeed, slash prices and try, try again.

That seems to be the strategy at Facebook Inc., which said it would temporarily cut $200 from the $600 price of its Oculus Rift virtual reality goggles plus a related accessory. It's the second time this year that Facebook has discounted Oculus gear. (The cost doesn't account for the powerful computer that users need to run Oculus.)

Virtual reality is not an obvious technology winner so far, and that holds for Facebook and Oculus, too. The VR device went on sale last year after a delay, and the company has sold perhaps a few hundred thousand of them. At Facebook's size, that's not great.

Oculus is not a flop by any means. But it remains unclear whether Oculus and virtual reality in general will become a mainstream technology that changes how people communicate and purchase real-world goods like cars, or whether it will remain a relatively nerdy fringe technology limited to video games and a few other areas.

The good news is that at the lower price more people will get to try Oculus and potentially get excited about the technology's potential. Winning fans for Oculus and for virtual reality in general is far more important to Facebook's future than any immediate revenue hit the company might take from reducing the device's price.

That said, it's clearer than ever that Oculus is going to be relatively immaterial to Facebook's finances for the foreseeable future. Facebook has been saying this for a while, but it's a bit of a disappointment for optimists. When Oculus went on sale in March 2016, Cantor Fitzgerald estimated VR could generate $7 billion in sales for Facebook by 2020, or about 10 percent of the company's estimated revenue that year.

Facebook's Share of 2016 Revenue From Payments and Oculus - 2.7 percent.

It's hard to predict technology future, but that Oculus sales estimate looks hard to reach now. Facebook's revenue from “payments and other fees” -- which includes sales of Oculus along with purchases of virtual goods in online video games -- was $753 million for 2016. That was less than 3 percent of Facebook's total annual sales. And analysts have said Oculus’s share of that revenue line was perhaps a couple hundred million dollars.

Facebook's nearly $2 billion acquisition of Oculus three years ago was a flier on virtual reality's potential. It was a worthwhile shot, but the technology still has a chicken-and-egg problem. VR requires a tipping point where both the technology and video games, movies and other tailor-made programming are compelling enough to persuade people plop down a big chunk of change for headsets. But Hollywood movie studios, video-game companies and others won't devote more energy to VR until there is more widespread embrace of the technology.

Facebook has shown it can reshape entire areas of technology by the sheer force of its will and 2 billion monthly users. Right now it doesn't seem as if Oculus is getting all of Facebook's considerable powers of persuasion.

The company has had to deal with a messy lawsuit over Oculus's origins and the distraction of political hobbies from an Oculus founder. That's not an ideal situation to get Oculus on the right footing. Facebook's attention is also divided between two virtual reality-type technologies. This spring Facebook showed off a major project in augmented reality, which mixes real world images with virtual ones like in the Pokemon Go smartphone game.

It’s not time yet to have real anxieties about Facebook's virtual reality project. But the company's struggles with Oculus do mean it's time to realize that when it comes to VR, Facebook isn't the unstoppable force it is in nearly everything the company attempts.

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