A year after launch, Oculus says Quest is starting a VR revolution

But plenty of challenges and unanswered questions remain about the technology's prospects for making the leap from nerd caves to living rooms.

The Oculus Quest

Facebook believes the Oculus Quest is the key to its VR future — and that it's quickly becoming a mainstream product.

Image: Courtesy of Facebook

Mike Verdu thought he had it all figured out.

After three decades in the video game business, including senior executive roles at Electronic Arts, Zynga and Atari, Verdu was about to start his own game company early last year. Then The Social Network came calling.

"I had raised funding, found a co-founder, found a team and was about a month away from pulling the trigger on a game startup when Facebook reached out to me," Verdu said. Facebook wanted to talk about the company's Oculus virtual reality operation. Oculus was about to release its first modern wireless headset, the Quest, and needed great games to sustain the platform. Could Verdu help?

Verdu, a self-proclaimed "bit of a VR skeptic," took the meeting at Facebook's Menlo Park campus anyway. At the end, Hugo Barra, a Facebook vice president, turned to Verdu and said, "We're not letting you out of the building until you try the Quest."

Verdu put it on. "And it was just magical," he said. "I thought, 'Wow, somebody teleported this thing back from 10 years in the future, and it feels like the iPhone of VR' and, 'Oh my God, VR is actually now,'" Verdu said. "It was very profound."

He knew what he had to do: "When I had this transcendent, transformative experience with the Quest, I went back to my co-founder and said, 'I don't think you want to be in business with a CEO who's just had this experience — I'll always be thinking about the contrast between whatever company we were working on and what was happening in VR.'" Luckily, Verdu's co-founder and investors were understanding. "I pulled the plug on the startup and joined Facebook." Verdu is now the company's vice president for AR/VR content.

Six years after Facebook acquired Oculus for $2 billion and three years after the first wave of VR hype collapsed amid dashed hopes that VR would become the next dominant entertainment medium, there aren't many other technologies that can still inspire grizzled tech veterans to quasi-religious reveries. (When was the last time anyone got an Apple tattoo?) People in the VR industry sometimes sound like members of a messianic cult. They have seen the future, and they want you to see it, too. Just put this headset on.

Yet as Facebook celebrates the first birthday this week of the Quest and its other top-end VR system, the wired Rift S, the VR evangelists are sounding a lot less crazy. That's because legitimate signs are emerging that Facebook and its competitors like Sony and HTC are finally creating a sustainable, growing virtual reality ecosystem. VR is not on some delightfully normal upward trajectory; after the carnage of recent years, it's going to be a long time until most investors want to hear about VR again. But for the true believers who survived, things are starting to look up.

Facebook announced Monday that consumers have spent more than $100 million on Quest content and that more than 10 individual Quest titles have generated more than $2 million in sales each. Those numbers may sound like small potatoes, especially for a behemoth like Facebook, but for both VR consumers and the fervent independent game developers who have bought into the technology, they are an essential sign of hope.

And that's before the quarantine bump. Sales of just about every entertainment and electronics category, including VR, have surged since March while much of the planet stays home. While hard sales figures are scarce, new Quest and Rift S systems remain largely sold out at major retailers. Facebook estimates that the vast majority of consumers buying the Quest are experiencing VR for the first time. According to analyst Neil Barbour, S&P Global Market Intelligence estimates that the overall VR industry shipped about 6 million modern headsets last year, leading to a total global VR installed base of about 13 million systems. The market leader is Sony's PlayStation VR, with about 4.5 million units installed, followed by almost 4 million total installed Oculus systems, Barbour said.

But for all the tailwinds propelling VR generally and Oculus specifically at the moment, plenty of challenges and unanswered questions remain about the technology's prospects for making the leap from nerd caves to everyday living rooms.

What kind of content does Oculus really need?

Whenever an industry promotes a new entertainment platform — color television, the VCR, Blu-ray, VR — it faces the same classic quandary. Consumers won't invest in a new system unless there's great content available for it. Meanwhile, great independent content producers won't make that material until the platform has a lot of users.

So how do initial platform creators like Oculus get that content to begin with? They pay for it. They pay for it by building internal content studios, by buying already-successful studios (as Oculus did in November by acquiring the maker of Beat Saber), and by directly paying, subsidizing and assisting outside developers to make what they hope is compelling, platform-defining content.

Modern VR's top consumer category has been games. So when Facebook hires a seasoned game executive like Mike Verdu to run its overall AR/VR content operation, what the company is really saying is: Quest needs great games.

Quest is clearly Facebook's most important VR product. Facebook is pinning its consumer VR ambitions on the hope that by liberating VR from wires, from separate sensors and from the need for a powerful PC, Quest can propel VR out of the PC-peripheral market and into the entertainment mainstream.

Games like Pistol Whip are meant to make use of the Quest's mental and physical engagement, not show off AAA-quality graphics.Image: Courtesy of Cloudhead Games

But Facebook is not marketing the Quest as a great game machine right now, perhaps for the simple reason that there are no major top-end games available for the system yet. "If you look at our marketing materials today, they're about what Quest as a product can do," said Chris Pruett, Facebook's director of AR/VR content ecosystem. "You don't need a PC. You pick it up, you put it on, there's no wires. You don't do 20 minutes of system updates before you can run your video game."

Rather than emphasize big-name games from famous properties, Facebook has been relying on relatively simple diversions to emphasize the basic physical and mental engagement of virtual reality. When you swing a virtual sword in Beat Saber, the wireless nature of Quest does actually allow the brain to mimic the sensation of wielding a (very light) blade. Because Quest is being pitched to everyday consumers, not hard-core VR experts, Facebook is curating the official store for Quest apps far more tightly than it does the market for Rift S software. Facebook does not want the average Quest VR newbie to stumble into buying some schlocky, low-quality app. In order to bypass those guardrails, Quest users must use a separate high-end cable (which Oculus does not provide in the box) and plug into a PC, thereby undercutting the Quest's main selling point.

"A lot of the software that is the most successful on Quest isn't well-known game IP," Pruett said. "It's Beat Saber, it's Superhot, but it's not a Halo, not a title that a gamer's going to recognize outside of the space." Once users start to navigate the store, Pruett said he hopes users will rely on the quality of the games more than simple name recognition.

The casual games strategy seems to be working for Quest for now, but Verdu — Pruett's boss — said that one of his top priorities is driving so-called "AAA" games onto Oculus headsets.

Related: Why Facebook thinks game-streaming is the future of Oculus VR

For at least this year, top-end gaming on Oculus will be available on Rift S, not the wireless Quest. (The Medal of Honor series from Electronic Arts is coming to Rift S later this year, for example.) Quest can run AAA games — like the groundbreaking Half Life: Alyx from Valve — while plugged into a computer, but not in wireless mode for the simple reason that the Qualcomm Snapdragon processor inside the headset is far less powerful than modern computer GPUs.

Jason Rubin, Facebook's vice president for special gaming initiatives, said that standalone VR headsets are fundamentally constrained — but new technologies like game-streaming could allow PC-quality graphics without wires in the future.

"Ultimately we'll throw those processors in a server farm somewhere and stream to your headset," Rubin said. "And a lot of people are going to say, 'Oh my god, that's a million years away.' It's not a million. It's not five. It's somewhere between."

But does the overall Oculus product line make sense?

The Rift S and the Quest (which cost an identical $399) present not only vastly different consumer experiences but also different challenges for game developers. It generally requires more time and effort to make games work on the Quest, because the code has to be optimized more carefully for the less-powerful system.

"Getting Moss onto the Quest was definitely a challenge for us," said Josh Stiksma, principal designer at Polyarc Games, maker of the popular puzzle game Moss. "It was definitely a lot of heavy lifting."

But Stiksma and other developers said the additional work has been more than justified by winning access to the Quest market. And in any case, they said, the mass audience targeted by Quest does seem most interested in simple games that get players right into the action.

Moss VR Moss' developers had to work hard to get their game working on the Oculus Quest, but they said it was worth it to reach a mass audience.Image: Courtesy of PolyArc Games

As put by Denny Unger, CEO of Cloudhead Games, maker of the Quest hit Pistol Whip: "A big motivating factor in Pistol Whip was: How do you get someone into VR and in 30 seconds have them immediately understand what they have to do? How do we engage their lizard brain and get them reacting rather than thinking about how to react?" In Pistol Whip, players immediately understand that they have to point and "shoot" the bad guys. (Unger said Pistol Whip cost less than $2 million to make.)

The Oculus product line doesn't stop at the Quest and Rift S, either. The company is also still making the $199 Oculus Go, which stands alone but which does not offer the full VR experience of the more advanced models. Rather, the Go is best-suited to viewing noninteractive videos. For example, Elizabeth Hyman, CEO of the XR Association, the industry's Washington lobbyists, said in an interview that she prefers the Go because, "I like the 360-video scenarios where I can travel and have sea turtles swimming beneath me or climbing the El Capitan rock face."

The Go also differs from the Quest and Rift S in only using a single hand controller, rather than two (or zero; Oculus also announced Monday that the Quest will soon feature games that track the user's hands without holding any controller at all).

While the Go may retain its target audience, it will remain essentially a legacy product. The future of Oculus is the Quest and the Rift S, or perhaps some combined version. The various Oculus products do provide different models for different sorts of users, but Facebook executives admit that a strong case can be made for consolidating the Oculus line in the future.

"The segmentation is kind of an outcome of evolution rather than companies deliberately segmenting, and I think that's OK," Verdu said. "It's a result of evolution with the Quest kind of being the new expression of what VR can be."

Half Life: Alyx The groundbreaking Half Life: Alyx from Valve is one of the games that shows the AAA future of VR. Valve

Parsing the discussions with Facebook executives, analysts and other VR experts, it is easy to believe that Facebook could want to use advanced wireless technology to develop a VR system that combines the easy setup and cordless aspects of the Quest with the Rift's ability to leverage off-board graphics hardware. For instance, Oculus could sell a one-box VR package that includes a small base station with a powerful dedicated graphics card that communicates wirelessly with a headset that no longer needs full onboard processors. A lot later, Oculus could follow up with a wireless base station that supports multiple headsets simultaneously, allowing easy multiplayer VR.

The first main technical challenge to such a system would appear to be developing wireless technology that could ensure the low latency and high, consistent frame rates required for VR, even while transmitting through a few normal household walls. The second challenge would be packaging that technology and the required computing chipsets into a base station small and light enough to remain easily portable.

But what if the real future of VR/AR is the enterprise market, not mass consumers?

Regardless of the Quest's fate, Facebook is hedging its bets. Consumer VR might never take off if many people simply can't stand wearing an electronic device strapped over their face. Sectors from medicine to real estate to manufacturing may make better use of advanced imaging technologies than do consumers flailing their arms around at home. Magic Leap, once a super-hyped augmented reality darling, recently shifted entirely to the enterprise market, appearing to abandon everyday consumers.

For now, though, Oculus is enjoying some good news after years of disappointment. In particular, Facebook executives appear genuinely relieved that small independent developers like Cloudhead and Polyarc are finally making money on the Quest platform.

"For me, the North Star for success is developer success," Verdu said. "That's where there's a lot to celebrate finally. Developers are now having a level of success in this new medium that warrants continued investment. You're seeing a flywheel that's finally got some momentum."

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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