Two years after ByteDance acquired Chinese VR (virtual reality) headset manufacturer Pico for a whopping $1.3 billion, the tech giant is now reportedly downsizing and restructuring its VR division.
The move comes as enthusiasm for the metaverse has waned, and emerging technologies like ChatGPT have surged to the forefront, offering transformative potential for the tech industry.
ByteDance’s overhaul follows in the wake of Tencent’s strategic pivot in its XR (extended reality) development earlier this year, moving away from in-house hardware production. Tencent is reportedly partnering with Meta Platforms to serve as the exclusive distributor of new, more affordable VR headsets in China with sales expected to begin in late 2024.
So, two of the highest-profile players in China’s VR market are scaling back. Meanwhile, Meta’s Quest 3 VR headset also failed to meet expectations in the U.S. The latest survey by analyst Ming-Chi Kuo indicates that Meta has reduced its Q4 shipment volume for Quest 3 by approximately 5%–10% this year, after market demand fell short of expectations.
Apple, which only held the stunning reveal of its Vision Pro headsets in June, is reportedly cutting production forecasts of the device, and delaying the launch plans for a lower-priced, mass-market Vision product.
The VR industry appears to be at another pivotal juncture. Despite significant investments, the anticipated “singularity” moment of widespread adoption remains elusive, and the industry is still seeking the validation that has yet to materialize with consumers.
ByteDance, in response to the uncertainty in the sector, has chosen a strategic path of conservation. The company aims to sustain its research endeavors at a minimal cost, while awaiting a potential resurgence in the VR market at a later date. The Beijing-based company is seeking to balance the need for innovation against the realities of a challenging market.
ByteDance’s $3 Billion Bet On Pico
ByteDance is the most committed Chinese investor in the virtual reality (VR) sector. In a strategic move that underscored its obligation to VR, ByteDance acquired Pico in August 2021 for a staggering 9 billion yuan ($1.3 billion). This acquisition price significantly exceeded the market consensus, which valued Pico at around 2-3 billion yuan at that time.
Following the acquisition, ByteDance kept up its pace of investment. Reports suggest that the company injected an additional 10 billion yuan in the subsequent year, aiming to boost the sales of Pico headsets. In total, ByteDance’s expenditure on its VR ambitions is estimated to be around 20 billion yuan ($2.74 billion).
This hefty investment reflects the company’s vision of VR as a key player in the future of technology at a time when the metaverse was the hottest concept out there. In 2021, Facebook rebranded as Meta, Disney officially established a metaverse division, and major Chinese companies all formed teams related to XR and the metaverse. But things didn’t go according to plan.
ByteDance had hoped that an upgraded VR headset, a high-cost performance PICO 4, could help it establish a dominant market position, similar to what Meta’s Quest headset was able to achieve. The company set an ambitious target of selling 1 million units for 2022, doubling on Pico’s half million in total sales in 2021.
However, despite leveraging its extensive short video platforms for marketing and enlisting numerous celebrities for promotions, Pico’s sales fell short. The total sales for 2022 were estimated to be around 700,000 units, well below their target.
Sales dropped further in 2023, when the total AR/VR headsets shipments in the entire Chinese market slumped to only 328,000 units. With Pico’s 59% market share, that means Pico may have sold around 194,000 units during the first six months of 2023.
Consumers Find VR Headsets Aren’t Must-Haves
To be sure, the design and performance of the PICO 4, priced at 2,500 yuan ($343), offers great value. But consumers are still not convinced that it’s something essential to have in their lives. “After playing it for a few times, it was left on the shelf collecting dust,” noted one Pico user.
The problems are manifold: high price entry barriers, subpar user experiences, the lack of quality content, and the absence of “killer apps.”
Users still complain of practical issues, such feelings of dizziness, lags in the software, heavy headsets, short battery life, compatibility with glasses, and controller sensitivity.
A lack of compelling content is also hindering the market. The most popular VR experiences today remain old games like Beat Saber. Emerging VR sports games struggle to remain viable, and users often find traditional gaming consoles like the Switch more appealing.
The Pico platform has only about 530 applications, including games, videos, sports, and office scenarios—far fewer than the millions of apps available on smartphones or the tens of thousands of titles available on video game consoles.
At the end of the day, unlike personal computers and smartphones, which are intrinsically tied to everyone’s work and daily lives, VR headsets have not achieved the same level of integration.
For now, VR remains primarily an entertainment device. That means it probably can’t justify billions of dollars of expenditure. It’s perhaps wise for ByteDance to avoid throwing good money after bad.
VR’s Time Will Come, Just Not Now In China
Despite facing challenges, the VR industry is still expected to play a crucial role as a next-generation mobile terminal or computing platform.
According to an IDC report, the VR/AR headset market is projected to grow by 46.8% in 2024, driven primarily by two major products: Meta’s Quest 3 and Apple’s Vision Pro.
However, the outlook for the Chinese market appears more cautious, especially with Pico and Tencent scaling back their efforts. There are no expectations for any major product releases in China in 2024.
Chinese VR/AR headset manufacturers are likely to focus on sustaining their operations, waiting for a transformative moment akin to the iPhone “revolution” in the future.