Meta advances XR ecosystem to power next-gen smart devices, says DIGITIMES Research

Meta's XR division, Reality Labs, remains unprofitable despite revenue growth, with Quest 3 sales driving a 30% increase in the first quarter and 28% in the second quarter of 2024 over 2023. These gains were offset by high operating expenses, leading to a US$4.5 billion loss in the second quarter alone.

Despite strong Quest headset performance, Meta and the broader XR industry struggle to achieve profitability, as mass-market adoption remains elusive, reflecting the sector's current limitations in mainstream appeal.

Vuzix's financial challenges deepened in 2024, with second-quarter revenues falling 77% year-over-year and a net loss of US$40.6 million. This downturn was largely due to a sales dip in its M400 smart glasses, following inflated demand from a 2023 one-time order in Asia.

Why keep investing in XR despite limited profitability?

Despite limited profitability, Meta and Vuzix remain invested in XR. According to DIGITIMES Research analyst Brandon Fang, early investments—such as Meta's US$2 billion acquisition of Oculus and US$880 million for CTRL-labs—reflect their aim to lead the next computing era, even with annual development costs exceeding US$10 billion.

Investing early doesn't ensure an easy exit later—leaving now risks sunk costs and future potential gains. Meta faces this dilemma, with CEO Mark Zuckerberg describing Reality Labs as a long-term bet, aiming for profitability by the 2030s.

Vuzix is targeting the enterprise AR market with complete systems and waveguide modules. Albeit unprofitable, the company secured a US$20 million investment from Quanta, signaling its long-term growth strategy as AR and XR markets evolve.

Key milestones of US XR players, 2012–2018

Source: Key players above, compiled by DIGITIMES Research, November 2024

Key milestones of US XR players, 2019–2024

Source: Key players above, compiled by DIGITIMES Research, November 2024

Can XR makers balance cost and quality for mass adoption?

Creating XR devices with extended battery life, high resolution, and a lightweight build at a US$300 price point is impractical. Fang's "project management triangle" framework—scope, cost, and time—highlights the difficulty in achieving quality, affordability, and efficiency all at once.

The cost structure of XR devices is dominated by manufacturing and component expenses, which comprise 60% to 80% of total costs. Retail prices often fail to cover R&D, marketing, and distribution, with display panels accounting for up to 33% of VR costs, while AR requires high-performance chips for computing.

To manage costs, XR makers must explore new business models, like app platforms and AI integrations. Meta's Ray-Ban Meta smart glasses achieved product-market fit (PMF) in North America, meeting consumer needs and enhancing competitive positioning, marking a potential step toward scalable production.

Who can challenge US XR dominance?

The US dominates the XR market, with open technology and global reach, especially in chip and hardware design. Qualcomm's Snapdragon XR platform powers key products like Meta Quest and Ray-Ban Meta glasses, reinforcing US dominance and extending standardized solutions further to Chinese firms like PICO and Xreal.

Leveraging low costs and advanced manufacturing, Chinese firms Xreal and Pico are expanding into Europe, the US, and Asia, focusing on entertainment and multifunctional applications. Xreal grows through retail partnerships like Smartech in major cities like London, Paris, and New York, while ByteDance-backed PICO strengthens its competitive edge with integrated apps like TikTok.

Counterpoint and Grand View Research show that China's closed XR market and security concerns push firms like Rokid and INMO toward emerging markets. Rokid provides enterprise AR for education, industry, and healthcare, while INMO, focused on waveguide-based AR products, saw 200% growth in 2023 through targeted applications.

According to Fang, Asia-Pacific and Europe offer promising XR growth potential, with Africa also gaining interest as companies, including Chinese firms, release locally tailored products to capture high regional demand.

While Qualcomm and Apple dominate the XR chip market, rumors suggest MediaTek may be developing a custom chip for Meta. However, with XR still niche, Qualcomm's market and technical edge face minimal immediate competition.

Long-term prospects and technical strategies

Fang added that the long-term vision for Meta and Vuzix is to grow the XR market by integrating hardware and software, enabling future devices to operate independently from iOS and Android ecosystems.

Meta is advancing Horizon OS to extend its platform across third-party devices, lowering development barriers and fostering app adoption. This evolution aims to create integrated ecosystems in AR, VR, and MR, leading the next generation of smart devices.

Fang explained that AR and VR require unique optimization approaches. AR glasses need low-power processors and high-performance displays, with diffraction waveguide technology currently favored. However, balancing a larger field of view (FOV) and higher resolution with efficient manufacturing remains challenging, as increased resolution raises power consumption, requiring design trade-offs.

While VR and MR processors have reached practical standards, the high cost of micro OLED display panels remains a limitation. Sony leads in quality, with Chinese manufacturers testing production to meet market standards and attract major clients.

About the analyst

Brandon Fang, a seasoned DIGITIMES Research analyst, brings over a decade of experience in XR, Metaverse, smart wearables, and AI, with deep insights into global industry trends, technologies, and key players. His background spans product management and leadership in AR/VR and gaming at public companies in Taiwan and the US, grounded in an Information Technology degree focused on interactive tech.

Credit: DIGITIMES Research