Essay: Oculus (VR) analysis inc. Porter’s Five Forces

The mission of Oculus is ‘to enable people to have meaningful interactions regardless of physical distance’ (Oculus, 2019), and the vision is ‘building the future of VR’ (Oculus, 2019).
Broadly defined, Oculus is operating in the industry of digital entertainment (Oculus, 2019). More narrowly, the industry of Oculus could be defined as the industry of reality hardware (VR- Expert, 2019) and even more narrow: the industry of VR goggles. It is a really fast-growing industry. The global market size of VR hardware has been increasing from 1.6 billion U.S. dollars in 2017 to 2.4 in 2018 and is estimated to grow until 4.4 this year (Statista, 2019).
PESTEL
This analysis only includes relevant elements.
Technological
Figure 1 shows the installed base of VR headsets worldwide from 2014 to 2020 (Statista 2019) and implies that the market grows fast. < 1% of all the computers are able to run with VR graphics on which the quality is classified as ‘acceptable’ (BBC, 2016). By 2020 this should grow to almost 10% (Statista, 2019).
Figure 1: virtual reality headsets
The technological developments of augmented reality are also very important for the VR industry. The AR market size worldwide is estimated to increase from roughly 3.5 billion to more than 198 billion U.S. dollars (Statista, 2019).
The AR and VR market together is estimated 12 billion U.S. dollars in 2018 and is expected to increase in the coming years, with forecasts for 2022 eclipsing 192 billion U.S. dollars (Statista, 2019).
Porter’s 5 Forces
Threat of new entrants
The increasing demand for VR leads to more interest in operating in the market, so therefore the threat of new entrants increases. Knowledge and money are needed for developing high-end goggles, which decreases the threat of new entrants. Once knowledge and money are available, the barriers to entry decrease. However, when they decide to invest in low-end VR goggles like the cardboard goggles, the investment costs are lower and there is not much knowledge needed (AVRspot, 2018).
Power of Buyers
The power of buyers in the VR market is high because there are many alternative VR goggles next to Oculus Rift (table 1). The price depends on the quality that customers want, comfort and compatibility. The switching costs are low because it is easy to switch from a low-end to high-end goggles which also needs a smartphone (Virtualreality123, 2019).
Power of Suppliers
According to Peasgood (2014), the Oculus Rift exists of several high-tech elements. For example Spectra7 Microsystems, which powers the Oculus Rift. There are different specific chips needed to make the high-end goggles, which increases the power of suppliers. High-end VR producers must rely on the production of the ‘chip-makers’. However, when looking at the cardboard VR goggles, fewer materials are needed, which decreases the power of the suppliers.
When considering the high power of suppliers, one could argue that vertical integration is the solution for this. Vertical integration brings everything in-house and makes the dependence on supplier lower and could avoid high transaction costs. However, it would be very difficult to be efficient in producing every part of the VR goggles. It is therefore very important to consider what they can produce efficiently in the organization and in the marketplace.
Substitutes
The substitute VR cave is a high threat because in this VR experience people can walk around (Strickland, n.d.). Augmented reality is also a substitute and is focused on real-life situations (Augment, 2017). Its threat is high because it develops continuously. The substitute 3D movies, in which customers can experience the movie more realistic than in 2D (physics.org, 2010) has a low threat because 3D becomes more outdated.
Competitive Rivalry
Sony is the current market leader (43% market share). Oculus is the second market leader with 19.4% market share (Statista, 2019). The different rivals can compete on different aspects, e.g. image quality, comfort, compatibility and of course price. These aspects are all included in Table 1. Figure 2: Market share virtual reality (Statista, 2019)
Since Oculus is operating globally, a whole new dimension arises; the international competition. The fact that they operate globally increases the number of competing firms within every national market and decreased seller concentration. This implies that Oculus should analyze every national market, in order to be aware of all their competitors.
Complements
Within the VR market, there are complementary products/software. Firstly, games are complements of the VR goggles, and to use the Oculus Rift Microsoft hardware is needed (Microsoft, 2019), or Xboxes. Furthermore, there are multiple VR products offered for different segments; entertainment, games, therapy or education. For using the Oculus Gear VR on smartphones, Oculus has a contract with Samsung. The platform of Oculus also includes movies, for example, Disney movies and business features (Oculus, 2019). Except for software applications, there are also hardware complements, like guns, controllers, headset or other applications (Oculus, 2019)
Oculus needs to develop new products in order to counter the threat of new entrants. Due to the high power of buyers and high threat of competitors, Oculus should focus on what customers want (e.g. price, quality, comfort, and compatibility) to improve their position in the VR market. Oculus could improve their position on the high power of suppliers by implementing vertical integration. Substitutes are developing continuously, therefore Oculus should also develop continuously. Also, Oculus should analyze every national market, since they are operating globally. Lastly, Oculus should focus on more complements in order to improve their obdurate position, because this could give rise to platform-based competition.
Industry evolution, innovation, and organizational change
Environmental change
As is mentioned in chapter 1.2, the VR market grows fast. Figure 3 shows that the market has already grown fast, from 6.1 billion in 2016 to 20.4 billion in 2019. However, when looking at the forecasted market size in 2022, it is 192.7 billion (Statista, 2019). When considering only 2016-2019, one could say that the VR industry finds itself in the maturity phase. However, since the market is expected to grow even more than it already did, we believe that the VR industry finds itself still more in the introduction phase of the industry life cycle. This means for Oculus that they should continuously develop and innovate their hard- and software in order to keep up with the market and keep their position.
Figure 3: Forecasted market size (Statista, 2019)
Learning dynamic capabilities
Oculus developed different types of VR goggles for multiple applications with different designs. These designs are based on PCs, smartphones, and standalones. In this way, Oculus adapts to the market and uses its competencies for new business opportunities and technological developments (Oculus, 2019).
Managing innovation
Patents, secrecy, lead- time
To stay in the introduction phase or go to the growth phase, Oculus should develop new technologies. To protect these technologies, Oculus should apply for the patents as soon as they developed the technology. Because patents expose the exact technology it protects, other companies could easily see how they could make the technology slightly different and in this way bypass the patent, and profit from Oculus’ technique. To prevent this from happening, Oculus should apply for patents on every component of the new technique they use. In the period that Oculus has applied for a patent, but the patent is still not allocated, it is advisable to work with trade secrets.
Product and process innovation
In the VR market, the way new types of goggles are produced is the most important to stay secret, because this is the way product innovations could be protected. Therefore, for the innovation of VR goggles, it is important to pay most attention to patents.
Develop innovations in industry
Developers are creating more realistic and accurate simulations of the real world, in the developed virtual world (Forbes, 2019). Ultimately, the VR industry is forecasted to become a multibillion-dollar industry (Globalme, 2018). The Gaming & entertainment industry has strong network externalities (installed base & complementary products).
For Oculus it is interesting to look at what strategy it concerns using these platforms. In this regard, Oculus could: monopolize the complementaries (vertical integrating by produce content themselves), or support the developers of content (by offering employees high-quality knowledge and quality or providing financial resources).
Oculus’ goal is to bring all the pieces together and make VR & AR together the platform of the future (Oculus, 2017). They should continue stimulating development on any platform in the industry and raise the level of VR.
Opportunities and threats
Oculus is developing cheaper, portable devices, that don’t need other gear to function (Marketplace, 2019). The forecast is that VR & AR will increasingly be used in training & teaching. Walmart announced that they will be using 17.000 Oculus Go headsets to train their employees (Forbes, 2019). Enterprise VR is a big opportunity. According to Business Insider Intelligence (2018), enterprise VR revenues will increase from 800 million in 2018, up to 5500 million (+587%) in 2023.
The growing AR market can be a threat to VR. Data shows that AR has the highest chance of showing its value beyond gaming because customers see more potential covering a much broader group of industries (shopping, taking photos, social media, navigation) (Globalwebindex, 2018).
Chinese tech-giants are introducing competing systems and can be a threat with an increasing number of home-grown innovations and competitors (Globalme, 2019). Compared to the current developments in the industry, some were groundbreaking (Forbes, 2018).
Network externalities
Because of the contract with Microsoft, potential VR users that already own a Microsoft device may be inclined to choose Oculus because this ‘matches’ their computer. In 2014, Oculus is bought by Facebook (Newsroom Facebook, 2018). Because Facebook is so well-known it is good for the reputation of Oculus that they are part of this organization now.
Because Oculus has a lot of competitors in the VR market we don’t expect the market is tippy. Oculus is one of the leading companies. This means that currently there is not one winning platform, so ´winner takes all markets´ is not the case.
Market segmentation
Figure 5: Market segmentation
In 2015, the PC segment was the largest revenue generating segment. However, the mobile platform segment is expected to become the largest platform in 2022, due to the ease of access to hardware, forced adoption and relatively lower prices (Credenceresearch, 2016).
Figure 6: hardware/software distribution (Grandvriewresearch, 2017)
In 2017, the hardware segment contained the largest market share (Businesswire, 2018). The software market is expected to surpass the sales of hardware, offering interesting opportunities for technology developers (Grandviewresearch, 2017).
At first, the VR technology was mainly used in gaming and entertainment applications. However, due to recent technological developments, the use of VR in healthcare, education, and retail has high potential and is expected to grow further (Grandviewresearch, 2017). The education sector will grow over 59% until 2022 (Businesswire, 2018). In 2018, Oculus announced the launch of Oculus Education pilot programs in several countries. With the possibility to bring VR headsets into schools, libraries, and museums (Oculus, 2018).
In 2017, North America dominated the VR market. At this moment, Asia-Pacific is the fastest growing market (Alliedmarketresearch, 2018). This is because of the growth in the adoption of technologically advanced solutions, and more end-user industry application areas in emerging economies, like China. In 2018, Oculus announced its new standalone VR headset, in collaboration with Xiaomi and Qualcomm, with the Chinese market as a target (Oculus, 2018).
Key Success Factors
The needs of the customers differ per segment. For example, pc users want software and hardware that matches their pc. The main dimension of competition for Oculus is the gaming segment. As will be explained in the strategic group the competition of Oculus is strong. There are many other companies operating in the VR industry. To deal with this Oculus came up with all different kinds of platforms; oculus go, quest, tethered to a PC.
5.6.2019