SINGAPORE -- Meta Platforms has struck a preliminary deal to sell a new, lower-priced version of its virtual-reality headset in China, regaining a foothold among consumers in the country 14 years after Facebook was shut out.
The agreement with Tencent Holdings will make the world's largest videogame company the exclusive seller of Meta's headsets in China, people familiar with the matter said, offering the U.S. technology giant a major new market as it looks to boost tepid global demand for its niche gear. Tencent will start selling the headset beginning late 2024, with the two companies reaching a deal after about a year of negotiations.
The deal is provisional and details are subject to change. It isn't clear whether Tencent needs to seek formal government approval for introducing Meta's device and offering VR content on the platform -- as it does for the Nintendo Switch and conventional videogames -- since the country hasn't issued rules for VR yet. Beijing has tightened regulations for videogames and other digital content, which could create hurdles for the deal.
Meta plans to use lenses in the headset that are cheaper than those in its most recent model, the Quest 3. This more-affordable version will also be sold in other markets, people familiar with the matter said. Meta will install a more advanced graphic processing unit than used in its Quest 2, which launched more than three years ago, the people said.
In the deal, Meta would take a bigger share of device sales and Tencent would take more of the content and service revenue, such as software subscriptions and game sales, a person familiar with the matter said. The headset would provide games and other apps published by Tencent, the person said.
Meta declined to comment. Tencent didn't respond to a request for comment.
Meta's China partnership comes as weakening demand for VR headsets fuels skepticism about the technology's longer-term potential to win over consumers. Earlier this year, Meta slashed prices for some headsets after its global shipments more than halved in the fourth quarter of last year.
The market leader in China's VR-headset industry, TikTok-owner ByteDance, is cutting hundreds of jobs in its Pico headset unit as it struggles with lackluster sales. Pico's marketing, sales and content teams will be downsized as it restructures to focus on hardware and other core technologies.
The VR industry is in a very early stage, and the market didn't grow as fast as Pico expected, Chief Executive Zhou Hongwei told staff at a Tuesday meeting.
Tencent came close to disbanding its extended-reality technology team, which includes its VR efforts, in February as it scaled back investment. As the deal with Meta neared agreement, Tencent rebuilt the team in August, people familiar with the matter said.
The deal will give Menlo Park, Calif.-based Meta renewed exposure to China's large consumer market after Facebook was blocked in 2009 as China cracked down on its internet following antigovernment unrest. Meta's Instagram and chat messenger WhatsApp are blocked in China.
Meta still makes money from the country by selling ads on Facebook and Instagram to Chinese companies. Meta's headsets currently aren't officially available in China.
Meta CEO Mark Zuckerberg spent a few years courting Chinese officials, but in recent times he has publicly criticized the country, especially as short-video app TikTok grew in popularity and challenged Meta's global dominance in social media. Zuckerberg's comments have bolstered negative views of the entrepreneur in Beijing that weighed on negotiations with Tencent, the Journal has reported.
The Meta-Tencent agreement bucks a recent trend of U.S. technology businesses exiting the Chinese market amid rising costs, new data regulations and tough domestic competition.
Meta was the global headset-market leader in the second quarter of 2023, with about 50% market share, according to data from market research firm IDC, while Sony and ByteDance's Pico were the second- and third-largest headset makers. Meta's Quest 3 starts from $500 and Sony's PlayStation VR2 costs $550. Pico costs around $340 in China and isn't sold in the U.S.
Global headset shipment fell 44.6% in the quarter from a year ago, IDC data shows. The market research firm expects 8.5 million headsets to ship this year, slightly more than in 2017.
With demand cooling, headset makers are re-examining their pricing strategies and considering selling more to professional users and company buyers who are more open to using such technology to improve productivity, executives and analysts say. Consumer hardware -- mainly used for videogames and other digital entertainment -- is likely to remain a niche market in the near future.
Meta has explored lowering costs of certain components as supply-chain costs rose, people familiar with the matter said.
Consumers have also complained that VR headsets are uncomfortable to wear for long because they are heavy and might cause vertigo and nausea.
In China, the VR market ended a two-year growth streak with a 56% decline in headset shipments in the first half of this year, according to technology analyst Counterpoint Research. Pico -- with a 50% market share there -- has this year scaled back marketing efforts and lowered shipment targets. Sony took 19% after its February debut.
Apple's Vision Pro headset -- unveiled in June -- will go on sale in the U.S. early next year, with more countries to follow shortly. Analysts say Apple focuses on commercial use cases over consumer entertainment as the device, starting at a much higher tag of $3,499, is capable of both virtual and augmented reality experiences.
The potential competition from Vision Pro, as well as Meta's partnership with Tencent, are likely to enhance the sales and adoption of such extended reality devices in China, said Flora Tang, a senior analyst at Counterpoint.
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