Editor's note: This article originally appears on PingWest's Chinese edition. Content has been modified for clarity.
ByteDance's 2021 acquisition of Pico, the world's second-largest VR (virtual reality) headset maker, sparked speculations of fierce competition with Meta's Oculus in the VR market, and expectations intensified in late September last year with the release of Pico's fourth-generation VR headset.
However, the business did not grow as expected, and it recently laid off a large number of employees. How did things come to be this way?
In the early stages, ByteDance, the TikTok owner, poured a lot of resources into Pico, even comparable to Meta’s investment in Oculus
ByteDance's aspirations to enter the extended reality (XR) industry are reflected in the price it paid for Pico. The VR company was acquired in August 2021 for 9 billion yuan ($1.3 billion), significantly more than the market consensus valuation of 2 billion yuan.
Prior to the acquisition, Goertek, China's largest VR hardware manufacturer and Oculus supplier, was a major shareholder in Pico and was in charge of producing Pico's VR devices.
With Goertek's unparalleled strength in VR supply chain and manufacturing, Pico has amassed a wealth of knowledge in hardware and technology development, while also shouldering the responsibility of exploring Goertek's consumer-facing business.
But it was a winding road, as Pico was not only extremely cash-intensive but also raised concerns from Goertek's clients because it posed a threat of competition. Eventually, the contract manufacturer had to make a difficult choice: to sell Pico, its rapidly expanding consumer-facing business.
When the sale proposal was initially presented, the worldwide craze for the Metaverse was in full swing, and nearly every major Chinese technology firm was in fear-of-missing-out (FOMO) mode, anxious to jump on the bandwagon. Naturally, Pico, which has the largest share of the VR headset market in China, became the most sought-after target.
According to sources familiar with the matter, Tencent, which adheres to more conservative investment principles, was also in the running to acquire Pico at the time but was reluctant to overpay. After a few twists and turns, Bytedance, a company with an aggressive investment strategy, bought Pico at a premium.
In the early days after the acquisition, ByteDance saw the VR/AR headset maker as a critical and strategic entry point into the next generation of the internet, rather than simply a tool to enhance its own content ecosystem.
Following its integration into ByteDance, Pico received massive support in terms of technology, content, exposure, and more. "Some internal technology experts were dispatched to improve Pico's algorithm tracking precision, memory management efficiency, and hardware device operating system power consumption," sources familiar with the matter told PingWest. Additionally, Douyin, TikTok's sister app in China, provided Pico with sustained and ample external exposure. During the Spring Festival in 2022, the total exposure of Pico on ByteDance’s omni-channels reached 1.13 billion.
“ByteDance poured a lot of resources into Pico in the early stages, even comparable to Meta's investment in Oculus,” a former Meta employee commented.
As the one and only Chinese unicorn capable of competing head-to-head with Meta on the global market, ByteDance's acquisition of Pico has undoubtedly energized the Chinese XR industry players, as if they foresee a promising future for rapid expansion.
ByteDance does not have a clear roadmap for Pico
Sources familiar with the matter said that Pico sold 700,000 VR headsets in 2022, falling short of the 1 million target set by ByteDance. The company’s misjudgment of the status quo of the domestic XR market, as well as a lack of clear strategic thinking following the acquisition of Pico, are among the contributing factors to the less-than-expected sales number.
A core employee who followed Pico from GoerTek to ByteDance told PingWest that the company never set a clear direction for Pico, and even the idea of positioning Pico as a portal to the Metaverse was not recognized internally. The company's ambiguity toward Pico's development was reflected in other ways as well: two months after the acquisition, ByteDance underwent its biggest organizational restructuring since its inception, separating its businesses into six units, and Pico was not included in any of the units.
Therefore, Pico has to start wading around in a lot of different areas without a plan, and so far the results haven't been great.
The idea of combining console games with VR headsets came out first, with Bytebox asking its gaming team to provide Pico with a lot of support and resources. It makes sense given that two of the leading companies in the space, Meta and Sony, have also been promoting their VR headsets by combining them with console games.
Still, it's a delicate approach for Pico to make significant strides in the consumer-facing VR market in China, where mobile gaming is overwhelmingly popular over console gaming.
If ByteDance continues to grow Pico's user base through this method, it could be a slow and arduous process that runs counter to the philosophy it holds, which is to trade large financial investments for rapid growth.
After not seeing satisfactory results in the gaming direction, ByteDance began experimenting with a growth strategy that combined entertainment video content with VR headsets. Several executives from Douyin and Xigua Video were sent to participate in Pico's business, and the business focus was shifted from VR gaming to VR video and live streaming. In the meantime, Pico is also attempting to expand its tentacles into other sectors, including concerts, sports events, fitness, social networks, enterprise solutions, and overseas markets.
Pico hopes to differentiate itself from competition in the XR sector by taking advantage of knowledge and experience from ByteDance on a short video and live streaming, said a former head of the Pico game branch team. In the meantime, the resources and manpower allocated to the game business are gradually decreasing. According to multiple insiders and people familiar with the matter, Pico is also self-producing and introducing some VR movies from content partners in addition to making content for Xigua Video and Tiktok, short video apps owned by ByteDance. However, the overall progress remains stagnant.
Pico was also attempting to capitalize on its extended reality (XR) business on social networks. In order to do so, Bytedance hired Ma Jie Si to assist in assembling the finest possible team for Pico. Ma Jie Si is the former head of Xiaom’s VR business and founder of Vyou, a virtual social entertainment app. Ma helped Pico launch an XR app similar to Oculus "Horizon World, but the app failed to achieve expectations with only thousands of daily active users.
None of these attempts brought additional surprises to Pico, while chaotic management and office politics hindered its development.
After the acquisition, the Pico team became the most contested aspect of the faction conflict. Former Pico insiders said that in addition to the struggle for the division of the business, there were also local organizational restructurings. "Some businesses underwent four restructuring adjustments in one year."
The launch of Apple's VR headset has the potential to light up the industry again, but there's still a lot of uncertainty.
Faced with decreasing costs and rising efficiencies in the domestic Internet industry, Pico must slow down and scale back its operations in order to survive.
According to the analysis of industry insiders, the cost of Pico4 is around 2373 yuan, which is very close to its starting price of 2499 yuan. "The marketing cost of Pico4 was in the four-digit range per unit. Basically, we are selling at a loss," a former Pico employee told PingWest.
At the same time, Pico's refund rate and unused rate were also high. Not only did a large number of users sell Pico on resale platforms, but dealers also slashed their prices to clear out their inventory.
Less than six months after the release of Pico4, internal personnel optimization communications were widely disseminated. Pico initiated rounds of layoffs at the end of 2022, with some key positions being replaced despite the fact that the layoffs were not of a sizable magnitude.
The most recent round of redundancies occurred in mid-February 2023, when ByteDance laid off 300–400 Pico employees, or approximately 15% of its talent pool. The number of layoffs was by far the largest.
According to a report from local media outlet 36kr, ByteDance has lowered its expectation for annual sales of Pico's VR headset from one million units last year to half a million units in 2023.
As the domestic VR market showed signs of slowing, there were mixed sentiments among practitioners who might be potentially impacted by the aftermath of Pico’s layoffs. Some people are optimistic that ByteDance will adjust its business strategy and take a cautious approach to growing its VR business for long-term success. Others, however, are pessimistic that the domestic VR industry will once again enter a deep freeze.
However, the outlook for the XR industry in 2023 remains positive.
The XR industry is looking forward to the MR (AR+VR) products that Apple is about to launch in the middle of the year, hoping that it can push this sector forward. "We know it won't be a groundbreaking product. This industry has a long way to go before it explodes, but it will serve as a stimulant for those still in the XR industry,” a Pico employee said.
But Pico employees have mixed feelings about the development of Apple’s mixed reality headset.
“Apple has delayed the release date many times; it’s hard to visualize what it looks like in its actual form. But it will embarrass us if Apple creates a technology that is far beyond our capabilities and sells well; if Apple's MR products fail to meet the market's expectations in a massive fashion, it will destroy the industry's confidence. Perhaps this state of ambiguous postponement is optimal, ” one of Pico’s internal employees reluctantly stated.