Virtual Reality, Real Returns
Jackson Baur, Dartmouth Business Journal
It’s safe to say virtual reality isn’t virtual anymore. As startup firms tested the water early in 2015 with gradual unveilings of new content and progressive technological improvements, virtual reality morphed into one of the most disruptive technologies to enter the gaming industry in recent years. When Deloitte predicted that virtual reality companies would carve out a billion-dollar video gaming niche in 2016, they were wrong. 2016 exceeded all expectations and brought with it a $5.2-billion year for the virtual reality market.
While the arrival of tech giants such as HTC, Google and Sony signaled a massive influx of capital to capture gains in the entertainment sector, industry analysts suggest the true potential of the technology has yet to be realized. To be sure, the arrival of full-body, immersion-based gaming experiences are exciting for the gaming industry and present significant opportunities for investors in and of themselves. However, high dollar acquisitions like Facebook’s buyout of Oculus in 2014 for $2 billion and ambitious market growth targets mean that Silicon Valley name brands are interested in more than mere gaming.
Valuations like these are driven not by what virtual reality has done so far. They are based on the technology’s potential applications beyond just console-based gaming. Inside the virtual reality headset, sensors behind glass lenses track eye movements to construct a close-to-real environment. High-speed image transmission delivers inputs to the eyes at rates that make the brain believe the world around it is real as it moves in lockstep with the rotation of the head.
What this means is that today’s virtual reality systems have mastered the art of fooling our sense of sight. False environments for entertainment purposes, training scenarios for healthcare and combat practice for the military are all feasible applications made possible with this new technology. From a budgetary perspective, education with headsets and tailored content costs less than the overall operational fees associated with training programs.
In terms of wide-scale application, virtual reality is still in its infancy, and several factors continue to impede its popularity with the public. According to a recent Sketchfab survey, individual consumers are put off by the costs associated with more advanced virtual reality headsets. With the price of the Oculus Rift headset at upwards of $850 and the HTC Vive at $799, such complaints are not unjustified.
The 2017 virtual reality industry survey compiled by Sketchfab also highlights two other pressing issues: the readiness of the technology and the absence of appealing content. While trade-show demos at the recent Consumer Electronics Show in Las Vegas enthralled viewers with crystal clear representations of scuba diving, space exploration and the like, a similar buildup of hype also surrounded the commercial failure of three-dimensional TV’s launch.
Virtual reality has bells and whistles aplenty but needs substance as well. While gamers will continually receive new content from gaming studios that drum up sales with virtual reality compatibility, non-gaming users will turn away if the content is unsatisfactory.
Virtual reality’s ability to succeed where 3D TV failed will be determined by content catering beyond the gaming market. Tweaking and expanding the existing technology for use in augmented reality simulations in healthcare, product design, and education will be key in maintaining VR’s lofty expectations.
However, at this point, the success of virtual reality seems to be almost a given in the industry. The IDC has forecasted worldwide revenues for the technology to grow at a compound annual rate of close to 180 percent until they approach the $150-billion-dollar mark in 2020. Investors looking to position themselves for these gains should plan accordingly and take advantage of the areas the technology can still improve in.
Virtual reality firms can collaborate with content generators, such as GoPro, to improve their products. A market leader in compact, high-quality recording, GoPro uses camera rigs in drones as a cost-effective alternative to expensive 360-degree photography that the creation of digital environments requires. Given its established track record and already successful product lines, GoPro is well-positioned to provide the visual elements that can take virtual reality from gaming to broader audiences. Moreover, with investments in content creator start-ups jumping from $331 million in 2015 to $1.48 billion in 2016 according to Pitchbook, the market certainly exists for companies willing to provide these services.
Companies that have already released VR products can be counted on to deliver reliable returns but investors targeting a larger yield should look to firms that have yet to enter the market. While Sony and Oculus have struck first and will likely reap the near term benefits of leading the gaming industry, Apple may strike last should it choose to marry the underlying technology to its iOS platform in some format. Given its patents for an iPhone compatible virtual reality headset and its 2015 acquisition of the augmented reality startup Metaio, Apple’s prospective foray into the industry is based on more than mere speculation.
Virtual reality could open countless doors for applet compatibility and competition against Alphabet Inc.’s successful Google Cardboard headset, which has already shipped close to five million units. For example, the inclusion of augmented reality technology in Nintendo’s smash hit PokemonGo allowed users to view falsified images overlaying the world around them, and netted the developer an additional $950 million in estimated 2016 revenues, according to market researcher App Annie. If this technology were to expand from downloadable software and apps to built-in smart phone hardware, the applications could be vastly expanded.
While much conjecture surrounds the future product offerings from the competing tech giants, the entry of new firms to the market will be certain to shape and reshape the industry. The simultaneous interest from these companies, coupled with their rapidly expanding investments in virtual reality as they compete for market share will create a plethora of new applications for the technology in due time. With broader content, better engineering and greater efficiencies in production allowing for more competitive pricing, virtual reality’s ultimate matriculation to a much broader consumer audience is nearly assured over the coming three to five-year horizon. At this rate, the returns behind virtual reality investments will be everything but virtual.