May 27, 2020

AR and VR – Back from the Dead

As sure as Gartner’s model predicts technology’s fall from inflated expectations to disillusionment, it also posits an unhurried recovery. And this is where AR and VR find themselves in May 2020, with consumer use progressing at a slow but steady pace. No doubt COVID-19 stay-at-home directives have played a role in this upturn, but these are only one part of a much larger trend.

Irrational Exuberance
The peak of inflated expectations occurred in 2016 and 2017, fueled by wild speculations on the part of analysts and industry leaders. In 2016, IDC analysts predicted that by 2020 AR-VR revenues would top $162B, a number greater than the anticipated revenue of the entire video game industry in 2020, and 26 times greater than the actual combined revenue of AR-VR products in 2019 ($6.3B). In 2017, Mark Zuckerberg announced his goal of building an audience of one billion VR users. In mid-year 2020, that number is counted in the millions.

Unfortunately, these were false expectations, inevitably leading to the AR-VR disillusionment that still resonates today.

So, what went wrong?

COST and…
For one, retail prices have been prohibitively high. The first high-performance VR systems that shipped in 2016 (the HTC Vive and the Oculus Rift) were expensive ($799 and $599, respectively) and required a pricey high-performance personal computer (at minimum $1,000, but usually $1,500 or more). As well, the connecting cables were irritating and the systems were difficult to set up and operate, limiting audience reach to tech-enthusiasts.

Consequently, both units sold poorly. Through 2019, lifetime sales of HTC’s Vive were only 1.3M units, 1.5M for Oculus Rift: orders of magnitude lower than original expectations.

Second, and unsurprisingly, most AR-VR software applications were games targeted at hardcore players. For example, Sony shipped its own VR peripheral system for PlayStation in 2016, but hardware shortages and a dearth of games meant that it never made significant penetration into its own user base. As of January 2020, Sony had sold just five million VR units to an installed base of over 100-million game systems.

Finally, low-end systems such as the Samsung Gear VR suffered from limited capabilities, with poor controls and low-quality graphics providing more headaches than entertainment. Moreover, promotions were largely limited to giveaways for new Android phone buyers, meaning the platforms themselves were rarely the focus of advertising.

The End of the Fall
Fortunes for virtual reality started to change in mid-2019, with Facebook’s introduction of the Oculus Quest. Priced at $399 for a standalone unit (no PC required), the Quest offered good graphics, a wireless internet connection, and a great price/quality ratio featuring a curated set of mass-market gaming, entertainment, and communication applications. It also offered a “Killer App” in Beat Saber, a music/action game that was fun, addictive, and provided a robust aerobic workout. Beat Saber was available on multiple platforms, but worked best on the tether-free Oculus Quest. In March 2020, developer Beat Studio announced that Beat Saber had sold over two million units across all platforms.

As proof of this strong ecosystem, Facebook recently announced that the Oculus Quest has driven software sales of $100M, with 20 titles earning over $1 million and 10 titles earning over $2M. The systems have been sold out since the holidays, with COVID-19 only increasing demand. Facebook has not released hardware sales numbers, though some sources speculate that 2019 sales were around 400,000 units. (My own industry sources have suggested life-to-date sales have passed a million.) In any case, with prices on eBay starting at $100 over the standard retail price, it’s clear that demand for the system remains high, with software sales suggesting users are engaged with their devices more than ever. Most important of all is Facebook’s dedication to the virtual reality platform, as it continues to maintain a large organization supporting a complete VR ecosystem (hardware, software, and service).

Augmented Reality has also recently re-emerged from the witness protection program, for reasons both good and bad. Former investor darling Magic Leap announced layoffs of half its staff in April (more than 1,000 employees), only to rescind the dismissals a month later after raising an additional $350 Million. But lackluster sales of the first Magic Leap product, combined with doubt about future products, has led to the company being compared to everything from Segway to Theranos.

Apple Makes a Play
On a more positive note, Apple recently announced the acquisition of NextVR, which creates VR sports and entertainment programming. The declaration came at the same time as a published leak of an “Apple Glass” headset that works like a pair of glasses, even working with prescription lenses. Priced at a rumored $499, Glass would utilize the processing power of a wirelessly-connected iPhone and use LIDAR technology to detect the environment in front of the user, while projecting images into the user’s field of view. The rumors have not yet been confirmed, but they follow numerous AR-related Apple patent filings and positive comments about AR from CEO Tim Cook.

The limited AR functionality on the iPhone fueled the record-breaking success of Pokemon Go, and the ability for Apple to create a new product that functions as both a new tech device and a fashion statement at the same time could mark a turning point for this media. And while VR and AR have radically different uses (VR is practically limited to indoor use, while the most powerful AR applications will be outside the home), Apple’s entry into the space, combined with the breakthrough experience of Oculus Quest, suggest that the broader category of “XR” (extended reality), is more than just a tech fad or reaction to COVID-19 isolation.

Conclusion
VR and AR are now both on a direct path to mass-market consumer adoption, with breakthrough content, technology, and new consumer-use scenarios forged in the era of social distancing. We will not soon see the same over-hyped forecasts of VR surpassing the market size of the video game industry; but if Apple enters the market, the scale of potential grows enormously. Consider that even the modestly-successful Apple watch was estimated to have sold over 30 million units in 2019, add to this the rich variety of entertainment, lifestyle, and enterprise applications that are possible with this technology and it is easy to see the brighter future ahead.

With both Apple and Facebook competing in the broader XR category (Facebook focusing—at least for now—in VR, while Apple targets AR), we are gearing up for a giant corporate battle for one of the last unconquered spaces in the technology and media space. The two firms will be driving both innovation and investment, thus ensuring that this category of products and services reaches mainstream consumer awareness on a scale much larger than seen to date.

 
 
 

Mike Fischer is a veteran of the video and gaming industries, having held executive positions at Microsoft, Amazon, Epic Games, and Square Enix. He is also a member of the faculty at the University of Southern California.

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