The VR Industry, Part 4: The Overall VR Ecosystem

This is the fourth in a five part series exploring the current state of the VR industry. I would recommend reading parts one, two, and three first.

A lot of the problems left to solve are so-called “hard problems” involving algorithms: adaptive streaming, SLAM, compression, 8k-12k playback, eye tracking, face tracking, algorithmic avatar generation, etc.

As mentioned at the end of my last post, I would like to take a moment to discuss the position cinematic VR occupies within the greater VR ecosystem.

Current statistics from Google and Samsung regarding the total time spent in headset indicate an equal split between cinematic VR and VR Games (and the trend indicates that gaming will end up only being about 35% in the next year or two). Now let’s zoom out and look at non-entertainment categories like hardware, social, and productivity. I believe that when these categories finally come to VR, it will be in a way that most people today don’t expect.

To understand why, first let’s look at hardware. When I go to a conference I can’t help but feel that so many hardware startups are simply combining the same generic toolbox of technology in different ways. This is because a lot of the tech used in VR is actually mature. In fact, the main reason we have VR today is because a whole bunch of well-known technological advancements converged into something affordable. The manner in which we combine these technologies is primarily a matter of execution, and bigger tech companies have many advantages (e.g., existing supply chains, large-scale manufacturing capability, familiarity dealing with complex IP issues surrounding much of this tech, etc.).

I believe that hardware startups are going to have a hard time growing into something very valuable — they can get acqui-hired, but I don’t see them reaching scale. Instead, what we’ll have is a scenario more akin to video game consoles: the core experience is owned and third-parties will be allowed to make peripherals that are less important. You can see this playing out in the controller space already: Samsung, Google, HTC, Facebook, and Microsoft have all opted to make their own controllers instead of letting others do it. Hardware will become even more consolidated as we complete the transition away from desktop and into mobile/standalone headsets where only the hardware integrated into the “phone” itself will matter.

On the software side of things, a lot of the problems left to solve are so-called “hard problems” involving algorithms: adaptive streaming, SLAM, compression, 8k-12k playback, eye tracking, face tracking, algorithmic avatar generation, etc. The big companies want to integrate and own this technology too. Some companies will get acquired, but it will mostly be in the instances where the startup is comprised of experts that a large tech company wants to absorb — in other words, more acqui-hires. I don’t see any large companies growing out of this area either.

The scenario I’m describing is a bummer for investors and startups who want to see big VR companies grow and flourish, but there’s actually an even more worrisome outcome in the works.

This is how I see it playing out: Because the hardware, operating systems, and core user experiences of VR are being created internally by the big companies, they will have the opportunity to integrate other functionality that today is handled by many different apps on your smartphone, for example: messaging, screen sharing, streaming, payments, and social.

Facebook’s recent announcement of AR Studio is a clear example that this is happening. Their AR/camera platform will handle everything except for the actual creative process of designing AR experiences (they even provide a new tool for that too). The company is basically saying, “let us do the hard part, you focus on the content.” Meanwhile both Steam and Daydream have announced social features for their home experiences in recent weeks. And Daydream Euphrates will also include streaming and messaging in the near future. In other words, I believe we are facing the “death of apps” and we’ll instead see a complete consolidation of most of the hardware and software layers of VR. We know companies like Facebook have as many as 1000 engineers already working on VR. How many startups are they already competing with? How many features have been integrated into the core experience that once would have been a separate app?

Side note: One interesting exception is HTC and their strategic decision to allow WeChat to setup a fiefdom within their ecosystem. They had to do this to try and reinforce their top position in China.

Upcoming versions of Google Daydream and YouTube VR will have integrated social, streaming, screen sharing, and messenging features.

This has happened before. Back in the day when Microsoft owned the PC computing paradigm they decided to make their own suite of office tools to capture more of the value in the market.

What remains to be seen is just how much of the app ecosystem the big tech companies are going to gobble up. With the average person only using around 10 apps per day, it’s not far fetched to think that they might try and take most of it. It’s certainly a safe bet that the big tech companies will seek to integrate messaging, social, ads, and payments into the core VR experience, but what about unexpected products related to education or tourism? We may very well be heading for a future where VR app stores consist entirely of entertainment.

Now I am going to speculate even more wildly for a moment: I believe that Facebook has their sights set on transcending the app store model entirely and instead implementing a new system with News Feed DNA. It will be about sharing individual pieces of content socially and the very idea of apps will be downplayed considerably. Facebook will abstract away everything that isn’t content (including hosting, compression, social, leaderboards, payments, messaging, etc. — as mentioned, they are already doing all of this with their recently-announced AR platform). Doing so will allow them to capture, analyze, and control as much of a user’s attention as possible. It will also allow for a deeper level of integration with hardware which is crucial to meet the performance demands of VR. For the first time, Facebook has the opportunity to no longer just be a website or app. You have to ask yourself what they would build if they made an OS or a web browser.

The favoritism of individual pieces of content over separate apps is yet another reason why I don’t believe in the long-term viability of the walled garden-style video apps that I covered in part three of this series.

For all of these reasons, I truly believe that the biggest opportunity in VR right now is the entertainment category (cinematic VR and VR games). Within the entertainment category, it’s looking likely that cinematic VR will be dominate use case. At the very least, non-entertainment startups, particularly in social or education, should think more like content companies and be prepared to compete with their host platform directly.

This begs the question: What will cinematic VR look like in the next few years? What is the future of VR entertainment? This will be the topic of my final post in this series.

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