Why VR Arcades are Critical to The Future of Virtual Reality Mass Adoption
Stop me if you’ve heard this one before.
A revolutionary technology launches to much fanfare and those with early access extol it as ‘flawed, but breathtaking’. The overwhelming hype sets off a flurry of interest from the public and, despite the expensive cost of hardware, early sales are promising.
But soon people realize the technology hasn’t caught up with their imagination plus there’s generally less content/utility than they hoped so just they don’t get daily active usage out of it. As a result, the technology is dubbed “just another fad” and the market hype moves on to the “next big thing”.
I am, of course, describing the trajectory of the smartwatch/wearables market, whose “hype-cycle” from just a few years ago maps remarkably closely to that of virtual reality (or “VR”) — given comparable price points, once-rampant but now rapidly cooling optimism and the fact that both technologies have come to a point where they need to prove their long term value, or be lost in relative obscurity.
Thankfully, VR in the US still has the untapped opportunity to leverage the powerful draw of out-of-home ( or “OOH”) entertainment and use it to stoke a passion for immersive experiences — which in turn will drive more meaningful adoption. I believe this renaissance will begin with VR Arcades.
Mass Adoption in VR has Lagged Behind Expectations…
There is certainly no shortage of articles bewildered at VR’s lack of adoption or the more recently modest sales forecasts. From the WaPo, to Fortune, to The Financial Times, many that once extolled the virtual reality paradigm shift are now pouring cold water on its imminent adoption prospects.
And it seems, that for now, both the lackluster engagement and sales data support their healthy skepticism.
In fact, eMarketer’s latest 2016 forecast shows that, only 22.4M people in the U.S. — or 7% of the population — would engage with a VR experience monthly in 2016. What’s worse, is that the number engaging in true high-def VR content is even smaller, when you consider the original figure includes 360° videos, photos and product demos via devices like connected TVs, desktops/laptops, mobile devices and headsets, as well as games via headset. In fact, the category is primarily driven by 360° video and still-photo content on platforms like Facebook and YouTube.
If we count only head-mounted displays(or “HMDs”) that number falls less than 9.6M MAUs of virtual reality content (or less than 3% of the pop.)
On-top of the muted engagement, 2016 sales figures came in well-below industry expectations. The VR industry shipped 6.3M devices and pulled in $1.8B in total revenue (compared to an expected $5.1B, per research firm Super Data) with the vast majority of software revenue specifically coming from gaming. On average, VR game users reportedly engage in 40 sessions a month.
But game publishers shouldn’t get too excited about that either, says SuperData’s Stephanie Llamas at Dec 2016’s VRX Conference:
“[Game makers] won’t make a profit for now,” Llamas said. “To break even is already incredibly difficult. This is to prepare you for a couple of years and make sacrifices at the start. But there are so many great returns later on. You have to learn what is the value proposition… … A lot of money is being invested. It’s still a ways off from mass consumption.”
Yes, the industry hopes that one day social media, telecommunication, education and e-commerce will become popular use cases for VR technology, but for now, gaming is the category that hardware and software makers alike are targeting. In that way, video game consoles and the broader industry around them are actually a good benchmark for the level of market penetration VR can achieve and I believe, quality virtual reality gaming experiences will be central to accelerating mass adoption
… Making Many Early Investors Sick to Their Stomachs
Unsurprisingly, venture investors have also taken notice of the slower-than expected growth and the lack of clear category winners. While the total number of VR deals each quarter has continued to trend upwards, total amount of funding in Q1 ‘17 was down to it’s lowest level in almost 2 years.
In fact, adjusting for notable deals in Q1 2017 below, like Lytro ($60M Series D), Sliver.tv ($16M Series A), Two Bit Circus ($15M Series B) and Dreamscape Immersive ($11M Series A) there was an average of $1.2M allocated across 76 AR/VR startups (and VR actually accounted for only ~52% of those deals).
Given the critical importance of quality hardware in virtual reality, it’s not hard to see why investors have been scared off by the sour news out of companies like Facebook, Samsung and HTC. Just recently, Facebook’s Oculus closed hundreds of live demo stations at Best Buy stores due to lack of customer interest in addition to slashing its prices after sales came in well below forecast. Add that to a disappointing lack of exits and that apparently ~90% of Chinese VR startups have gone bankrupt, it makes sense that while US investors might be generally long virtual reality, most will now be in ‘wait and see mode’.
I’d venture that this comes from a lack of visibility into a clear ‘timetable’ for mass virtual reality adoption. While larger HMD manufacturer are willing to invest to keep the industry churning in the short term, the potential dry-up of venture capital flow really doesn’t bode well for the organic growth and innovation that comes from having new start-ups in the ecosystem.
So to sum it up, sales are lagging expectations, recurring engagement is low (outside of gaming) and venture capitalists are right-sizing their patronage into a select few deals, while focusing on seeding a new crop of companies in the hopes that the next wave of VR-mania will be the one that sticks.
What’s Really Holding Virtual Reality Back?
Like a properly entitled millennial, I don’t want to wait for the next wave, so let’s dig into what is holding mass adoption back and more importantly: Why?
Experts point to several reasons behind the slow adoption but I believe the primary reason is simpler than all that. Steve Bowler, president of VR game developer CloudGate Studio, best sums up it up:
“How do you advertise a color TV on black-and-white televisions? It requires people walking down to main street and seeing it for themselves,”
Demonstrating virtual reality experiences on flat screens doesn’t give people a good enough taste of how different the experience really is. Now, couple that to those other factors like the “cost of those headsets, ergonomic design of those headsets, and the fact that we’re still limited by technology” like battery-life and cable-tethering (which, funny enough, is the thing literally holding you back), says Signia Venture Partners’ Sunny Dhillon, and it’s not hard to see why adoption has lagged.
Beyond the hardware, the lack of quality, triple-A software hasn’t helped either. IDC senior research analyst Jitesh Ubrani likewise offers that “With plenty of headset options already in the market and even more coming soon, hardware isn’t the issue. The challenge continues to be slow growth in content appealing to a mass audience, combined with the confusion around a lack of cross-platform support.” Skydance Media’s president and COO Jesse Sisgold rightly commented:
“There’s not that many titles that have come out and [consumers] said, ‘Oh my gosh it’s a little bit expensive, but I need to have this at home.’”
To that end, I would argue that low-end experiences like Google Cardboard are actually doing way more harm than good because to the uninitiated Cardboard seems a close approximation of VR but to the rest of us that know better, let’s be honest, Cardboard is [insert poop emoji]
Anyway, so let’s summarize what we know:
- Not enough people have tried virtual realty content
- If they have, most likely they have tried content of low-quality
- True VR experience require not just good software (content) but also strong hardware (the HMD and the processor that runs the experience)
- Purchasing a quality VR experience for yourself is still very expensive
- Furthermore, you can’t accurately sell a 3D experience on a 2D screen
- Lastly, you definitely can’t sell someone an expensive thing that they haven’t tried when the next best thing they can try is [insert poop emoji]
Yes, VR Arcades Can Help Alleviate — If Not Fix — All of That
The more you think about it, the more obvious of a marriage it becomes.
For starters, (we) Millennials value experience over ownership and are ready and willing to pay for it. And it’s not just travel and cultural experiences — live performances, sporting events, concerts, and other social out-of-home all drive a significant portion of spend. As a matter of Eventbrite projected in 2016 that 80% of those in the coveted 18–34 demo will attend a live ticketed event this year, leveraging an est. $1.3 trillion in spending power. That’s Trillion… with a T. Yet despite a willingness by millennials to spend on entertainment, true immersive VR still has a high cost-barrier for ownership and while most of the industry pats themselves on the back for how affordable they have made HMDs, the full experience is still about a few $1000 away for the average consumer.
This is compounded when you include the increasing critical weapon peripherals like VRsenals’ VR-15 haptic assault rifle or the haptic gloves, vests and body suits from companies like EXOS, GloveOne, AxonVR, and most recently, Woojer — that make for a supremely better experience. Most of these hardware creators started as Kickstarters with direct-to-consumer business models but would be better off first selling direct-to (and showcasing products-in) arcade who can afford the price tag.
On the higher ends of the unaffordable-but-mind-blowing spectrum are movement focused accessories the Virtuix Omni (video above), an omni-directional treadmill that allows users to walk or run through the virtual world that everyone should try but probably doesn’t make sense for purchase outside for the average consumer. Arcades are the perfect portal for bringing great VR experiences to mass appeal.
At an arcade, players have the ability try out all these amazing products via a low-entry fee that is comparable to that of nice karaoke bar, escape-the-room adventure or an afternoon at TopGolf for several hours of entertainment — all OOH industries that have seen strong patronage as millennials enter their prime earning years. Likewise, it gives arcade owners the ability to purchase or rent new equipment at volume discounts with the understanding that monthly active visitors will allow them to recoup their investment.
One of the big complaints about at-home VR is that it is a silo-ed experience which takes away from many of the social aspects of gaming or viewing live sports and entertainment. But thankfully, arcades also allow for much better co-op experiences by connecting players over a local area network vs. trying to deliver a quality open experience to a distributed group.
And the more VR Arcades there are and the more they succeed, the more developers will feel comfortable innovating on and experimenting with new types of content, knowing that there will be an audience for it. In fact, HTC’s new “Viveport Arcade” program is betting on just that fact.
Last October, HTC announced that the rollout of it’s new program that aims to grant virtual reality arcades access to hundreds (and eventually thousands) of titles for a flat rate, making it into a subscription service akin to Netflix. They want to make it far simpler for Arcade owners to acquire and distribute the most compelling VR content at a reasonable price. Frankly, it’s a phenomenal marketing tool for HTC’s own headsets precisely because it’s getting them in the hands of as many users as possible in the right setting i.e. not a damn Best Buy, Oculus.
VR Arcades Have Already Taken Off… Just quite not in America
Don’t just take my word for it. The global VR ecosystem is already seeing real enthusiasm around VR Arcades, but that seems to be centered mostly in China, at least for now. According to Kevin Williams, founder of the Digital Out-of-Home Entertainment Network Association:
“VR has found a home with Chinese players as the majority of the market do not have the capability to support home based VR and already are happy to play their PC games in LAN Game centers … Amusement venues and location-based entertainment sites have also grown in popularity in the Asian Dragon market — so it was logical that VR Arcades would be embryonic within this incubator.”
As of October 2016 there were 3,000+ VR arcades in China already — a number they expect to continue growing after the announcement of Viveport Arcade, according to Alvin Wang Graylin, China Regional President of Vive
These experiences run the gamut from basic facilities that allow players to try out the latest consumer VR systems in dedicated booths, to more advanced specialist franchise sites called VR Parks (like Viveport’s own ViveLand locations)to finally in this category there are VR Arena-Scale facilities, which offer VR lasertag style experiences.
Products like the Virtuix Omni treadmill I mentioned above and other haptic guns, gloves and body suits are already popular in China, but have yet to catch on in the US. There are a handful of companies trying to change that, and one might actually be succeeding. Enter ‘ The Void’
The Void does a great job aggregating a lot of the hardware, peripherals and and game mechanics mentioned above into their system and combining it with illusion design, misdirection and magic theory to create the illusion of reality around a full immersive experience. I saw a demo of their Ghostbusters-themed virtual reality attraction here in NYC but hope to make it out to their massive facility in Utah to experience the full Void adventure soon.
VR Arcades can be as simple as booths or as immersive as The Void but they are powerful precisely because they can flex their muscles in front of consumers that would normally have no idea of how powerful the technology can really be. Better yet, HMD manufacturers can take a page out of Bonobos vertical commerce playbook to leverage these arcades as ‘showrooms’, offering to help players (impluse) purchase their own headsets and accompanying software right in store if they are so inclined.
The Future of VR is Up to Us
The ability that a quality virtual reality experience has to create immersive experiences and illict powerful emotional responses is nothing short of magical. Despite this, the industry is struggling to sell the hardware necessary to justify further time and investment in VR, which is rightly troubling.
Out-of-home entertainment venues like VR Arcades have the exciting opportunity to not only change the trajectory of the industry but also capitalize on a genuine amount of public intrigue while virtual reality’s social relevance is still strong. Gaming content remains the most engaging VR Content today and there is already tremendous appetite for consumers, especially millennials, to spend on unique out of home experiences.
This also an opportunity for headset manufacturers like HTC, Oculus and Samsung to see arcades as an extension of their marketing spend — frankly one that will have higher first-purchase conversion. This is likewise a chance for game & experience publishers to focus on creating, publishing and iterating on software at a greater scale while letting venue operators focus on driving sales and managing customer service.
And frankly, this is a way for savvy real estate owners in high foot traffic like malls to monetize newly vacated retail space to engage a younger, more-affluent, repeat client base that doesn’t view shopping as out-of-home destination but is still sees entertainment as an exciting one.
The bottom line is that VR Arcades turn virtual reality into a fun, accessible, shared experience, and open these up to consumers at a fraction of the cost of ownership.
So the more passionate and entrepreneurial among us should go out and start more of these Arcades — hopefully I've been able show that the market demand and appetite certainly will reward it. The rest of us should likewise be seeking out, rooting for, promoting, and offering support to our local VR Arcades.
Because the future of virtual reality may very well depend on it.
Special thanks to Prerna Singh for reading an early draft of this article!
Please leave me a comment below with your thoughts. Also if you know great companies in out-of-home virtual reality that we should meet at MSG Ventures, please feel free to introduce us. If you liked the article, this definitely won’t be my last piece on OOH VR, so like and follow my Medium site for more actively researched theses (like this one)!
Lastly, if you’re in New York City, go check The Void’s Ghostbusters Experience or this VR Bar in Brooklyn and tell me what you think. If you’re not in NYC, go find the latest VR Arcade in your town and jump right in. You’ll be glad you did!
