The rise and fall of Chinese VR Arcades and what we can learn from it

It’s been many months since the first stories about wildly profitable Chinese VR arcades began circulating western media. These arcades reportedly stole the hearts of investors and instilled new hope in the eyes of content creators during a time when predictions of VR adoption were severely falling below expectations.

So how did it all start, and where are they now ?

As arcades take on a sort of retro and greasy look in North America, PC bangs and Internet Cafes were at an all time high in Asia. So it is not surprising that when VR first exploded into the market with the HTC Vive and Oculus Rift in mid 2015, location-based entertainment providers were quick to jump onto the trend. Unlike American VR companies, which immediately scrambled to build the next “killer app” or some underlying software tool, Chinese opportunists chose to take a more human-centric approach and focused on how to get people to first put on these geeky-looking space goggles. The big difference in mindset is spurred on by the 1.4 billion people population. With a consumer market size that big, capturing any percentage of it could easily make you a successful company. So why spend so much effort building cutting edge technology and raising money from skeptical VCs when you can simply play the bottom line, leverage cheap manufacturing, and serve the largest growing middle class the world has ever known.

Thus began the great race to national scale between companies like Shenzhen-based Emax, Beijing-based Leke, and Hangzhou-based VRimmer. At the beginning all of these companies had some sort of competitive advantage over one another and were more or less targeting different segments of the market. Emax for example focused on building end to end solutions including custom chairs and headsets that can be easily installed in malls and airports, they partner with these high trafficked locations by providing the equipments as well as contents (through IGEVR) for a share of revenue. Although the contents were questionably bad, there was enough hype to capture a crowd and subsequently generate great profits for everyone involved. Contrastingly, instead of plugging portable VR setups into existing locations, Leke opted to build out their own full fledged arcades providing a more immersive environment for VR gaming all around. Then we have VRimmer, who take a more radical approach segmenting their target audience. They’ve opted interestingly to target children, specifically in terms of education. With a culture like China in which education is the definition of status, it is no wonder that a high-tech education platform would be popular amongst the ever competitive parents.

As these company began to show significant traction, garnering the attention and approval of Chinese investors, many copy-cats started emerging with exact business models and products targeting different provinces. It is important to note during a pitch, many small time VCs in China would rather ask you “what is out there that has proven your model and product” instead of “what is different about you and your competitors”. While the idea of Venture Capitalism is popular in China, the associated risk is not. So hype and FOMO based investing paired with a seemingly limitless consumer market turned the great race into a bloodshed in which there would be no greater victim than content itself.

Virtual Reality is a new medium of entertainment. A VR headset is comparable to a TV, it doesn’t matter how advanced or cool it is, if your 70 inch UHD flat screen didn’t support all the cable, blue-ray, console games, and Netflix, then it is effectively a very expensive piece of wall decoration. VR got stuck in the chicken and egg problem since the very beginning, developers don’t want to build content for a medium that has no users, while consumers don’t want to buy a piece of technology that has no content. So initially when China rolled out with its VR arcade strategy, developers were overjoyed at the new opportunity. In their minds they were expecting thousands of eager Chinese teenagers lining up after school to spend hours at the VR arcades. Little did they know the pressure to scale into as many locations as possible reduced the budget for content to 0. After all during board meetings, investors rarely ask you about the quality of your content, it’s mostly about numbers. What’s quantifiable were how many hours of content you have, how many locations you have, and how much revenue can be expected. So as money continue to be poured into VR arcade startups, companies began to cut as many corners as they can to improve sales while reducing costs. The first costs to be cut were obviously content. Instead of buying and licensing content, companies began illegally reselling games from steam and/or downloading content off youtube 360. As content-distribution laws start tightening up, they started hiring blue collar VR developers, whom by the thousands were popping into existence from new bootcamps buying into the VR hype. These unskilled laborers were not the artists we see in American studios, they work with bare minimum mechanics with free Unity Assets and specializes in creating low budget content. This turn of events inevitably lead to the downfall of VR arcades and subsequently VR in China, as retention were at all time lows and companies struggle to fill their locations.

Today, early players like Emax whom amassed enough capital early on are pivoting into newer frontiers, taking on the challenges of building theme parks and micro tech villages with IP from the likes of Dreamworks and Studio Ghibli. While smaller hardware retailers seek to replicate their once flourishing model outside of China. Africa, Canada, Eastern Europe, the market that haven’t exhausted the VR hype are still out there, and perhaps they will learn from their mistakes and breathe new life into the medium world wide.

Chinese VR Hardware in West Vancouver, BC, Canada

So what can we learn from all this ?

  1. American startups are product-oriented while Chinese companies are People-oriented. We can learn a lot about how to market technology to the general public from China
  2. Content is the bread and butter of every new medium, nothing sticks without good content
  3. Both intelligent Investors and intelligent entrepreneurs are important, having a good balance of the two lead to a healthy ecosystem.
  4. VR is a global industry, which means if something doesn’t work in one market, try another one!