This Year’s $5B Virtual Reality Market

And How it Will Revolutionize How We Express and Experience

By Shahin Farshchi, PhD

Virtual Reality caught worldwide attention with Facebook’s $2B acquisition of Oculus VR, driven by Mark Zuckerberg’s vision to not just share moments, but to share experiences. Many view the Oculus Rift as a radical innovation, but creating immersive effects using stereoscopic imaging isn’t new. The View-Master we know and loved as children dates back to the early part of the century. Since Morton Heilig introduced the world to VR with his mini-fridge-sized mini cinema, sensors and displays have improved by orders of magnitude. The Oculus team masterfully integrated them to create a life-like, immersive experience while mitigating the nauseating side-effects — but VR is still a novelty. Early motion pictures wowed audiences with moving trains and staged performances, but like VR, started as a novelty. Shortly thereafter, artists invented panning, zooming, and cuts that led to the rich narratives and experiences that made film a de-facto medium for artistic expression. The first computer games wowed consumers with blocks moving on a screen, and have matured into immersive cinematic experiences with rich narratives and life-like characters. Will Virtual Reality engender the next generation of magical experiences? Before 2D cameras and cinemas go by the way of the typewriter, movie and game developers must innovate together to turn VR into the de-facto platform for experience and expression to make SuperData’s $5B 2016 market forecast for VR to become a reality.

Many VR advocates expect gamers to be the early adopters for VR. Though almost all VR game demos impress in the first five minutes, volume shipments will be incumbent upon developers delivering fun, enticing experiences worthy of purchase. For example, Sega and Nintendo do more than just put more colors and richer sounds into traditional arcade games. They created narratives and storylines around what became iconic characters, e.g., Zelda, Sonic the Hedgehog and Mario Brothers. These experiences were enabled by best-of-breed hardware at the time, combined music, sound effects, speed, story and graphics in a way that brought those characters to life. Sega and Nintendo drove hardware sales through great software, and for the first time, they were able to create franchises around these iconic characters. This symbiotic relationship between hardware and franchises would extend into later platforms such as PlayStation, with Crash Bandicoot, to move hardware units. What content will be the driver for VR?

Unfortunately, game publishers haven’t committed to investing the tens of millions needed to create amazing games in VR. Why? It’s a classic chicken-and-egg problem: publishers can’t justify spending money on content without a means of distributing it, i.e., a user base with compatible VR hardware. Today, VR users are typically developers or hard-core gamers whose numbers are nowhere near the install base of Sony’s Playstation or Microsoft’s XBOX. Sony and Microsoft spent exorbitant amounts of money generating content to seed millions of units in households. Nintendo also launched its console with an amazing title, Super Mario, establishing the console in America’s living rooms. The penetration of Nintendo’s consoles drove game publishers to invest heavily in games, despite having to pay heavy royalties to Nintendo. By 1990, 30% of US households owned a Nintendo Entertainment System.

Publishers and developers invested heavily in game development and marketing, not to mention hefty royalties, to Nintendo given its massive install base in the late-80s. SuperData Research expects less than 10 million console and PC VR units by the end of 2016. In comparison, over half of US households have a traditional gaming console today.

To exacerbate the distribution challenge, developing a content for VR is fundamentally more challenging than traditional games and movies. The rich, 360-degree VR environment means having to generate significantly more artistic content for a given amount of gameplay or viewing duration. Furthermore, avoiding nausea requires fast rendering hence high-performance compute. Scenes that movies have the luxury of hours to render have to be executed in real-time in VR. Transitioning to VR may seem like a giant, expensive leap for developers. Fortunately, cheap mobile VR is expected to gain faster adoption than high-end consoles and PCs. Mobile VR does enable some graphics and tracking, making it it easier to develop upon — but dampens the experience. I expect traditional console makers and publishers to take the less risky path by introducing games that can be “better experienced” in VR as an “option” vs. creating a dedicated VR experience. The task of creating revolutionary experiences that are fundamentally built on VR, hence creating a rich, immersive experience, is on the shoulders of startups.

Big gaming companies are experimenting in VR as well. Sony announced 49 prototype games at its PlayStation Experience conference, and is expected to have over 50 titles upon launching the PlayStationVR. Furthermore, Sony has been public about going beyond gaming to a broader audience. Sony Worldwide Studios President Shuhei Yoshida expects non-gaming applications to play a huge role in broad VR adoption; from education to improving health. Rather than waiting for the likes of Sony and Microsoft to push VR capability, I think game developers have a unique opportunity to create a franchise that could be more valuable than the greatest game franchises ever i.e., Halo, Super Mario, Dune, and Grand Theft Auto. On the flip side, because big gaming companies will eventually move their large franchises over to VR as an extension, they can help rise the tide that will float all boats.

Crytek’s The Climb uses Oculus’ Touch controllers to simulate mountain climbing from the first-person. Many VR developers are experimenting with different gameplay mechanics to see what works best with players. The Climb uses gaze and shifting position to guide the player in an intuitive fashion. There will be lots of trial and error.

Startups are experimenting with different game mechanics and gameplay models. Candy Crush developer Tommy Palm recently raised $6M for Resolution Games. Several former Zynga developers recently raised $8M for Baobab, which aims to focus on computer-generated VR storytelling. Meanwhile, Facebook’s Oculus launched Story Studio with veterans from Pixar to leverage VR for documentaries, storytelling, activism, fantasy, and exploration. Furthermore, HTC is working with entertainment companies like HBO and Lionsgate for HTC Vive VR film content, and Samsung is working with 20th Century Fox and other Hollywood studios to create VR film content for its Galaxy VR. Disney led a $65M financing in JauntVR, maker of a VR filming rig, with the expectation of helping build VR production and distribution. Disney also funded LittlStar, which aims to bring 360-degree video to AppleTV, with content from major players such as Discovery, Disney, Fusion, MLB, Mountain Dew, National Geographic, PBS and Red Bull.

LeBron James’ Striving for Greatness from Felix and Paul, available on GearVR, is an excellent piece that uses subtle visual cues to overcome the lack of pan and zoom in VR; tools used in conventional movies to build a narrative. Although innovative, we are still in the early ages of VR: reminiscent of the days when motion pictures awed audiences with moving trains and galloping horses.

The hardware is here

Although today’s VR systems require engineering degrees to set up, New technology from startups will deliver rich plug-and-play VR experiences to the mainstream. Gigabyte-per-second wireless connectivity with low latency can untether head-mounted displays (HMDs). GPU power is making its way into inexpensive machines, and in the future, mobile devices. Big players such as Sony, Microsoft, HTC, Samsung, Zeiss, as well several startups are rushing to offer their alternatives to Oculus’ Rift. Sensor fusion coupled to advanced processing will make it easier to do body tracking without complicated optical setups.

Developer tools are more powerful than ever

EDA tool companies have been taking game-development seriously for many years. Now, they are working harder to make it easier to port into gaming engines such as Valve, Unity, and Unreal. Unity is offering SDKs to modify images for any VR headset, support a variety of controllers, and gesture recognition. Getting these tools into the hands of movie and game developers will help creatives make new genres of content experiences that ultimately will move high-end hardware units.

There is certainly lots of hype around VR. Will VR suffer the same fate as 3D television, which in its heyday, was the future of viewing experiences, but fell flat due to lack of content and consumer pull? The same could very well happen with VR. Taking a page out of the gaming and movie history books, we’ve seen that:

Studios, developers, and publishers want to see units shipped before investing in building and marketing content

The original PlayStation shipped over 100 million units in less than a year; therefore, the 10 million VR consoles predicted by SuperData may sound conservative. Star Wars’ The Force Awakens needed weeks to surpass $1.5B in ticket sales globally, while Grand Theft Auto V surpassed $1B in sales in three days.

They need to capitalize across platforms on global marketing campaigns

Unity and Valve are enabling cross-platform compatibility — but the hefty cost of development and marketing needs to be distributed across many platforms, all over the world, otherwise VR will be relegated to a cool R&D project stuck in a chicken-and-egg cycle.