When Will Spring Arrive for VR?
Introduction:
I remember hearing from a friend — who was with the then-Kanbox — talking about his plans about going into VR at the end of 2014. I guiltily did some research after the meeting; however, I was still unable to understand why Facebook would put down USD2 billion to acquire Oculus. After seeing numerous teams and demos in my Juan Shi Tian Di Office Building in Wangjing Subdistrict, I remain unconvinced that this slag-quality helmet that covers the entire face was the “product” of the future.
It was only in end-2015 that I experienced for the first time the HTC Vive at TVR’s office (in a building with the awesome name of Zhongguancun Virtual Reality Space). I was blown away by the experience, and my passion for this field was thus ignited. I have met with over 100 companies in the last 15 to 16 years, and although developments for VR have been slower than expected, I do have some valuable experiences to look back on. At the same time, there are still investment opportunities in certain segments.
Summary:
1. Hardware and software standards for VR are gradually being defined; however, there is no “killer app” yet
2. In terms of penetration rate, currently the state of VR industry can be compared to the state of the smartphone industry in 2007/2008. Another two years or so will be needed to amass enough users to sustain the content ecology
3. In terms of investment, in the short term one can look towards applications in vertical industries, while for the long term one should pay attention to developments in the area of underlying technologies
I. Hardware and software standards for VR becoming increasingly defined
1) What exactly are we talking about when we talk about VR?
Most people tend to first think of various head-mounted displays or HMDs. As the image below shows, HMDs can range from the simplest Cardboard mobile phone cover (or perhaps we should call that a viewer) to the HTC Vive, which offers the best experience to date. These HMDs vary in terms of the sense of immersiveness (including viewing angle, image resolution, refresh rate, delay, etc.) offered. Prices also vary greatly. In short, you get what you pay for.
Since the staff at Deutsche Bank have worked very hard to put this comparison together, I will not translate it (actually specifications do not have to be translated for professionals; for newbies, they would not understand anyway):
2) Actually, the ecology behind the HMD is even more important
The illustration below shows the structure of the VR HMD ecology, from the upstream to the downstream to the hardware, middle and content layers. We can see that apart from the HMDs that consumers see, on the upstream there are the HMD makers, chip manufacturers (image processing, transmission etc.), and some sensors (like the gyroscope). In terms of accessories, there are space tracking devices like the Lighthouse, and input devices (controllers, gesture recognition), etc.
The major players in the hardware layer are shown in this diagram. They include:
a) HMDs: PC, mobile, all-in-one. The PC HMD market is dominated by three major players. The majority of domestic HMD manufacturers (such as Mojing and Deepoon) are focusing on the development of all-in-one devices
b) Interactive devices: LeapMotion (gesture recognition), the Ximmerse controller, etc.
c) Photo devices: The number of consumer-grade panoramic camera products available is growing by the day, with examples being ThetaS, Insta360, and eyesir
When we move one level up to the middle layer (which is the layer that is often ignored), we see the following:
a) Google: Its Daydream platform brings together major mobile manufacturers, which means that mobile VR platforms in the future may converge
b) Unity/Unreal, etc.: Early focus was on the speeding up of games and videos; currently greater application differentiation has appeared with new areas such as game recording and panoramic audio
In terms of content, there are quite a number of companies that were started up in the first half of 2016. However, there are relatively few quality domestic platforms in the space, or there are relatively few content teams. Summary is as follows:
a) Video and games: Two major themes in content. On the PC side there are already a few major titles (Final Fantasy, Assassin’s Creed), while the focus of the mobile platform is on video content
b) Mature teams: Mostly from the client-game market, and have begun to go into VR gaming. In terms of industry applications, business models for home improvement and offline stores are relatively more mature
c) Platforms for panoramic videos: YouTube, Facebook, iQiyi, Youku Tudou
In summary, in my view the overall landscape of the VR industry has become clear. In particular, Google’s Daydream platform has made the boundaries of the “sphere of influence” of mobile VR players in various areas much clearer. However, flagship phones that are compliant with Daydream standards will mostly be launched in the second half of 2017. An application ecology centered on Daydream will probably only emerge in 2018.
II. User base is likely to hit critical mass in two years’ time in terms of delivery volume
3) Industry maturation is predicated on delivery volume
There is always a chicken-and-egg problem in emerging industries. Without content, consumers are unlikely to be tempted by hardware, and with little hardware sales, developers will not have the confidence to work on quality content. This cycle is usually broken by the so-called “killer app”, such as Microsoft’s bestselling Office suite or the Angry Birds game on the mobile platform. Applications like these can help to disrupt the pattern of linear growth in hardware sales, and at the same time serve as an example that would draw the entry of large numbers of developers.
But one precondition for the emergence of such killer apps [in the VR space] is that there must first be a critical delivery volume/penetration rate for hardware products. The data and forecasts below mainly come from Deutsche Bank, but are closer to industry estimates. For example, ownership of PC VR devices stood at around four million sets (mostly Sony) in 2016. which makes for a penetration rate of less than 1% among PC gamers.
Ownership figures for mobile VR devices should be around the 15-million units (excluding Cardboard version. Ownership of Samsung Gear devices has just crossed the 10-million units, while figures for other all-in-ones are minuscule). Clearly, Deutsche Bank did not consider the catastrophic impact of the Galaxy 7 on Samsung when preparing this forecast. Due to the Galaxy 7 exploding battery issue, many Gear VR HMDs were dumped in the market in the 100 to 200-dollar range. Sales for this area shall not be achieved until 2017.
It is worth noting that although imitations of the Cardboard device have been derided by expert gamers, there are claims from Huaqiangbei [in Shenzhen] that over seven million units are shipped per month, with 50% shipped overseas and 50% to domestic customers. At this rate, global ownership of Cardboard devices should already be near the 100 million units, which is an astounding figure. Based on our observations, users of imitation Cardboards mainly use their devices for video viewing (such as such platforms as “Cheng” and “Bo”), and use their devices for around 20 minutes or so [each time]. These two video platforms have already logged millions of downloads and DAU in the low hundreds of thousands. Just how to convert this user segment and what the industry impact would be are very interesting questions.
4) Current state of VR market is akin to state of smartphone market in 2007/2008
Shipment figures for both PC and mobile VR have just crossed the 10-million mark. What does the fact that penetration remains at 1% say? Let us make a loose analogy here: in my opinion, the current situation is a little like what was happening with smartphones in 2007/2008, when devices had just appeared on the scene. Penetration rate was less than 5%, and there were few developers. I estimate that as long as mobile device ownership crosses the 100-million mark in two years, with a few million daily active users, there will be enough critical mass to support developers of various applications. Then, the software ecology will be more easily formed.
III. Focus on vertical industries and underlying technologies
Based on our observations, since 2016 investment in VR hardware has gradually declined, and VR content and industry applications have become the key focus. A report from IT Juzi corroborates this observation.
VR real-estate view apps, the industry representative, has raced to the forefront thanks to the strong pushes by real estate brokage business in the first half of 2016. Of course, NextVR’s NBA VR livecasts are also worth highlighting. These livecasts have also drawn widespread attention. Many companies depend on outsourced projects for their income and are not worth investing in. However, companies like NextVR which have exclusive IP rights have the potential to retrace the steps of ESPN during the rise of live television broadcasts. Of course, there is also the question of whether the current IP rights pricing has been inflated, and at what rate VR audiences are set to grow.
Compared to real estate or football livecast VR apps, we are even more inclined to study the underlying technologies of these industry applications. Holographic technologies centered on the human body and even the entire environment are becoming more mature by the day (more precise, faster, and even real-time). The application of such technologies will greatly expand the scope of VR applications and lead to the emergence of many interesting applications such as Telepresence, and 3D Memory Recording on weddings/wedding proposals, etc.
