This post is by Chris Fralic, Partner at First Round
Long before Oculus Rift appeared on the scene, I went to the 1993 Macworld convention in Boston and saw an image of VPL Research’s Jaron Lanier fully clad in his trademark dreadlocks, VR headset and gloves. It stopped me in my tracks. Asking questions about that one image and the technology it showcased led me to attend my first TED conference (which in turn led me to First Round) and kicked off a 20-year fascination with virtual reality.
Fast forward to today. VR and augmented reality are two of the hottest areas of emerging technology. Over the past 6 to 9 months, I’ve made it my personal “20% Project” to get a handle on what’s happening, the likely inflection points, and the potential shockwaves it’s poised to send through the industry. I’ve met with many smart people, followed the trends, and tracked new product announcements in order to answer these questions: “What will VR and AR enable in the near and long term? What are the most promising areas for seed stage investing?”
So here’s what’s happening now. At a high level, the market is broken into two main categories: Virtual Reality and Augmented Reality. In the long run of 5 to 10 years, I think AR will be the dominant platform, whether it’s a version of Microsoft’s HoloLens or Magic Leap, or it’s built into glasses and ultimately contact lenses. Apple is reportedly working on AR too, filing patents for a new type of flexible display.
For VR, I think a stronger distinction should be made between mobile solutions and dedicated, high end solutions.
Currently, most of the virtual reality buzz is a frenzy of speculation around the upcoming releases of severalmajor head mounted display devices (HMDs) — especially the Oculus Rift, HTC Vive and Sony’s Project Morpheus (a peripheral for the PS4). On that side, the demo I saw of the HTC Vive at Valve HQ in Seattle was probably the single best demo I’ve ever seen in my 30 years in tech — VR or otherwise — and my favorite part of it was playing with Tilt Brush and interacting with the Portal robot. I also recently tried the latest consumer version of the Oculus Rift, and was especially impressed by the social elements and how you interact with others inside of VR.
An area that’s too often underrepresented is the market for smartphone-based mobile VR, currently comprised of Google Cardboard and the Samsung Gear VR. While mobile VR may not provide the full immersion and “presence” of systems that let you blow apart aliens in 2160 x 1200 resolution, I think mobile VR actually has a strong shot at being the initial winner in the VR market, and the VR platform with the largest eventual reach.
Think of the market for mobile games versus console games, and it’s not just about the number of devices. In 2015, global mobile game revenues are expected to generate $30.3 billion worldwide, surpassing console games for the first time.
Despite the attention the HMD market is getting lately, we’re still at least several years away from seeing meaningful scale in the market for two big reasons: computing power and price. Both the Oculus and HTC Vive require computers with advanced hardware specs. According to the latest Steam Hardware Survey, the percent of existing PCs that can support the Oculus is in the single digits, and the percentage of Macs appears to be roughly zero.
Then there’s price. A new desktop PC that meets the requirements has an average price tag of around $1,000, with notebook costs likely to be much higher. Given that the average purchase price of a notebook PC in the U.S. has consistently hovered around $500 — and that there’s a general shift away from desktops and toward notebooks / tablets — it’s fair to assume that the consumer market for HMDs will mostly be hard core gamers for the immediate future.
On the other side of the spectrum, we’ve seen very strong growth in the mobile VR market, driven by shorter time to market, lower costs, and the ubiquity of smartphones — 64% of people in the U.S. have one already. Google Cardboard launched in June 2014, and within one year, over 1 million units were shipped at an average cost of just $20 per unit. That makes Cardboard today’s leading VR platform in terms of reach. The product landscape is also diversifying quickly, with Samsung inking a distribution dealfor Gear VR at Best Buy stores earlier this year and new players coming to market like Merge VR.
Even if smartphones never catch up to the latest functionality in HMDs, they’ll probably get within striking distance of the minimum requirements to provide a fully immersive sense of reality. The Oculus first gained notoriety because it was the first HMD to hit the base standards for fluid immersion. Five years seems like a conservative time horizon before we see mobile phones converge on those same standards, especially given the pace of improvement in screen resolutions, mobile GPUs and refresh rates.
Another major advantage for mobile VR is that the ubiquity of smartphones will help bypass the high investment barrier ($1,500 to $2,000 including all components) that consumers must shell out to experience content on HMDs. One of the Oculus marketing team’s biggest challenges today is providing a broader audience with that first “wow” impression of the technology. This makes user acquisition very expensive. Mobile VR benefits from a much higher degree of social virality. I’ve seen that firsthand after sharing dozens of Samsung Gear VR demos.
I’ve seen a few companies working on converting 2D services and content for VR consumption, and I expect to see even more in the future. While the conversation around HMDs has centered around “killer apps” that will encourage mass market adoption, mobile VR may lend itself more to building on existing consumer applications and touchpoints. Instead of watching Netflix on your smartphone, consider slipping your phone into a headset and watching from the comfort of your own private movie theater. I expect we’ll see a talented community of developers build the tools and techniques necessary to adapt existing, popular services and content in ways that leverage VR’s unique capabilities.
Google has been very strategic in encouraging exactly this behavior. So far, the company has been very careful to establish lower consumer expectations around Cardboard apps, while also working hard to elevate content standards. A great example is the recent Jump partnership with GoPro, for which Google will provide the processing-intensive stitching for new VR videos, as well as host created content on Youtube. A second example includes the release of a Cardboard SDK for Unity, the powerful game engine that’s been gaining momentum. In the meantime, Samsung has also been pushing the envelope on content with its Milk platform, offering free high-quality 360-degree videos to Gear VR consumers.
So what does this all point toward?
A few years from now, I think there’s a strong chance that the the mobile VR headset market will look a lot like today’s headphone market. Most people will use low cost devices that they’ve gotten for either cheap or free, while high-end offerings find traction among hardcore users. Just as most iPhone buyers are content to use the earbuds that come in the box, we’ll see manufacturers start to bundle VR headsets with newer phone models. There will be more promotional advertising like Birchbox’s recent giveaway of tens of thousands of Cardboard viewers for Birchbox Man subscribers. Within the next several years, you might have a set at home, another at work, and pick up an extra at the airport before a long flight.
Two decades after I first glimpsed a future with VR, the industry is still in its infancy and ready to take off — and I think it really will this time. I know, “This time is different,” may be every investor’s famous last words, but when it comes to VR and AR, I’ll take that risk.
With mobile-led platforms providing a base level experience for the mass market and high-end HMD plays raising the ceiling on what’s possible, I really do believe this time is different. So, I’m keeping my eyes peeled, especially in these four areas:
- Hardware and software that can accelerate smartphone performance
- Data compression technologies and formats to stream large VR files
- Services that help adapt existing 2D content for 3D viewing
- Content creation tools for “light” mobile VR experiences (both consumer and professional)
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