Just under four decades ago the world saw a revolutionary event: Commodore International, Tandy Corporation and Apple Computer each released devices that would become the first truly successful commercial personal computers, with 6.5 million devices being sold over the following years, being dubbed the “1977 Trinity” that would mark the beginning of personal computing.
Since then the market for PCs has matured dramatically, generating revenues of $295.7 billion in 2015. Similarly, smartphone revenues are expected to flatten at $330 billion by 2017. However a new technology is looking to adopt the title of ‘Product That Will Change The World’, as very recently the first commercially available Virtual Reality devices have emerged. If successful, these technologies could join the ranks of previous General Purpose Technologies (GPT’s) that have substantially changed economies.
The Next Level
Whilst still barely out of infancy, the new wave of VR devices is progressing rapidly. The Oculus Rift device, for example, has gone from prototype to approval for consumer use by the Federal Communications Commission in 6 years. Other brand new devices from HTC, Sony and Samsung have been flying off shelves. Nonetheless a lot of progress remains for the Virtual and Augmented Reality markets. This article gives an overview of the current state of the VR and AR technologies, before assessing the long-term potential for these markets, the challenges they will face and the potential impacts they could have across the next decade and beyond.
Where We Stand
Virtual Reality systems are currently best described as immersive multimedia, with a user interacting with a simulated environment that is highly realistic. Augmented Reality employs many similar technologies to VR, chiefly the wearable head-mounted hardware, but instead combines elements from the user’s real environment along with virtual elements.
Investors have put a lot of faith into these markets. Generally one can assess the VR and AR markets based on three fields: hardware, software and content.
In terms of hardware, Virtual Reality leads Augmented Reality by a wide margin. A number of leading devices became commercially available last year: Oculus Rift on 28th March, HTC Vive on 5th April, and PlayStation VR on October 13th. Compare this to the failed attempt of Google Glass to kick-start the AR market. Additionally sales are promising: SuperData reported that across 2016 Oculus sold 250,000 devices, HTC sold 420,000 Vives and Sony sold 750,000 PlayStation VR’s. These are all one type of VR Head Mounted Display that makes use of computers or consoles for power, as opposed to the second predominant type that works in conjunction with Smartphones (SuperData further subdivides these two categories).
These smartphones devices appear to have more traction: SuperData found that the three leading Smartphone-VR devices (Google Cardboard, Google Daydream and Samsung Gear VR) account for 98% of the nearly 89 million headsets sold. This is likely because the addressable market of Smartphone-VR devices is larger compared to devices that require additional computing power beyond the Smartphones we all carry in our pocket.
Technologically, the devices that released across 2016 broadly have a field of view between 90 and 110 degrees regardless of type. The non-smartphone devices will have refresh rates of 90-120 Hz and will pack 2-2.6 million pixels into each image, with Oculus Rift delivering a 1080×1200 resolution image to each eye.
Software has not been at the forefront of VR and AR coverage, given that the primary applications for VR are primarily based on creating an environment for users to explore rather than allowing users to generate their own content, thus the primary software requirement is to create 3D environments. Such programs that allow people to create virtual environments are available, such as software from IrisVR. As for capturing real environments for VR use, companies such as Matterport have created 3D-sensing cameras that can capture environments and they have raised $56 million to date to develop the technology.
Interfaces for VR devices have also been developed to allow users to access content directly through the device. AR software development is more challenging than its VR counterpart given the need of applications to merge with the user’s real environment but this is not an extreme obstacle and some promising AR technologies are rapidly developing.
However the lack of attention software receives should not be confused for lack of importance. Notably, software publisher ZeniMax was awarded $500 million in damages after executives working on Oculus Rift that had previously been employed at id Software (owned by Zenimax) broke their non-disclosure agreements and infringed copyright – this was a blow to Oculus (albeit far from fatal, falling short of the sought-after $6 billion damages as the FT reported). Given that millions of devices are in the hands of consumers, the focus will increasingly be put on software development.
Pushing the Boundaries
Whilst the content of Augmented Reality is constrained given that content creation naturally follows hardware and software development, the potential applications of Virtual Reality is developing but limited in the short term. The products that are becoming available this year are primarily aimed at the gaming industry or as a complement to mobile devices. Whilst some ‘Triple-A’ high budget games are supported by the Rift platform, major game developers will likely stick to the more lucrative and stable PC/console platforms for now.
However, the development of independent content is growing. WEARVR, One of the leading promotion sites for VR content, currently hosts over 2000 VR games and experiences since being founded in 2014. Google previously reported that over 1000 Cardboard-compatible apps were available in the Google Play Store and had a total of 25 million installs.Games studio Mojang had already made their best-selling game Minecraft compatible for Gear VR and Oculus last year. Outside of the entertainment industry there have been a few quiet developments, including the development of a VR Internet Brower by Mozilla.
When viewing all three of these aspects together it can be seen that the VR market is developing well initially. Google has shipped 5 million Cardboard viewers. Amazon and Best Buy both sold out their initial stock of the Samsung Gear VR within 48 hours, and the aforementioned sales figures speak for themselves. Whilst Smartphone-based devices dominate, many more devices will come to market over the coming years and will allow the market to develop.
The Battle for the Market
This will add downward pressure to the price of the devices, with consultants KZero estimating an average price of $100 by 2018. Despite the high price point the strategic bundling of items and tailor-made packages that support devices has made it easier for consumers to consider buying such devices: as an example just before release Oculus announced the availability of bundles with PC’s that are certified as ‘Oculus Ready’ with competitive prices.
Bundles have been seen pairing Samsung’s Gear VR with Smartphones and TechCrunch reports that Gear VR will be bundled with the coming Galaxy S8 Smartphone. HTC Vive has also established itself alongside the leading PC-game platform Steam, but as mentioned the limited availability of Triple-A gaming titles may hinder broader demand.
Estimates for the size of the VR and AR markets in the medium term differ greatly, which is due to the novelty of the products. Pure quantitative analysis of the industry is difficult when products have only been on the shelves for months and there is no existing market data. However, Digi-Capital predicts that the VR and AR markets could collectively generate revenue of $108 billion by 2021 from a comparatively non-existent $5 billion 2016 market, with AR technology taking the majority share of this:
To put this into perspective, the global Smartphone market generated revenues slightly above this at $159 billion in 2011. If Digi-Capital is correct, then the VR/AR market will also grow similarly to the Smartphone Market did from 2008 to 2012: across these 5 years the Smartphone market added $179 billion to its global revenue according to Credit Suisse. This suggests substantial prospects for VR/AR and firmly demonstrates that the youth of AR/VR should not be mistaken for weakness.
Looking Into the Distance
The long term could be very fruitful for the VR and AR markets. The improvement of technology and development of applications could lead to market size estimates mentioned above becoming a reality.
In terms of hardware and software, progress remains needed if VR and AR devices are to succeed. Digi-Capital sets out seven of factors that must be addressed in order to drive VR and AR growth, but with appropriate investment into the three fields the future of the market is promising. Mobility, Wearability, Resolution and Immersion will likely improve as technology develops. As mentioned, Affordability will improve with competitiveness and technological development reducing the cost of the devices. The final two factors (Usability and Flexibility) carry the most uncertainty as they rely heavily on the development of applications.
The future applications for VR beyond gaming mostly move towards the entertainment and design functions. As mentioned the existing applications for VR are the creation or capture of explorable environments, however this could easily spill over into other industries. Ideas to generate tours of museums, galleries and famous buildings have all been floated. Architectural applications are among the strongest suggested uses, in not only designing buildings but also by being able to provide a more immersive and realistic showcase for clients, and Matterport is aggressively targeting the real-estate sector to use its cameras.
Aside from this, the potential for technical applications of VR and AR above and beyond aesthetics should not be underestimated. In 2013 it was reported that a team at SpaceX was successfully designing rocket components by combining the Oculus Rift with other devices. Training applications of VR have also been considered by allowing people to enter simulated environments, whether these are of a medical, military or sporting design.
The Future is Augmented
As one can imagine, the future applications of AR far outweigh those of VR technology. Considering the only major AR device seen so far has failed in spectacular fashion, many people may be unconvinced of this. Google Glass’ ultimate failure was not providing any compelling reason for consumers to use the device. The functions of Google Glass were very limited and paled in comparison to the powerful Smartphones carried in consumers’ pockets.
However with enough time to develop the hardware, software and functions of AR devices, the market could grow substantially, with a report from Citigroup suggesting that in time AR devices could replace Smartphones. Ultimately, one should not confuse the failure of Google Glass with a lack of demand for AR products. After all, the concept of Microsoft’s HoloLens AR device that made a debut in January last year and begins shipping developer kits this year was incredibly well received, and the HoloLens website obtained 50 million visits over 2015, nearly double the number of visits to the Oculus Rift website in the same year.
An impressive demonstration that exists of AR technology has been demonstrated by Magic Leap, which is developing a product that can seamlessly blend digital graphics into the real world, with promising footage being captured directly through their product and released. Magic Leap has continuously attracted more funding from companies such as Google, Qualcomm, Alibaba, Warner Brothers and J.P. Morgan, bringing the value of the company to $4.5 billion.
Although very secretive about their work, their hardware development is clearly unparalleled, promising no field-of-view limitation and incredibly realistic objects by projecting light directly into the user’s eye. Bolstered by creative staff such as the co-creator of Guardians of the Galaxy and the writer of award-winning video games such as Dishonored, Magic Leap seems to be ticking all of the boxes for a successful AR product. Competition is also rising: Apple and Facebook are reported to be working on their own augmented reality projects to catch up to the frontrunners: Business Insider reported late last year that Magic Leap started manufacturing an unannounced product, potentially for a 2017 release.
The Internet of Things
The potential of synergies with complementary products is also developing and is likely to be a substantial driver of VR and AR growth in the future. One example is the or example the Leap Motion application, which allows a user to control their computer via hand gestures can sense motions as small as 1/100th of a millimetre across all 10 fingers at 290 frames per second, using only a device the size of a USB stick costing $80. This could allow for more immersive control in a VR environment, and would be especially useful in allowing AR to reach its potential.
One development that will arguably especially assist AR technology is the development of the Internet of Things (IoT), described as a global infrastructure for the information society by interconnecting physical objects using electronics, sensors and network connectivity, enabling these objects to collect and exchange data. AR technology would be well suited to a world full of connected items and digital information, acting as an interface for a more digitised world.
Specifically regarding the AR market, it would be amiss not to touch on a pressing issue concerning our technological future despite the positive outlook. Cyber-security has received worthy attention since Edward Snowden’s disclosures on the extent of government surveillance, and there have been numerous cyber-attacks and data breaches in recent years, with the TalkTalk breach in October last year involving over 150,000 customers being the most recent large-scale example. The implications for AR devices that are constantly reliant on data about consumer environments and personal information are substantial, and companies along with lawmakers will need to rigorously protect the digital information of its consumers in a digital world.
Big Things Have Small Beginnings
There is a long way to go for Virtual and Augmented Reality. The products are finally appearing but they are not perfect. A great deal of development will still be required, and whilst it is easy to have faith that the hardware and the software can be developed, the development of content is less predictable. Numerous applications that have gone unmentioned here have been suggested, and not all of these will be successful. Just as with Google Glass, some ideas may look better on paper than they would in reality.
Even if the exact applications of AR and VR in the long term are not precisely known, one can have faith the AR and VR technologies will be far from useless and may one day become an everyday technology that is key to our society. Facebook’s Zuckerberg told analysts that it could take 10 years before VR becomes a mainstream investment, however to quote Steve Jobs, “You can’t connect the dots looking forward”. It will be a remarkable experience to see how these technologies will develop in the future.