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Virtual Reality Inches Closer to Commercial Reality
Virtual Reality Inches Closer to Commercial Reality
According to Silicon Valley pundits, virtual and augmented reality are on the verge of commercial takeoff. Where does this technology really stand?
Technology Briefing

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It's never a good sign when experts are predicting that a new technology will conquer the world, and yet most people don't understand what it does or why they would ever need it. And that's the situation that virtual reality (VR) and augmented reality (AR) are in today.

The hype is growing, with pundits proclaiming that VR and AR are ready to explode. For instance, TechCrunch forecasts that revenues will hit $150 billion three years from now.

But most consumers simply aren't all that interested. For instance, a recent ReportLinker survey concluded that "the majority of respondents do not understand the concept of virtual reality and fully half cannot name a single brand behind the VR technology." And while 58 percent of Americans have heard about VR, they remain unable to "explain what it's all about."

Of course, there was a time when the majority of Americans didn't understand the Internet, smartphones, or Facebook, and all of those innovations eventually caught on and evolved into game-changers. But for every blockbuster like the iPhone, there's an overhyped, underwhelming product like Google Glass, which received breathless reviews in 2013 before launching in 2014, where it encountered both the backlash against early adopters and the privacy concerns that we forecast in our October 2013 issue. Google withdrew Glass in 2015 and was reportedly revamping the product under the helm of a former Apple designer, but its rumored re-launch in 2016 never happened.

Let's be clear: VR and AR will transform the user experience in several business and consumer applications. And the twin technologies will be big. It just won't happen as soon as many pundits are predicting.

Because we've covered this topic many times, as recently as May 2016, we'll keep our discussion of "what it is" as succinct as possible and refer you to previous issues for more details should you need them. To distinguish between VR and AR, keep in mind:

  • Virtual reality creates an experience in which the user enters either a fantasy world, like a video game, or a virtual version of a real world, such as a flight simulator. The key players in VR are Sony, Oculus, HTV, and Samsung.
  • Augmented reality creates an experience in which the user sees digital objects and characters within the real world, as in the Pokemon Go fad last year that imbedded animated characters within physical landmarks, or the overlaying of a repair manual's diagrams over the machine that a technician needs to fix. AR's key players are Microsoft, Google, and Magic Leap.

Both technologies typically rely on headsets that must be worn over the eyes. VR headsets are opaque in order to remove wearers from their actual surroundings and immerse them in the virtual world. AR headsets are clear so wearers can see their physical environment, as well as the enhancements added by the software.

When these technologies finally mature, the potential applications are endless. Here are nine possibilities that Goldman Sachs Global Investment Research explored in a recent report:

Videogames: Gamers can use VR to embed themselves in virtual worlds, or they can use AR to turn the real world into a video game. Because gamers have been waiting for the technology and are eager to use it, this is the application that is most likely to succeed first. Goldman Sachs expects VR videogame revenues to reach $6.9 billion in 2020 and $11.6 billion in 2025.

Live events: Seats at concerts, major sports events like the Super Bowl, and political conventions are limited, and many of those seats provide less than ideal views of the action.

VR streaming of live events would make every viewer feel like he or she has the best seat at the event, and instead of paying hundreds or even thousands of dollars to attend in person, the user will be able to watch comfortably from home for as little as $10. Consider that HBO and Showtime charged 4.4 million people $100 each to watch the pay-per-view broadcast of the Pacquiao/Mayweather boxing title fight in 2015.

Goldman Sachs projects revenues from VR live events to reach $750 million in 2020 and $4.1 billion in 2025.

Video entertainment: Viewers won't simply watch a VR film; they'll be immersed in it.

The user experience will be heightened, with the ability to view scenes from any angle at will. But existing movies can't be converted to the VR format because they must be filmed in a 360-degree format that didn't exist when they were produced. Goldman Sachs sees VR video as an incremental enhancement, like IMAX.

Assuming viewers would pay 30 percent more than the average annual spend of $108 per Netflix subscriber and 5 percent annual growth, VR video subscribers would generate revenues of $750 million in 2020 and $3.2 billion in 2025.

Retail: Applying AR and VR tech to the shopping experience would eliminate the need for customers to visit showrooms to examine refrigerators or test-drivecars, try on clothes in dressing rooms, or place online orders for products like sofas or rugs without seeing what they would look like in their own homes.

Already, Lowe's has installed "Holorooms" in six of its home improvement stores to enable customers to use Oculus VR to virtually design their own bathroomsand kitchens, while Microsoft and Volvo partnered on a pilot program that allowed car shoppers to select the features they wanted and see the results in hologram form at a dealership.

Goldman Sachs projects that retailers will spend $500 million on VR software in 2020, with that figure climbing to $1.6 billion five years later.

Real estate: VR tours of homes and apartments would allow buyers and renters to view multiple properties without traveling to each location. The technology could disrupt the real estate industry, with virtual agents stealing commissions from human realtors. Currently, annual real estate agents' commissions in the U.S., UK, Japan, and Germany-which have the largest online markets for real estate-total $107 billion. If 130,000 real estate agents spend $5,000 a year to display VR ads for homes (a reasonable assumption since agents today spend $4,000 a year on average on sites like Zillow), then revenues will reach $750 million in 2020 and $2.6 billion in 2025.

Healthcare: AR could be used to assist doctors in surgeries, while VR could help patients recover from conditions like post-traumatic stress disorders or to overcome phobias like a fear of heights or anxiety in social settings. This could be a $1.2 billion market in 2020 that reaches $5.1 billion in 2025.

Education: VR offers the potential to revolutionize education by allowing students to experience first-hand such events as Abraham Lincoln's assassination, or the creation of the solar system. Considering that Gartner estimates the software industry's revenues from education to be $12 billion worldwide, Goldman Sachs conservatively projects $300 million in VR educational software revenues in 2020 and $700 million in 2025.

Military: The U.S. military already uses VR for flight simulations and battlefield combat simulations. With 6.9 million military personnel in high-income nations according to the World Bank, providing VR training to just 700,000 soldiers at an annual cost of $2,000 each would generate revenues of $1.4 billion in 2025. In the shorter term, revenues would reach $500 million in 2020.

Engineering: VR and AR are more effective and efficient than CAD and CAM in enabling engineers to test designs before manufacturing products, which will increase productivity and reduce waste. Assuming that 1 million of the 6 million engineers in the U.S., Europe, and Japan use VR and AR technology in 2020, software revenues will be $1.5 billion in 2020, according to Goldman Sachs. If 3.2 million engineers adopt the software by 2025, revenues will more than double.

That's a total of just over $13 billion in revenues in 2020. While we're slightly skeptical of Goldman Sachs' predictions for that timeframe-with the exception of the videogame market, which may be even bigger than the firm projects-let's assume they're all accurate. That $13.15 billion total is less than 10 percent of the $150 billion in revenues that TechCrunch predicts the technologies willgenerate by 2020.

And that's what is important to remember here: It's all too easy to see an exciting new technological platform as a disruptive force that will change everything overnight, but when you actually take the time to quantify the number of people who will adopt the new technology in the short term, the reality is that the transformation will be gradual.

That's good news, because it means that whether you are looking at VR and AR from the perspective of an executive, an entrepreneur, or an investor, you still have time to think about how you can seize this opportunity.

Based on this trend, we offer the following forecasts:

First, contrary to what Silicon Valley pundits want you to believe, both VR are AR are five-to-ten years away from making a meaningful impact.

In other words, the industry is still at the level of the Apple I computer, before Steve Jobs and Steve Wozniak perfected their invention and reached critical mass with the Apple II. The technology has real potential, but it's simply not ready yet. For example, the Magic Leap headset is too bulky and expensive, according to a recent report in Wired, and the company hasn't figured out how to compress the technology into a slimmer device.

Another article in Wired revealed that Microsoft's HoloLens offers a much narrower field of vision than its on-stage demos before large audiences suggest.6 And because most consumers are resisting high prices for VR, many developers, like Oculus, are selling their devices at cost, hoping to lock users into a platform now and capture profits later.

Second, the biggest challenge for the technology is that users will not want to wear an ugly, heavy headset to experience virtual or augmented reality.

This is what Wired magazine labels "The Dork Factor." According to its report, "There's no getting around the fact that everyone looks like a dork wearing a head-mounted display." Some new interface will need to be invented that is less intrusive than the headset that completely covers the top half of the user's face.

Third, when the technologies achieve economies of scale and benefit from continued improvements in price/performance, they will transform industries in the second half of the next decade.

As noted earlier, videogaming is the application for VR and AR that will prove to be the exception. It's likely to be the first and most lucrative use of virtual reality because there are already 230 million gaming consoles in use, with another 150 million gamers using PCs. Gamers will instantly notice the difference in the user experience between a 2D game and a VR game, and they'll be willing to pay for the upgrade. After that, the applications that will see the fastest growth will be real estate, live events, retail, and the military.

Fourth, several companies will be positioned to play key roles in this industry in the 2020s.

These firms include:

  • Alphabet, which undoubtedly sees the advantage of collecting data on users' interactions in VR for marketing purposes. It has given away millions of Google Cardboard viewers to speed up adoption of its VR platform.
  • Facebook, which acquired Oculus in 2014 for $2 billion. It can now offer VR ads at a higher CPM (cost per thousand) impressions than its traditional marketing rates.
  • Largan Precision, which dominates the market for manufacturing high-quality lenses for smartphones. Largan is likely to bring its expertise to VR cameras.
  • Microsoft, which has an installed base of users for its Office software suite of 1.2 billion. The company can leverage this connection in marketing its HoloLens VR product.
  • Nvidia, which manufactures graphics processors for gaming and other industries. It currently has about 250 alliances with firms to develop VR applications with its DesignWorks and GameWorks platforms.
  • Samsung, which partnered with Oculus to create the Gear VR headset, which relies on the Samsung Galaxy phone for its display and processor and Oculus for the software. At $99, the offering is far below higher-quality competing products like the Oculus Rift at $599.
  • Sony, which unveiled its PlayStation VR gaming platform in 2016. PlayStation's installed base of customers is more than 40 million, with 30 percent of users considered "hardcore," defined as fifteen or more hours of gaming per week, and more than 90 percent described as "active" gamers.
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