Hardware Giants Bet Big on Virtual Reality and a Market That Doesn’t Yet Exist

Remember that feeling as a child before your birthday — the mixture of excitement and worry that deepest-held wishes might not come true? That’s how everyone in the nascent business of virtual reality feels like right now.

Facebook-owned Oculus is getting ready to ship its first Rift VR headsets to U.S. consumers next week. Mobile-phone maker HTC will follow up with deliveries of the Vive VR headset one week later, and Sony is preparing to launch its PlayStation VR headset as well.

This marks the first time that these kinds of devices, capable of delivering immersive VR experiences, are going to make it to consumers’ living rooms.

Daniel Downey for Variety

“It’s a moment of truth for VR,” says Anthony Batt, co-founder of Wevr, a company dedicated to creating cinematic VR experiences. “We are excited. But with excitement, there is always a sense of fear.”

Up until now, Oculus and HTC were shipping pre-release versions of their devices to developers only. Without a retail product, content producers had little way of knowing what consumers actually wanted, or whether they’d be interested in virtual reality at all.

“We had this razor handle before the razor blade for a while,” says 20th Century Fox futurist Ted Schilowitz, whose Fox Innovation Lab in January unveiled “The Martian VR Experience,” a virtual reality companion to Fox’s recent Oscar-nominated hit “The Martian.”

As with any first-generation technology, there are kinks to be worked out. And without any real feedback from consumers, developers have been making a lot of blind bets on what a mainstream audience would actually want from the new medium. Chances are, at least some of them are way off base. If anything, Batt fears that the media and consumers may have to adjust their expectations of a new technology. “It’s the very beginning,” he says. “It’s a relatively new craft. Craft takes time to develop.”

There’s enough anecdotal evidence to suggest that the headsets will be a hit, at least with early adopters. At the recent Consumer Electronics Show in Las Vegas, curious attendees lined up for hours just to get a glimpse at what Oculus has been working on — and few walked away without raving about experiences that are unlike anything they had seen before.

What’s more, Oculus alone has shipped more than 175,000 of its pre-release headsets since debuting its first version on Kickstarter in 2012, signaling overwhelming interest from developers — and enthusiasts posing as such — to get first dibs on one of the devices.

Fox Innovation Lab’s “The Martian VR Experience” puts users in the space shoes of Mark Watney, and includes video-game elements.

Among the issues headset makers will have to deal with early on is price sensitivity. The Oculus Rift is retailing for $600. That price doesn’t include the high-end computer necessary to run games and experiences for the device, which may set users back another $1,000 or more. Also not included are handheld controllers — like the ones necessary to use “The Martian VR Experience” — which Oculus will start selling later this year, with pricing still to be determined. The Vive includes similar controllers at launch, but also costs a whopping $800 — again without the necessary PC.

Those prices initially caused some uproar among VR enthusiasts, but most industry insiders aren’t too worried about sticker shock. “Early adopters have historically rushed out and more than gladly paid for devices that were expensive,” maintains Wevr co-founder and CEO Neville Spiteri. Schilowitz agrees: “That’s not a barrier of entry for them at all.” Over time, prices always come down, he argues, pointing out that Blu-ray players once cost more than $2,000.

High prices could nonetheless influence how headset manufacturers position VR in these early days, and which content will be most popular. “The early adopters that are really excited about this are gamers,” says Jason Rubin, head of studios at Oculus. Video-game enthusiasts are already used to paying top dollar for high-end PCs and game consoles, which is why it only makes sense for Oculus, HTC and Sony to target them first.

Hollywood studios and others have to keep that audience in mind as they try to bring narrative storytelling and cinematic experiences to VR, argues Batt. That’s why his company partnered with high-tech comedian and musician Reggie Watts for a VR experience. “He trends high with the gaming audience,” Batt says.

However, Schilowitz thinks a degree of counterprogramming may make sense as well: As consumers discover VR, new audiences may become interested in new forms of gaming that are unlike those on traditional PCs or consoles, and gamers may be enticed by new forms of storytelling that don’t look and feel like a passive movie-viewing experience. “It will actually broaden the audience,” he says.

Sources: Deloitte Global; CCS Insights; Barclays; Digi-Capital

“The Martian VR Experience” is an example of something that straddles the two categories. It ties in with the movie, featuring video-diary entries from Mark Watney (Matt Damon) that give users the experience of being in the film, as well as offering challenges that make it feel like a video game.

And while many in Hollywood are starting to release VR apps to promote TV shows and movies, Fox is looking at “Martian VR” as a trial balloon for a new generation of paid home entertainment. The studio will begin selling the experience to users of high-end headsets this spring, and Fox Home Entertainment president Mike Dunn believes that many will open their wallets for it. “We expect ‘The Martian VR Experience’ to be profitable,” he says.

Opinions vary widely over the right price point and distribution model for VR content. Some believe consumers will take their cues from the world of gaming, where players are more than willing to drop serious cash on fresh releases. Others think the economics of VR content will be more aligned with that in the world of hand-held devices. “VR experiences will be similar to mobile apps in that they will be based on the freemium model,” argues Immersv co-founder and CEO Mihir Shah, whose company is building an ad platform for virtual reality. “Right now, most VR apps are paid apps, but that’s only because there isn’t a strong infrastructure in place for them to monetize through ads and in-app purchases.”

Finally, there are the likes of Netflix, Hulu and Amazon, which are all exploring ways to add VR content to their respective subscription services. A lot of this work is still hush-hush. Only Hulu has owned up to developing native VR content, with the company’s head of experience Ben Smith telling the audience at a Variety event earlier this year that his team is working hard within the format. “We are spending a lot of time in incubation. Trying things, seeing what works, what doesn’t work,” Smith said.

Netflix hasn’t officially committed to VR content, but some within the company are cautiously optimistic. “It’s an innovation we will embrace,” says Net­flix chief product officer Neil Hunt, while also warning that some consumers may never want to wear headsets, just like some never warmed up to 3D glasses. Amazon has kept completely mum on the new medium, but a recent job posting laid out ambitious plans for a dedicated team within the company’s video service that aims to bring VR experiences to consumers.

Subscriptions, paid content and advertising: It’s possible that there is room for all of these models as the medium evolves. And it’s likely that consumption and spending patterns will vary widely among different platforms, which brings up another problem with the early days of VR — everyone seems to be talking about different things.

On the one hand are the high-end VR headsets made by Oculus and HTC that are set to reach consumers in the next two weeks. On the other are much more affordable mobile VR viewers like Samsung’s Gear VR that use cell phones as screens, or even the cheap Google Cardboard viewers that are often given away for free as smartphone accessories.

There are also hybrid devices like LG’s 360 viewer, which comes with a dedicated display but plugs into a phone. And there are reports that Google is developing a stand-alone headset that works without any additional hardware. All of this doesn’t even include augmented reality devices like Microsoft’s HoloLens, which combine holographic projections with images from the real world.

These approaches aren’t just competing bets on technology, they also could shape the new medium’s functionality — determining which experiences are the most compelling to consumers. Most industry insiders believe that there is no one-size-fits-all approach, and that mobile and stationary VR will coexist, at least for the foreseeable future.

Still, all of these competing efforts do make it harder to figure out how big an opportunity VR really is. Estimates of audience size for VR, and the revenue that Hollywood and others will generate with it, are all over the map. Deloitte Global estimates that headset manufacturers will ship 2.5 million devices by the end of this year, and that revenue from both hardware and software will total $1 billion. CCS Insight concurs with those projections, and forecasts that 24 million devices will be in the hands of consumers by 2018. Digi-Capital estimates that virtual and augmented reality will generate $150 billion by 2020.

A crowd of convention-goers experience Samsung’s VR goggles during the company’s presentation last month at the Mobile World Congress in Barcelona. EPA/Alberto EstÈvez/Newscom

Some caution that it’s best not to just look at headset shipments and sales in these early days. “Success of VR will be measured by hours and dollars, not units,” declared Oculus founder Palmer Luckey on Twitter last month. “Dusty headsets on desks / in the bin won’t sustain an ecosystem, content will!”

But what’s going to be the winning content that will get users to tune in over and over, maybe even every day?

“Great games will give you that repeat usage,” Batt insists. Reaching the same kind of stickiness with storytelling is much harder, he argues, especially as long as VR developers focus on short, passive video experiences that can be consumed in just a few minutes. Batt likens such content to music videos, asking: “How many times do you watch a Rihanna video?”

The key for developers is to give users agency, argues Batt, pointing to a surprise hit that has been turning heads at VR demo sessions for months: Tilt Brush, a virtual reality drawing game that was initially developed by a VR startup, and is now owned by Google. At its core, Tilt Brush is little more than MS Paint, or any other basic illustration app, complete with virtual brushes, pencils and color palettes. But with an HTC Vive, it gives users the ability to draw pictures in the air in front of them, then walk around their creations and animate them in a 3D space.

Figuring out how to create that same level of interactivity and immersion with VR stories is key to making the medium successful, Batt says. “That’s going to create daily-active users,” he explains.

In the end, the early days of VR may not be just about how consumers react, but also how studios and other creatives take advantage of the opportunities ahead. VR comes with huge risks and many unknowns, but it also has a huge upside — for companies that don’t sit on the sidelines, that is.

That’s a lesson Fox is taking to heart. “If you’re gonna do something, you might as well just do it,” Schilowitz argues. “We didn’t limp into this thing. We just dove all the way in and started swimming.”

Batt agrees that this is no time for Hollywood to be timid and wait for consumer demand to shape VR’s future. “If you want to be in it,” he says, “you have to start now.”

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