VR in the Early Adoption Phase

Those of us who have seen a sporting event, concert, travel destination or videoVR Hurdles Playstation Headset game through the prism of Virtual Reality (VR) understand how the technology will impact the way we experience the world. However, for GPs & LPs, the transformation is moving slower than expected. Fortune notes that 2016 VR sales were very disappointing, as the industry shipped 6.3 million devices and earned $1.8 billion in revenue compared to the experts’ predictions of $5.1 billion. At the beginning of 2016, Goldman Sachs projected that the industry would be an $80 billion market by 2025, which at the current market adoption rate and technology hurdles seems unlikely.

A New York Times article quotes Sunny Dhillon of Signia Venture Partners, who believes that VR appears to be heading towards the “trough of disillusionment,” which usually comes after a period of inflated expectations. The good news for investors is that Sunny believes this period will eventually be followed by a common acceptance of the benefits. So, the question for LPs is hopefully not if, but when. Per Pitchbook, $1.48 billion was invested in the virtual and augmented reality industries in 2016, compared to $331 million in 2015. With the launch of several major devices in Q1 2016, the sluggish sales numbers that followed indicate there are still obstacles to overcome before VR gains widespread market acceptance.

Goldman Sachs expects slower adoption for VR but impressive potential in the long-term:

VR Hurdles GS VR Adoption

Goldman projects how VR revenues will look in 2025:

VR Hurdles GS VR Revenues

Complications to Overcome

Industry experts have identified the following obstacles, which must be overcome to bring VR into the mainstream:

  • Health Effects– In his Forbes article, Kalev Leetaru discusses the issue of VR sickness. Nausea and eye strain are current side effects of prolonged use of the VR headsets, the former deriving from conflicting signals to the eyes and inner ear. An article from the Financial Times also suggests that there could be psychological repercussions such as reckless behavior when the user struggles to know the difference between virtual and real life.
  • Cost – Most sources cite cost as a major hurdle for VR to reach the mainstream. Leetaru says that the newest models cost about $600 but also need high-end PCs with powerful processors, currently worth about $1,500, to operate.
  • Technology Advances – An article in the New York Times notes that the more powerful headsets are still required to be tethered to a PC or gaming console. A company called Sixa has developed a wireless adapter that eliminates the need for cords. The device must also allow for comfort over hours of continuous use. The weight of the device is also an important factor.
  • PC Computing Power – As mentioned above, the headsets need power to run. So much power that graphics chipmaker Nvidia has estimated that approximately 1% of all current PCs can handle virtual applications and most need a sevenfold increase in performance to work properly.

Interest in the Future, Despite Complexities

The amazement consumers experience after giving VR a try for the first time is real. While there are still pervasive issues to conquer with the technology, investors are excited about the possibilities of VR technologies. Data collectors say that Virtual Reality has garnered more interest for ages 18 years or younger and interest declines as age rises. This factors into the cost issue as a young customer base has less money to spend. The question of when this technology will finally become mainstream is still being debated, but with big companies already diving into these advancements, Virtual Reality will certainly be an interesting space for investors to consider in the coming years.

For information on how virtual reality is being used today, for fun and professionally, please read You Are Now Entering a Virtual Reality.