Virtual Reality: Why Investors Should Pay Attention in 2016

Tech analysts are expecting virtual reality to have a breakthrough year in 2016, as a series of long-anticipated headset makers debut their products. This report analyses prospects for the development of augmented and virtual reality technology, with a focus on VR headsets, which are expected to dominate the next generation of video gaming devices, gaining mainstream adoption by 2019.

SciVacAlex Cutulenco | Ubika Research Analyst | February 17, 2016: Virtual and augmented reality technologies date back to the early years of 1980s, when Sega began working on the first prototypes of their Sega VR headsets. Failing to reach mass market attraction and an inability to raise industry financing, the technology never reach its full imagined potential. Several decades later, and tech analysts are expecting this industry to have a breakthrough year in 2016, as a series of long-anticipated headset makers debut their products.

Overall, the AR/VR industry raised a total of $658M in equity financing in 2015, across 126 deals. This report analyses prospects for the development of augmented and virtual reality technology, with a focus on VR headsets, which are expected to dominate the next generation of video gaming devices, gaining mainstream adoption by 2019.

Figure 1: AR/VR Investment Activity (Q1/2012 – Q4/2015)ARVR Investing Activity

Source: CB Insight

AR vs. VR: know the difference

Augmented reality and virtual reality are fundamentally different technologies. Augmented reality describes a technology that overlays computer-generated content on top of a user’s perception of the real world. Virtual reality technology simulates a presence in an alternate computer-generated reality that replaces the physical one.

2016: A crucial year for VR

Samsung Gear VR was released at the end of 2015. The headset uses a smartphone to process and project content, similar to the Google Cardboard platform, but in a more refined package. 2016 will mark the next step in VR headset sophistication with dedicated, self-contained devices like Oculus Rift and PlayStation VR entering the market. The ability of these devices to generate interest amongst consumers and game developers will largely determine the pace of adoption of VR technology in gaming over the longer term.

The first devices will be expensive and with limited content available that takes advantage of the hardware, demand will be reliant on early adopters and video game enthusiasts. Subsequent generations of headsets will likely put greater emphasis on cost control as the market becomes more competitive, leading to the release of products tailored for the broader consumer market.

Market Outlook

The most popular VR platform of 2015 has been Google Cardboard, which was released by mid-2015, and is estimated to have sold around 800,000 units. Galaxy Gear VR was later launched on November 27 in selected T-Mobile stores in the US, with a US$99 price tag, however it is estimated that only about 50,000 units were sold within 2015.

The market forecast is for a significant increase in more sophisticated products in 2016, with the launches of Oculus Rift, HTC Vive and PlayStation VR. With these launches, demand for less sophisticated solutions like Google Cardboard and Galaxy Gear VR is unlikely to see significant growth. Total volume sales are expected to increase in 2016, while average unit prices reach over US$300.

Figure 2: Expected Global Retail Volume of VR Headsets (2015 – 2016)image1

Source: Euromonitor International

Strong console sales make for a favorable environment to VR acceptance

2015 and 2016 are likely to be strong years for video game sales, largely due to successful launches of current generation consoles in late 2013. This has resulted in a large installed base of new generation consoles with processing capabilities sufficient for some VR content.

Figure 2: Sales only account current generation consoles, and not forecasted console releasesimage2

Source: Euromonitor International

Long Term

By 2019, retail volume sales of AR/VR headsets are expected to reach over 13 million units globally. For the foreseeable future the market will be dominated by gaming-focused VR headsets.

As smartphone-based VR headsets give way to devices with integrated screens over 2016, there is expected to be a significant increase in average unit prices. Subsequently, as competition intensifies and volume sales tick up, prices will start declining.

Competitor VR Headset Matriximage3

As the market moves from mobile-based devices to dedicated VR headsets in 2016, lower cost options are expected to see the strongest growth. Unlike its competitors, Sony Corp can sell VR headsets at low or even negative margins initially, relying on game and services revenue to make up the losses in the long run.

Risks

Content remains king

Ultimately, content quality and availability will determine how successful AR/VR headsets will be in the long term. The lack of access to quality content specifically designed for 3D TVs was a key reason why the technology never became mainstream. But with digital gaming becoming ever more popular AR/VR games will be easily accessible to consumers worldwide. This leaves the creation of compelling content specifically tailored to the new platform as the industry’s key problem to solve.

Cost Control

3D TVs were significantly more expensive than comparable non-3D models, which slowed user adoption. If VR is to become a mainstream technology it needs to focus on maximizing its user base, which means making VR content inexpensive and easy to obtain.

Alex can be reach at: alex@gravitasfinancial.com

Read more analyst insights from Alex Cutulenco

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