VR Begins Transition From (Failed) Next Big Thing to Sustainable Business
The ongoing theme in the media for much of the last 12 months has been that Virtual Reality (VR) as a technology is a bust. And from a pure headset shipment number perspective, it’s been hard to argue against that narrative. But as with most thing in this world, the reality is a bit more nuanced than that. Further, I would argue that VR is now poised to move from a technology burdened with unrealistic expectations to one that will enable smart vendors engaged in the space to build out more modest, but profitable and sustainable businesses going forward.
The Headset Decline
At IDC we track three categories of VR headsets: Screenless viewers, such as Samsung’s Gear VR, Tethered, such as HTC Vive, and standalone, such as Oculus Go. (We exclude Google Cardboard-based products from our numbers.) If we look back two years, to 3Q16, we see that the entire market shipped 2.4M units, and that screenless viewers constituted over 2M of those units. And more than half of those units came from Samsung. As it often does, Samsung was moving to establish itself in the new category by leveraging its strong position in smartphones, often bundling its Gear VR screenless viewer at low or no cost with its high-end Galaxy phones. The company continued this practice for some time, but that 3Q16 number was the high point, and by 2018 it had all but given up on the Gear VR. In 3Q18 Samsung shipped just 125K of its screenless viewers.
Samsung’s early push and later shift away from the screenless viewer category caused the overall VR market to appear to grow fast (from a small base) and then fall off a cliff. But inside the bigger numbers, the other two headset categories were continuing to evolve. HTC and Facebook lowered the price of their headsets, and later HTC launched a Pro version of the Vive. Sony launched PlayStation VR. A number of vendors launched products using Microsoft’s Mixed Reality platform. And Lenovo, Vive and Oculus launched standalone products. All of this led to some notable ups and downs along the way, but here’s the bottom line. In 3Q16 tethered shipments totalled 372K; in 3Q18 they hit 1.1M. In 3Q16 standalone headsets were at 30K; in 3Q18 they grew to 392K. So, yes, the total market in 3Q18 was down versus the same quarter in 2016 (1.9M versus 2.4M), but the product mix shifted dramatically and revenues grew substantially.
Early Adopters Are Happy
So the headset market itself has been a wild ride over the past two years. During that time, we’ve seen a substantial build-out of the existing platforms and the content available on then. The challenge, when it comes to pleasing consumers, is that the type and quality of content out there seems to please current owners, but it doesn’t excite non-VR headset owners enough to buy. We recently surveyed over 2,000 U.S. consumers, and among the small subset of that group who currently owned VR headsets, most are happy with both the hardware itself and the content (especially those who own tethered and standalone products). However, when we asked non-owners about their interest in VR, the response was tepid at best. The clear challenge here is that to date there’s been no specific application or type of content compelling enough to drive more mainstream users to deal with the cost and hassle of acquiring the VR hardware. This obviously creates challenge for the market: How do you incentivise developers and content producers to create better experiences without a large enough installed base? How do you grow the installed base without better content?
While the industry ponders the consumer challenge, many vendors in the space have moved to embrace a near-term opportunity upon which they can build a business in the meantime: Business users.
I have talked about the opportunities for VR in the commercial segment in a previous column, so I won’t repeat the argument here except to say that since I wrote that back in April, interest from commercial has only grown. And vendors are moving to embrace this interest.
HTC’s Vive Pro is a great example of a company listening to what business users said they need. The hardware addressed business requirements, including a higher resolution screen, and HTC’s Vive Business Edition package rolled in a professional use license, commercial warranty, deployment options, and dedicated phone support.
Facebook has also been paying close attention to the commercial side of things and has built out business-specific bundles for both its Oculus Rift and Oculus Go products. Likewise, Lenovo is now offering its Mirage Solo VR headset as part of a bundle targeting education deployments.
As the business use case for VR continues to solidify, the biggest hurdle won’t be the hardware itself, but the need for more developers—and the tools they need—to build out both broad business VR applications as well as company-specific, proprietary ones. This will be a challenge, but there’s money to be made here, and it involves significantly less risk than trying to create consumer content that requires dramatically more scale to drive profitability.
Looking ahead, there’s reason for cautious optimism in the VR market. Early next year, Facebook will ship its Oculus Quest headset, a standalone product that offers significant performance gains for the category. I expect Facebook to tell a strong story about the use case for Quest in business. And we’ll see Facebook, HTC, Lenovo, and others continue to build out more interesting use cases for both consumer and commercial users. VR may not have lived up to the early hype, but the technology still has a role to play in our world. Companies who stay the course, and play it smart, should find a profitable, sustainable way forward.