VR industry faces reality check on sales growth

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The makers of virtual-reality hardware and software are finding themselves caught up in a complex new game: expectations. 

From tech giants such as Sony, Alphabet and Facebook to the many start-ups and independent developers who are creating apps for their headsets, the VR market so far has not played out as anyone quite anticipated. 

As video games creators meet this week in San Francisco for the annual Game Developers Conference, many in the industry are fretting that virtual reality is taking longer to reach a mainstream audience than they had hoped, especially after Facebook’s blockbuster $2bn acquisition of Oculus VR three years ago. 

Amid growing competition, Oculus appears to have lost its early advantage in pioneering the latest generation of VR technology. Of the high-end headsets that offer the richest graphics and most immersive experiences, Sony’s PlayStation VR has established itself as the clear market leader in terms of units sold. Many analysts and developers believe Oculus Rift lags behind in third place behind HTC’s Vive. 

While HTC and Oculus have not disclosed sales figures, Sony said on Monday it had sold 915,000 PlayStation VR headsets since the $400 device went on sale in October. By some industry estimates, that could mean PlayStation VR is outselling the more expensive Oculus Rift by as much as three to one. 

Andrew House, global chief executive of Sony Interactive Entertainment, said demand for PSVR had outstripped supply and the company was racing to increase production. “Closing in on 1m units, we are thrilled by the pace of adoption for PSVR and firmly believe it will establish a leadership position in this exciting new market,” he told the FT. 

At the same time, however, many analysts have been paring back their forecasts for the VR market as a whole. 

CCS Insight, one research group, estimates 11m virtual and augmented-reality devices were sold in 2016, with the vast majority being low-cost smartphone viewers such as Google’s Cardboard and Samsung’s Gear VR. Only 1.2m were dedicated VR devices for using with a games console or PC, CCS said. 

“These figures fall below our previous expectations,” it said in a report on Friday. “Slower than previously expected market growth in 2016 has led us to delay the forecasted spike in adoption by one year for VR.” 

As well as the high price of VR systems such as Oculus Rift and HTC’s Vive, alongside the high-end PCs required to support them, CCS blames “limited availability” of content for holding back VR. 

“I don’t think anyone has yet developed that killer app” for VR, said Minal Hasan, co-founder of K2 Global, a venture fund that invested in AR headset maker Magic Leap. “We are still several years out before we expect to see a big breakout hit on the content side.” 

While that is causing challenges for some developers who had raised multimillion dollar funding rounds hoping for an initial surge in sales, a handful of independent games studios are showing that popularity in VR can be lucrative — as long as costs are managed appropriately. 

Tipatat Chennavasin, general partner at The Virtual Reality Fund, an investment firm focused on the sector, has calculated that at least eight VR-only titles have generated more than $1m in revenues so far. “Even if adoption is a little slower than we’d like, the fact that people are spending in VR will continue to create a healthy ecosystem for VR developers who are smart and thinking about it carefully,” Mr Chennavasin said. 

Among that elite group is Owlchemy Labs, the Texas-based developer behind Job Simulator, a game available for all three high-end VR systems, which said last month it had generated $3m in sales to date, and Survios, whose Vive title Raw Data reached $1m in sales in its first month.

The high price of the hardware means that “high-end VR preselects the whales”, Mr Chennavasin said, using the games and gambling industry term for high-spending players. But compared with the enthusiasm ahead of the Game Developers Conference a year ago, he added, “there is a real reality check . . . This is not a gold rush. There is not money for every developer out there.” 

The success of Job Simulator, a chaotic and cartoonish satire set in a future when automation has rendered human labour a museum piece, was in part because it took early advantage of the motion-sensitive handheld controllers that first appeared with HTC’s Vive in April. 

Oculus’s equivalent Touch controllers did not go on sale until December, one of a number of delays in shipping products last year. Oculus has struggled to manage the shift from a tight-knit start-up to a large organisation inside Facebook, according to several people who have worked with the company, leading to a sharp increase in staff turnover over the past year. 

“It seems like a mess,” said one person who has worked with the team for several years. “The fact that HTC is everywhere and Oculus is almost nowhere blows my mind. Given [Oculus] had a year and a half head-start [over rival headsets], they should be crushing it.” 

After a reorganisation at Oculus in December that saw former chief executive Brendan Iribe put in charge of the Rift headset, last month Facebook appointed Hugo Barra, a former Google and Xiaomi executive, as overall head of its VR efforts. 

Jason Rubin, Oculus’s vice-president of content, said in an interview on the sidelines of GDC this week that the reorganisation followed a rapid increase in headcount, from dozens to hundreds in just a couple of years. While Mr Rubin denied that Oculus had developed a problem with staff retention, he said that in the years since the Facebook deal, “a lot of things have changed from a management standpoint” that made the leadership changes necessary.

“I think Oculus has now gone from being a start-up to being able to kick it into second gear, and really get serious and move forward as a larger company, which is required to get VR to be the next computing platform,” he said.

Facebook chief Mark Zuckerberg hinted at his frustration with Oculus’s pace of progress in Facebook’s last earnings call with analysts, saying that delays to the Rift and Touch were “obviously somewhat of a disappointment”, even though it was “quite a good result” that 5m units shipped of the Gear VR, the smartphone-based headset that Oculus developed in partnership with Samsung. 

“There are parts of this that are on a good trajectory and parts where we’re a little behind where we would want to be,” he said. “I would ask for the patience of the investor community . . . because we’re going to invest a lot in this, and it’s not going to return or be really profitable for us for quite a while.”