So you want to invest in VR or AR?

A colleague in Israel asked me what my advice would be for someone who wanted to invest in virtual reality (VR) or augmented reality (AR). At a very high level, I want to start out by talking about the recent HISTORY of AR and VR.

In late 2012, some people were saying that augmented reality (in the form of Google Glass) was going to be the Next Big Thing. When we talk about Next Big Things, we need to compare them to things that are Current Big Things! Each of smartphones, computers and TV sets have installed bases of over a billion units globally. Annual unit sales are over 100 million, or over a billion in the case of smartphones. Annual sales in dollars are over $100 billion. And each device is used for over one hour per DAY on average.

In 2013, AR headsets did much worse than expected, with estimated unit sales of 50,000. (Not million – thousand!)

In early 2014, the folks who had been hyping AR said “Don’t worry. It turns out that AR isn’t the Next Big Thing after all, instead that will be Virtual Reality. Look at the Oculus Rift, etc. Not this year, but 2016. It’s going to be huge!”

In 2016, VR headsets did much worse than expected by most, with the high end models (Oculus, HTC Vive and PlayStation VR) selling only about a billion dollars, and maybe 2 million units? Not only were sales low, but (outside of gaming) the consumer feedback was negative, with most people who bought a headset using it for a while, but then using it much less after a few weeks, then stopping entirely. I call these kinds of technologies (home 3D printers would be another good example) "digital waffle makers." They look good at first, but rapidly end up in the basement.

In early 2017, the folks who had been hyping VR said “Don’t worry. It turns out that VR isn’t the Next Big Thing after all, instead that will be Augmented Reality. Look at the success of Pokémon Go, and new devices like Magic Leap and HoloLens. Not this year, but 2018. It’s going to be huge!”

I hope it is obvious at this point that two things are going on:

1. There is a small but passionate community that is predisposed to like VR/AR kinds of technologies. They tend to be geeks, they tend to be gamers, and I suspect they are science fiction fans. For some reason, they are convinced that VR/AR will be big one day, and repeated failures only mean that the next iteration will be the one that succeeds.
2. Although there may be applications in gaming and some businesses for VR/AR, most consumers do not want the technology, aren’t buying it in serious numbers, and are not only disinterested, but actively DISLIKE the experience of wearing a thing on their head. Not just AR and VR headsets, but even lighter and cheaper solutions like 3D TV glasses. (That technology is now seen as a complete failure, and all TV set makers have stopped selling 3D TVs.)

I think some of the reason that AR/VR is so persistent is the PC and computer games example. For years, only geeks used home computers or played the games, but now everybody does. So there is a kind of repeating theme that geeks are early adopters, and prescient. If geeks use it today, one day soon everyone will use it. That was true for the computer and for video games, but it is NOT always true. Some things that geeks like NEVER go mainstream, and my view is that consumer VR and AR will remain niche.

Even if the consumer market for VR and AR remains niche, what about the enterprise market? I think those are real markets, but there are a few important issues to consider.

1. That VR and AR will not be big consumer successes matters a lot. If a billion VR headsets sell per year, that would drive the cost of manufacturing down due to the scale, it would mean that device innovation was rapid and constant, it would mean that there would be a large ecosystem of content and software, and it would mean employees already knew how to use the devices. This is why smartphones and tablets are such great enterprise tools: they started with mass consumer adoption, and taking them into the enterprise was easy. If VR and AR headsets remain niche, then prices will stay high, upgrades will be slow, and the ecosystem will be weak. This means that the enterprise markets will need to have very high ROI to justify business plans.
2. You have to be very careful about potential enterprise use cases. As an example, what if I came up with a cool AR headset that someone could wear while taking blood? It would show exactly where the veins are, and help me select the right place. Great idea, right? The problem is that while DUNCAN needs help in knowing where to find a vein, almost all (99% or more) of blood tests are being done by nurses and technicians who do this for a living. They are extensively trained, and have likely done it tens of thousands of times…they don’t NEED an expensive AR headset; it would only get in the way! Many of the AR business plans I see are along these lines: they look impressive to the average person, but have very poor real world utility.
3. Speaking of getting in the way. What about an AR headset that could be used by a utility worker up on a pole on a power line? They need to use both hands, and having an AR device on their heads could show them useful stuff. True…but what if the AR headset dropped down a blinking icon and it obscured a dangerous live wire? AR is great in theory, but it needs to be implemented in such a way that it NEVER confuses, hides or obscures. Harder to do than you think. I should add that many of the AR applications you see in business plans are for workers who are not always highly educated and in some place may not even be literate. The US military has lots of experience in head mounted displays, and not every soldier is good at reading complex real time displays: information overload is a real challenge. (Another issue is ruggedness or safety: many of these work environments are dirty or wet or outside, or in places where a spark could cause an explosion. Current versions of most AR equipment are neither robust nor tested in these kinds of environments.)
4. Will VR be big in medical? Almost certainly: I could take a 3D ultrasound image of a fetus and let doctors or parents look at it in 3D VR. Fantastic! But that only works because hospitals have “VR ready” digital content! Taking existing digital medical imaging data and “porting” it to a VR headset is cheap and easy (thousands of dollars, at a guess). In contrast, if a hotel wanted to create a VR experience of their new resort, they would need to go out and capture VR content with big, expensive cameras, do it professionally, edit it, and so on. At a guess, hundreds of thousands of dollars, or even millions. Add in expensive headsets, and VR needs to start being very useful in order to have a positive ROI.

If I were an investor, what would I take away?

Yes, there might be an opportunity here. But the VR and AR markets are enterprise scale, not consumer scale. Likely to be no more than $10B per year each, even by 2020. That’s not nothing, but it also needs to be shared across a number of players, both hardware and software. Valuation will matter a lot. And anybody investing today is not "the early money." See the slide at top: billions of dollars have already been invested.