Virtual Reality: Delusion or Reality?
This article is pretty much good to go on Gamasutra. As it features unique sales data that isn’t available elsewhere, I figured Immersed Access would be the place to share it first. Clearly, our industry has a lot of work to do to make virtual reality and immersive technology successful and viable in the long run. If these numbers hold up, everyone needs to be playing and preparing for the long game. I am very confident that it can and it will happen for everyone, we just have to go into this with both eyes open.
Please honor the Immersed Access non-disclosure on the content until it is publicized, though feel free to share your own private commentary and input. Maybe I missed some important angles, and all input is valued. Also, please remember that if comments are shared here, that commentary and by whom is private unless they say otherwise.
In December, I wrote an article entitled “Build to Last: VR Sales Figures You Can Count On” which was published on Meant to be Seen, Jon Peddie Research‘s Techwatch, and Display Daily. The industry echoed similar sentiments shortly after. As we’re well into the new year, and nearly all the big product launches have been announced, I figured it would be a good idea to share a follow-up article and see how the numbers have held up since.
It’s best to read the first article before digging into this one. There are a few products and angles not discussed here. Also remember that this is 100% about the current launch year. This does not provide a long term projection; at least not yet.
Our Market’s Unbreakable Law of Physics
In the original article, I explained that the virtual reality (VR) industry is bound by Moore’s Law; the expectation that processor circuitry is doubled every two years. This isn’t about processing performance as much as it is about the physicality of the chips, but they are closely related.
There is a big sales expectation around mobile and virtual reality, and the article highlighted that it takes about 10 years for the best PC desktop GPU to have a mass-market mobile equivalent.
When Samsung announced a 30% increase in CPU power and just over 60% improvement in GPU power with their Galaxy S7, I was thinking that maybe – just maybe – there was a way to break out of the Moore’s Law limitation. I was wrong.
I reached out to Dr. Jon Peddie of Jon Peddie Research and Neil Trevett, President of the Khronos Group (Khronos makes the new Vulkan API).
First, it is an impressive performance increase brought forward by the Snapdragon 820 processor (Samsung is actually manufacturing them). We don’t really know how much of an improvement is based on the hardware or the software or a combination thereof. It’s helpful that they are using a pseudo water-cooled solution, and by taking advantage of Khronos’ new Vulkan API, they are able to get more processing performance out of their hardware than their previous software interface.
According to Neil Trevett, the Vulkan API is designed to enable game engines, middleware and advanced applications to squeeze maximum performance from any system because the driver is much thinner and has less overhead and latency for higher performance headroom. Neil also highlighted that Vulkan enables multi-threaded work preparation to leverage multi-core CPUs to fully load the GPU – this is important because every modern phone has multi-core CPUs. The end result is that Vulkan is designed to enable more performance with lower battery consumption from existing hardware.
Jon cautioned that in practice, unless there are secondary innovations on a regular basis, this isn’t going to be a year-over-year performance bump of the same measure and improvements like this are normal; performance isn’t always a uniform curve going up and up and up at the same pace.
All things being equal, we are still looking at a ten-year window for today’s top GPU on PC to be available on a mass market in the mobile space.
Gear VR Sales
In an earlier figure, I said that Samsung sells about 300 million smartphones a year with about 20% of these being high-end. This translates to a potential reach of 60 million phones for Gear VR in a given year. I figured that if Samsung could achieve an aggressive 5% early adoption rate within 12 months of the Gear VR launch, that brings it to about three million units sold.
Here’s the thing. I was basing this on customers actually buying the HMD. Samsung’s Gear VR is now being given away for free as part of a pre-order bundle in multiple international regions. They did the same during the 2015 holiday season with the Galaxy S6. If Samsung is going to seed the market a couple periods during the year (e.g. launch and holiday season), then we could justifiably bump this up to a 15% – 20% adoption rate or 9-12 million units give or take. The unknown is whether or not people will use the device, and we won’t have information on that until later in the year. It’s possible they can do better than this; it’s just an estimate.
Once the price was dropped to $99 for the Samsung Gear VR. I’ve always maintained that this was going to primarily be a content business more than a hardware business for Samsung and Oculus. That’s my take, anyway.
Has VR Impacted GPU Sales Yet?
Based on Jon Peddie Research’s latest quarterly GPU sales report, the total number of AIBs (Add-in Boards / Discrete Graphics Cards) sold in 2015 was 50 million compared to 44 million in 2014. Of these, about 5.93 million are “Enthusiast Level” AIBs shipped in 2015 compared to 2.9 million in 2014.
Had it only been the enthusiast level GPUs that saw the sales improvement, I would have credited some of this to VR equipment pre-sales. However, given that the total market size improved, I think this is more about a better economy than anything else. That said, while VR may not be pushing out more GPU sales, I do think that a larger portion of those sold will be VR-compliant and feature more profitable margins for the GPU makers such as AMD and Nvidia.
Incidentally, anyone tracking this space should seriously make a point to buy JPR’s quarterly GPU sales reports because this represents the lifeblood of the industry more so than anything else.
So if people aren’t buying their VR GPUs now, what then? The pattern that JPR is expecting is that people will buy the required hardware very close to if not after the products are launched. We don’t know how that will translate to actual CPU/GPU sales.
How Many PC VR Units (Oculus, HTC, everyone else) Will Sell in 2016?
We are considering a VR-qualified GPU as an AMD 290 series or Nvidia 970/980 series graphics card or better. They are all AIB or discrete graphics cards for desktop computers.
With the above in mind, my previous VR sales expectations are holding true. The VR-compliant GPUs are just a portion of the shipped enthusiast AIB units in 2014/2015. Let’s arbitrarily say that 60% of the enthusiast level GPUs sold are VR compliant. That brings the number to about 5.3 million VR-qualified GPUs in the market. Throwing in another two million VR-compliant GPUs for the last quarter of 2014 and the first quarter of 2016 brings us to 7.3 million qualified AIB/GPUs for VR. Of the 7.3 million AIBs, they aren’t all going to be attached to the right PC hardware (e.g. powerful CPUs, enough USB 3.0 ports, etc.), and many will be multi-GPU setups in a single PC. For these reasons, I’m thinking the total market size potential in 2016 is 3 million PCs.
Our 2016 sales expectation of about 500,000 PC HMD units industry-wide (including 300,000 consumer sales + up to 200,000 media / content developer sales) has not changed. Sure, PC VR makers like Oculus and HTC could do better – this is just an estimate based on available data..
Now! These unit sales are not an indicator of whether or not VR will make revenue – at least not directly. The key is for the industry to figure out a way to thrive on the possibility of a few hundred thousand units in hardware sales in the short term.
We are already seeing some very creative ideas. FOVE, HTC, and Starbreeze Studios have already publicized efforts to have VR available in public exhibition. While this is just an educated guess, I don’t think that their revenue models require oodles of hardware product sales to be profitable. Then there is the marketing angle where VR is used to help sell products in creative ways; I think real estate is going to be huge. Business, architecture, academia, engineering, medicine – these are all valid uses of VR that are only going to get better and more accessible without requiring droves and droves of HMDs in the market. In the case of medicine, we’re already seeing VR being used to treat post traumatic stress disorder, and experiments are being done to see if using VR to visualize genetic data will be a more effective means to find and to treat cancer.
As for entertainment, game developers will have specialized sales that they can bill significantly more for provided their content is exceptionally good. Estudiofuture has successfully created VR experiences that their local government has sold per use. Their public demo was paid for 15,000 times without a full consumer HMD product in the market. There is profit for those that know where and how to find it.
In the original analysis, we suggested that HMD makers such as Facebook and HTC could get away with units valued at as much as $1,000 USD because this is an early adoption market and there is disposable income in this space. Looks like both companies agreed with Oculus going for $600 plus the eventual price of their Touch Controllers just days before their announcement, and HTC’s complete Vive package going for $800. With the reasonable 2016 sales expectations caused by the limited availability and affordability of processing power, I think this pricing model is to be expected.
I think it’s highly likely that the prices will drop further for holiday sales and for special bundling discounts with the right computer hardware.
One thing I WILL say is that complaining about the price for modern VR equipment which would have easily been valued in the tens of thousands of dollars just a couple of years ago, is nearly the same as complaining about not getting WiFi on the magic seat that takes you across the ocean over the course of a Saturday afternoon! It really has grown difficult to impress people these days.
Sony Playstation VR (PSVR)
Nothing has changed here with the exception that our predictions of a 35-40 million PS4 universe achieved by the end of 2015 was confirmed with a last count of over 36 million PS4s in the wild as of December 31, 2015.
I still think it’s feasible for Sony to achieve a 10% attach rate within 2016, though that in itself doesn’t matter as they will have sequential year to year growth given their platform’s consistency and likely affordability.
Senior Facebook management including Sheryl Sandberg (COO) and David Wehner (CFO) went on record at the Goldman Sachs Technology and Internet Conference in San Francisco earlier this month.
Sourced verbatim from:
She explained at the Goldman Sachs Technology and Internet Conference in San Francisco on Tuesday that turning VR into a business is part of the social networking giant’s 10- year plan rather than an immediate action item. Facebook has been credited for taking an early bet on VR by buying start-up Oculus VR for $2 billion in early 2014.
CFO David Wehner echoed Sandberg’s by explaining that Facebook continues to invest in projects outside of VR. He said he believes that there’s much that can be “accomplished with VR,” but it’s still “very early days.”
“It will take time to develop the ecosystem,” Wehner said on stage.
We have to remember that Facebook’s outlook is only applicable to Facebook. Their traditional financials are so out of scale, it’s impossible for VR to appear in a meaningful business plan for them. However, they are the exception to the rule! The rest of the industry needs viability within three to five years at the most, and we all have to prepare ourselves for much lower sales results than the crazy hype blasted out by much of the report-selling press.
Echoing our own projections, Unity CEO John Riccietello highlighted a year-to-year adoption map at the 2016 Vision Summit, though he made no reference to actual product sales or value in the diagram. Instead, it was a curve that nearly plateaued through 2017, with an adoption curve that quickly climbs to the year 2020. I think he had the right idea and was just missing the source data to explain why.
What Does This All Mean?
I can only empathize with the pressures that the PC VR vendors are faced with. Facebook invested $2 billion in a company that by their own estimates will take ten years to deliver meaningful success (for them) – and who knows what technology will look like a decade from now. Mobile is their lowest hanging fruit thanks to their work with Samsung, though it will be difficult to maintain exclusivity with Google looming overheard with their own Cardboard API and public announcements that they are building a Gear VR competitor. There isn’t enough to go on yet, but even Apple looks like they are taking an interest in virtual reality in some form or another.
While HTC and Valve are releasing a punch for punch worthy competitor to Facebook, they too are going to have to come up with some creative ideas to deliver 10% revenues from non-smartphone business including VR. Fortunately, they have been very public about pursuing alternative business ideas for VR, so they may not need the same hardware sales figures that others are depending on.
The alternative brands with up and coming devices are actually in a pretty good position because 2016 marks the period where the market potential is very limited thanks to Moore’s Law and the baked-in hardware requirements set by vendors such as Oculus and HTC. Opportunities are actually better a little bit later rather than sooner because the processing power will be more widespread and more affordably accessible. The only catch is they will need supportive standards or find a way to make sure content makers adopt their SDKs. Also, and this goes for everyone, if the market tries to ramp up resolution or field of view, BOOM! The qualified PC window gets reset to 300,000 to 500,000 units because Moore’s Law has to catch up again and again and again.
It’s unclear if GPU and processing power vendors will sell more units as much as it is about them selling better or more premium units with better margins. Both the Oculus and HTC platforms are encouraging AMD 290 series or Nvidia 970 series desktop GPUs as the minimum spec, and as explained above, the more pronounced GPU sales will happen during and after final VR product launch. Even if it’s just from better margins, I think this will be a boon for the GPU makers.
It’s the content makers that carry the highest risk and reward. The moment HMDs are released, we won’t have projected sales; we’ll have real sales. Once we have real sales, the industry has to be sold on fundaments rather than wild speculation. When I say fundamentals, I mean customers buying enough products that companies can pay their bills without an investor on their back. Very few content makers will have their work sponsored by the platforms in advance, so it’s very likely they will have to support some kind of interoperability standard and/or support multiple SDKs to maximize their sales. It’s the only way to get the required distribution.
When it comes to content makers, keep in mind that I am speaking about VR exclusive titles. There is a lot of software that would probably work well through traditional display monitors or better yet, the readily available and standardized 3D HDTVs (there really are tens of millions of them out there waiting for good content). The catch is the market will have to do some serious soul searching about how much of a VR purist they want (or need) to be.
So what does this all mean? Well, don’t panic. Nothing has changed as this was all written in the VR book of life a very long time ago. Once you do the math, it’s no wonder the market suddenly came to the realization that 2016 is going to be a modest introductory year instead of a bang from rags to riches. The real industry test is going to be what steps are taken to prepare for 2018 going forward. I really think mass marketability is a thought-through plan rather than an instant reaction. Besides, the market needs time to learn and create amazing content!
The Immersive Technology Alliance is doing our part. With dozens of member companies featuring a solid cross section of the major markets in immersive tech, we are committed to helping the industry get all it needs to be viable within three to five years. We want the industry to profit in the short term, and flourish in the long term. The one thing that this industry continues to teach us is that the market has to find open ways to collaborate – even among the staunchest competitors. We really are at that razor thin fork between fad and viability. Having been part of the modern 3D era and seeing the clear parallels with how this market is developing, I’m certain there are some lessons that need to be learned from that era – and fast!
In partnership with the Open Gaming Alliance, The Immersive Technology Alliance and ITA VR Council’s next breakfast annual meeting will be taking place on March 15, 2016 (8:00AM to 10:00AM) during VRDC / GDC in San Francisco (near Moscone Centre). We are going to be discussing and ratifying our new mission statement, members will be talking about the challenges they are working to overcome and how we can help each other, and some cool stuff will be showcased.
Sample alliance members include Crytek, Starbreeze Studios, Futuremark, Basemark, Advanced Micro Devices, Skybound Entertainment, FOVE, VRVana, ImmersiON-VRelia, and dozens more. Our Board and Advisory Board features such names as Mike Capps (formerly President of Epic Games for 10 years), John Gaeta (Creative Director, New Media & Experiences, Lucasfilm), Habib Zargarpour (Creative Director, Microsoft Studios), Daryl Sartain (Chair, ITA VR Council, Director of VR for AMD), Neil Trevett (President of The Khronos Group, VP Mobile Content for Nvidia), and more.
While this is a private meeting, basic level membership is free for qualified content makers, and special arrangements are available for early start-up companies. There is time to join in advance so you can participate.
Everyone who wishes to help build viability of this market or has a problem that needs solving is encouraged to join up and be part of the discussion. More than leaders, our industry needs leadership, and this leadership should be comprised of the people and companies that have the most to gain and to lose in the market. We all need to be empowered to act in the industry’s interests, and I welcome you all to be part of it.