Understanding the Market for Virtual Reality Gaming

In this segment from Industry Focus: Consumer Goods, virtual reality is the name of the game as Vincent Shen and Seth McNew look at the companies vying for a dominant position in this exciting, fast-growing segment of the video game industry.

Some of the first dedicated headsets hit store shelves in 2016. While sales for some devices have been promising, others have stalled due to high price tags and a lack of titles. How big will this market ultimately be?

Vincent Shen: A lot of the big players have been putting money into this, and also, people not typically into the video game industry. Sony (SNE +2.44%) has the PlayStation VR. This offering is supposed to be meeting management expectations. This is a headset, sells for about $400 for most of the retailers that I checked before the show. It was released late last fall. So far, they've sold about 1 million units. Management seems very happy with the progress they've seen with this. What do you think?

McNew: I think they had a great advantage of having the first console to make this a real part of the console. I think it works great. I love being able to play on it. And there's a lot of upsells they have with that, different kinds of controllers, the games that go along with it. It seems like it's a great opportunity for them to continue getting revenue off of that release. And obviously, other companies are following along. 

Shen: Yeah. In terms of that dedicated headset, two other main competitors are the -- OK, the pronunciation on this, I've heard two different thoughts -- HTC (NASDAQOTH: HTCXF) Vive. I don't mind either one, we'll just call it HTC. Their headset is being compared a lot to the Facebook Oculus Rift. These companies have not offered nearly that level of detail that Sony has in terms of their PlayStation VR, but some people say the VR is outselling the Rift three to one, in terms of some analyst estimates. But ultimately, bringing this back, what kind of impact is this going to have for these companies, their bottom lines, and their overall revenue? A research group called CCS Insight, they put virtual and augmented reality device sales at 11 million last year, which is actually way more than you would think. We talk about console sales. Nintendo, with the Switch, is hoping that, if they can hit 10 million, that's really a good threshold for them to attract developer attention. They would be very happy with that. But, while that seems really great, and the forecasted device sales might top 60 million by 2020, there is a caveat to all of that: most of this volume comes from low-cost solutions, like Google Cardboard.

McNew: Sure, or even ones like the Google Daydream that they released for the Pixel, that's something like $80, but that has to be used with the phone. There's not a lot of technology there other than the screen that views the phone. Here, you're talking about real headsets that have the technology to be a serious gaming solution. And you have the early adopters that have used that so far. But, here in the next couple of years, you'll see the prices start to decrease a little bit, and they could be a little bit more mass market.

Shen: And that's the big challenge, I think, with this technology in general. A lot of people have said that 2016 deflated a lot of expectations for virtual reality. Not that there isn't a lot of optimism behind it, but a reality check, in a sense. When it comes down to it, if you want something like what the Oculus Rift offers, you need not just the headset itself, which costs anywhere from $500, for Facebook's offering, to $800 for HTC's offering, at least according to Amazon. In addition to that, you need a PC with some really strong specs, and a high quality GPU video card to be able to even run these games. So, at the moment, like you mentioned, early adopters -- although, you're going to get early adopters, but otherwise, people are going to be very reluctant to shell out over $1,000 for a dedicated system when the titles themselves are limited in the virtual reality space.

McNew: And as we talked about earlier in this podcast, that's going to be a holdback. When you have the content that makes people want to pay that much money, then people will. But, of course, the other thing about the virtual reality is that you're still waiting to see what other industries it can be used for. People are already going to have one at home for gaming, and it also works for something else. Might be more impetus to buy something, if it works for something more than just the game.

Shen: The value proposition, it's easier to shell out that kind of money. And the thing is, over time, like anything with technology, it will get cheaper. Going back to that original number I mentioned, 11 million virtual and augmented reality devices sold in 2016. If you go to those dedicated headsets, the ones that are hundreds of dollars, much more sophisticated than, for example, the Google Cardboard, sales at just over 1 million. Still really early, but definitely something that I personally am very excited personally to see develop. Anything else from you, Seth, in terms of takeaways for people who are thinking big picture about video games, be it eSports, virtual reality, digital downloads? Anything else?

McNew: Yeah, especially, we were talking about the chips that go in your computer that are going to power all this stuff, that leads into a whole other discussion of companies like NVIDIA, for example, that's making that technology that's driving the technology behind the gaming industry. That's for a whole other podcast, but it's something to look at.