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Is There a Future for Virtual Reality?

By Simon Erickson - Nov 25, 2017 at 10:34AM

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Virtual reality is a hot topic, but the high costs are putting a damper on sales.

We all have such high hopes for virtual reality. The technology is just that cool. 

Anyone who has put on a VR headset can already attest to the quality of the experience. Two years ago, I got to ride a VR roller coaster. Last year, I sat in the middle of a VR symphony. Both times, I walked away with chills running down my neck.

VR is a technology that could fundamentally change the entertainment industry, but it could also apply to other applications as well. Hospital surgeries, corporate videoconferencing, or military simulations are others areas that seem to be natural fits.

With potentially unlimited opportunities, industry experts began throwing out huge growth estimates. International Data Corporation believes the global market for virtual and augmented reality will grow from $14 billion this year to $143 billion in 2020. That's a tenfold increase for the entire industry in just three years -- quite a prediction!

However, the accelerated growth of VR always seems to be just around the bend. Are we really going to see an inflection point of rapidly accelerating sales, or will VR continue to be stuck in neutral?

A man interacts with a virtual reality headset

Image source: Getty Images.

Pokemon proved the concept

Perhaps the best example for those bullish on the future of VR was Nintendo's (NTDOY 1.94%) launch of Pokemon Go in 2016. The augmented-reality game blended digital characters with actual locations, where players would use their smartphones to navigate real-world streets to "catch" Pokemon. The game was free to download, but Nintendo charged within the game for "PokeBalls," which allowed you to catch more Pokemon.

By just about any metric, the game was a huge success. It quickly became the most downloaded game of all time for an opening weekend on Apple's AppStore and had 50 million Android downloads within three weeks. In its first month, players had collectively walked while in-app farther than the distance from Earth to Pluto. To date, the game has generated $1.2 billion of revenue and been downloaded more than 750 million times -- which is nearly 10% of the world's population.

The game's success has also been a huge boon for investors. Since Pokemon Go's release last summer, Nintendo's stock price has tripled. The game served as proof that the public was indeed able to understand and willing to embrace augmented reality.

What has VR done for us lately?

But those bearish on the future of VR will point out that we haven't seen Pokemon Go's momentum continue. The number of teenagers huddling up to catch Pokemon while oblivious to their surroundings seems to be falling. And somewhat surprisingly, we haven't really seen that many spinoff games trying to replicate Pokemon Go's success.

One likely reason is that the hardware is still too expensive. Pokemon Go requires only a smartphone to play, but true virtual reality requires some serious spending, for the headsets and high-performance computers needed for the high-resolution graphics.

A variety of vendors offer headsets. HTC's Vive and Facebook's (META -0.11%) Oculus Rift virtual-reality headsets both hit the market in early 2016 at prices of $800 and $600, respectively. These price points were too high for the mass market to afford, and consumer adoption was limited to gaming enthusiasts. 

This led us to a chicken-or-the-egg standoff. Without a large enough audience to appeal to, media companies wouldn't produce VR content. But without enough downloadable content, consumers wouldn't pony up for the headsets. 

What the future holds

Just as the theory of disruptive innovation would predict, prices have begun to come down. Facebook temporarily dropped the price of the Oculus Rift to $400 this summer, while HTC permanently dropped the price of the Vive to $600. Both companies have also come out with cheaper models, with the Oculus Go now available for $200 and HTC recently announcing a new wireless headset. And let's not forget Samsung's (NASDAQOTH: SSNLF) Gear VR headset, which attaches directly onto its Galaxy Smartphones, sells for around $100. There were 6 million VR headsets that shipped last year, and the Gear accounted for three-quarters of them.

I believe that the current industry forecasts are too optimistic, but that VR will eventually succeed in reaching the mainstream. Once high-quality, wireless headsets reach the $200-ish mass-market price point, affordable for Christmas presents, we'll begin to see price elasticity kick in. The decrease in costs will be offset by a significant increase in demand, which will spur interest in the advertising, software, and content needed to build out the VR ecosystem.

Simon Erickson owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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