Virtual reality (VR) and augmented reality (AR) have been hot buzzwords in the tech market over the past few years. Facebook (NASDAQ:FB) got the ball rolling with its acquisition of Oculus VR in 2014, Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google introduced cheap VR for smartphones with Cardboard later that year, and Samsung launched a higher-end VR smartphone experience with Gear VR in 2015.
In 2016, Microsoft (NASDAQ:MSFT) introduced its HoloLens AR headset, and Google-backed Niantic Labs set the mobile AR market on fire with Pokémon Go. Many similar hardware and software products followed, and an increasing number of analysts proclaimed that VR and AR would become the next big computing platforms.
But by 2017, much of the euphoria had faded. High-end headsets like the Oculus Rift and HTC Vive remained pricey and cumbersome toys for tech enthusiasts. Mainstream consumers who dabbled with Cardboard or Gear VR didn't see compelling reasons to buy higher-end devices. With a price tag of $3,000, HoloLens remained restricted to developers, and it's still unclear if a cheaper consumer version will ever arrive.
Worldwide shipments of AR and VR headsets fell 30.5% annually to just 1.2 million units during the first quarter of 2018 according to IDC's latest numbers. The firm attributes that huge drop to the unbundling of free VR headsets with high-end smartphones, which was a common strategy last year. So are the AR and VR markets already dying? Or are they merely taking a breather before better devices rope in more consumers?
IDC thinks the AR and VR markets will recover
IDC admits that despite a "poor start" to 2018, it still expects the AR and VR headset markets to "return to growth over the remainder of the year as more vendors target the commercial AR and VR markets." In particular, it believes that cheaper stand-alone headsets like the Oculus Go, which doesn't require a smartphone or high-end PC, will generate more mainstream interest.
IDC believes that Microsoft's new Mixed Reality headsets -- which are made by OEMs like HP, Dell, and Lenovo -- should boost headset sales among enterprise customers. In the AR market, IDC thinks headsets like the HoloLens and Magic Leap's One "will help drive adoption in the commercial and consumer markets." It also sees new developer platforms, like Apple's ARKit and Google's ARCore, bringing more apps to AR devices.
IDC believes that AR and VR headset shipments will rise 6% to 8.9 million in 2018, then continue growing toward 65.9 million units by 2022. Within that total, it expects stand-alone and PC-tethered AR headsets to lead the charge with triple-digit compound annual growth rates between 2018 and 2022.
Time for a reality check
IDC's quarterly shipment estimates are well-respected, but its predictions about future tech trends have been hit-and-miss. After all, this is the same firm that declared in 2011 that Windows Phone would claim 21% of the smartphone market in 2015, followed by BlackBerry at 14%. Both companies control less than 1% of the smartphone market today.
As for the AR and VR markets, IDC's forecast seemingly ignores some red flags. AR headsets are useful for certain workers who can use heads-up displays for real-time information and remote assistance, but only a few companies will buy them in bulk like regular PCs or mobile devices. It's also generally easier to run software on a PC or smartphone instead of putting on a headset and learning new gestures and commands.
Meanwhile, Google-backed Magic Leap's disappointing tech demo for its Magic Leap One headset, which featured a crudely rendered golem tossing rocks, was hailed as a possible "death knell" for the AR market by Futurism. In March, Sensor Tower reported that only about 2,000 ARKit-only and ARKit-compatible apps were available in Apple's App Store.
As for VR devices, Sony (NYSE:SNE) PlayStation chief John Kodera recently stated that the growth of the VR market remained "below market forecasts" at an investor meeting. Recent price cuts on the Oculus Rift, Vive, and PlayStation VR all indicate that headset makers are desperate to sell more devices. Lastly, the unbundling of free VR headsets from smartphones indicates that customers simply aren't that interested in VR apps.
But companies aren't giving up
The big drop in headset shipments in the first quarter is a red flag for AR and VR companies. I think AR and VR headsets could still appeal to hardcore gamers and certain enterprise users, but mainstream adoption could remain elusive as PCs and smartphones remain cheaper primary computing devices. Therefore, investors should be wary of any company that bets too heavily on the growth of these two fledgling markets.