Facebook's (NASDAQ:FB) Oculus VR recently unveiled a new virtual reality headset prototype, Crescent Bay, at its Oculus Connect conference.
Crescent Bay is the third Rift VR headset from Oculus, which hasn't launched an official consumer-facing product yet. Its first two headsets were development kits, while Crescent Bay is considered a "feature prototype" to showcase new elements. The new features include a faster frame rate, 360-degree head tracking, integrated headphones, and a lighter frame.
Oculus has taken major steps to encourage the development of more VR software. It recently announced a deal with Unity Technologies, which allows everyone using the free and pro versions of its game engine Unity to create Oculus-compatible content. Samsung (NASDAQOTH:SSNLF) also recently unveiled the Gear VR, an Oculus-developed device that converts the Galaxy Note 4 into a VR headset for mobile games. In addition, Oculus launched an official app marketplace featuring applications for the Gear and Rift headsets.
So will Crescent Bay, which takes Oculus one step closer to a commercial launch, usher in a new era of VR gaming? Or will VR headsets run into the same obstacles that have plagued the technology for decades, and fail to become anything more than a niche gadget for hard-core gamers?
The business of virtual reality gaming
Research firm KZero, which is extremely bullish on the VR market, expects revenue from virtual reality hardware and games to rise from nearly nothing this year to $5.2 billion by 2018. The firm believes 56.8 million VR hardware devices will be sold between 2014 and 2018.
However, that rosy forecast is based on the expectation that the public will simply pick up VR headsets and start buying games the same way they buy mobile apps. Only 100,000 Oculus Rift developer kits have yet been shipped worldwide. By comparison, Nintendo's (NASDAQOTH:NTDOY) 3DS handheld has sold 44.1 million units to become the best-selling current-generation console. In other words, KZero's forecast expects an untested technology to surpass 3DS hardware sales within four years -- I highly doubt that will happen. Meanwhile, research firm MarketsandMarkets has issued a much more conservative estimate, which sees the value of the virtual reality market hitting $407.5 million by 2018.
But debating whether the VR market is worth $407.5 million or $5.2 billion is pointless if the public shuns virtual reality headsets. A 2012 IGN survey found that only 26% of over 62,000 gamers were interested in VR games. One out of every four gamers isn't bad, but it might not be enough to convince major game publishers to spend extra time and money to make VR versions of their top products.
Understanding the pitfalls and the competitors
Virtual reality headsets still must overcome two other major problems: the "geek factor" and safety issues. Considering the icy reception that Google Glass is getting, it's hard to see most people, even mobile gaming enthusiasts, wearing Samsung's Gear VR in public. Since VR headsets completely obstruct the users' view, they could also cause accidents at home.
Companies have launched VR and immersive headsets in the past, but none caught on. Nintendo's Virtual Boy, a stationary headset that projected red and black stereoscopic 3D images, lasted for less than a year in the mid-1990s before being discontinued. More recently, Sony (NYSE:SNE) launched $1,000 "wearable HDTVs," which are headsets that let viewers privately watch movies and play games. Sony's devices are designed for public use, but wearing headsets that completely obstruct a user's vision simply isn't practical or safe while taking a bus or sitting in the park.
However, these challenges haven't discouraged companies from developing new VR devices.
Sony is preparing to launch Morpheus, its answer to Oculus, which will turn PlayStation 4 games into immersive virtual reality experiences. A start-up called Totem, which is trying to raise $350,000 on Kickstarter to launch its rival VR headset, is putting cameras on the front of the device, which addresses safety concerns by allowing users to see the outside world from within the virtual one.
The Foolish takeaway
I believe a market exists for VR headsets, but they will likely only appeal to hard-core gamers and tech enthusiasts.
A virtual reality headset would be a fun peripheral for PC and console gaming, but it's hard to see VR devices from Oculus, Morpheus, Totem, and others becoming as widely accepted as motion-controlled Wiimotes and smartphone games. Shareholders of Facebook, Sony, and other VR-invested tech companies should carefully consider those factors before believing all the hype about VR gaming.