Like any nascent technology, the market potential for virtual reality is tough to nail down. While analysts have floated some early projections, ultimately the success of the space will depend on big tech's ability to push VR beyond hardcore gamers and find appeal for mainstream users. Several big announcements over the past few weeks show companies like Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Facebook (NASDAQ:FB), and Samsung are intent on getting consumers to interact with the technology. In this week's podcast, we update you on all things VR, and talk about one company that could win big if the technology takes off.

A full transcript follows the video.

 

Sean O'Reilly: We're loading up The Matrix on this tech edition of Industry Focus.

Greetings, Fools! I am Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is Friday, September 25, 2015 and with me today is the irreplaceable Dylan Lewis. How's it going, man?

Dylan Lewis: Pretty good.

O'Reilly: You good?

Lewis: Yeah.

O'Reilly: TGIF?

Lewis: TGIF, I'm feeling well-rested, it's pizza day, and I'm ready to rock this podcast.

O'Reilly: It's coming up roses. Everywhere. Dylan, we've got a pretty good show for our listeners here today. We're talking about virtual reality. Before we get into things I'm very curious; what's your favorite alternative reality film? Inception, or The Matrix?

Lewis: It's got to be Inception.

O'Reilly: I could not agree more.

Lewis: Just because of the psychological depths of it.

O'Reilly: What am I missing? Are there any other films that lend themselves to virtual reality? It doesn't matter. Real quick, just to give our listeners some perspective, you and I are preparing our notes before we came in, my task was the market size. Full disclosure folks; it's all a guess. These are all kind of a joke. There's no hard data on what the size of this market is.

Lewis: It's tough because it's such a [...]market.

O'Reilly: It is. It's like the smart phone market in 2003. People had a BlackBerry (NASDAQ:BBRY) and everyone else had a flip phone. Few people have attempted to figure out what it might be worth. Mobile and virtual reality investment consultancy Digi-Capital out in San Francisco were very aggressive. They think it's going to be a $150 billion market by 2020. It's a 1-5-0, followed by nine other 0s. I was like "Okay."

Lewis: That's a lot of cash.

O'Reilly: It is. They say that because -- when I was reading this, and given that they're a digital mobile consultancy doing M&A it seemed like they were blinded by the fact that they do this stuff all the time and they were excited about it. They think because they view the addressable market for virtual reality as being the same human beings on planet earth as the smart phone and tablet market. That's their argument.

Lewis: I don't know if I buy those estimates.

O'Reilly: They're saying if you own those things you're interested in them and you're in an addressable market for virtual reality. U.K. based KZero, more conservatively put the market at $5.2 billion by 2018.

Lewis: Okay.

O'Reilly: That sounds a bit more reasonable. We don't know. Oculus Rift exists. We've played with it here at The Fool, but it's not available in stores. Those are the future markets. Somewhere between $5.2 and $150 billion by the end of the decade.

Lewis: Right. Just throw a dart between those two numbers.

O'Reilly: We'll take the halfway point and call it 80. Dylan, I'm anxious to hear what's been going on lately because Oculus Rift was all the rage a year or two ago, we got a prototype here at headquarters, I've played it, it made me motion sick and I'll talk about that later if you want. Then nobody talked about any of this. What's been going on?

Lewis: This week at Oculus Connect Conference Samsung unveiled its newest Gear VR headset. This is an update on their previous edition.

O'Reilly: Is this on their phone?

Lewis: Yes.

O'Reilly: It is? This is the headset that you can actually put your Samsung phone in.

Lewis: Exactly. It's going to come in at $99, which is half the price of the last one.

O'Reilly: That's so reasonable.

Lewis: Yeah. It's a dramatic markdown from what the last one debuted at. It's compatible with the entire line of 2015 Samsung smartphones. Note 5, S6 Edge, and S6 Edge Plus. They're going to start shipping this out in the U.S. in mid to late November, just before Black Friday, of course.

O'Reilly: Naturally. Black Friday doesn't kill enough people.

Lewis: Yeah. It seems like a really nice gadget for people that love gadgets. I'm not sure what the mainstream appeal is going to be. When you look at this price point starting to come down from $200 to $100 it definitely becomes more palatable for someone that's interested, but not a hard core gamer.

O'Reilly: It lends itself to -- who came up with those numbers? Digi-Capital. That lends itself to their argument that it's kind of the same thing because these companies are using the cell phones to make the headsets and virtual reality.

Lewis: If you already have the computer in your pocket that's fueling whatever you're going to be experiencing...

O'Reilly: You buy a $100 headset.

Lewis: Right. That's really not asking that much. Piggybacking on some of that news they had some content providers and some app developers speak at Oculus Connect. Hulu announced that their VR application will be available this fall.

O'Reilly: Wow! Hulu is in on this?

Lewis: Yeah. Some content providers are coming into this space and they also mentioned they'll be including original virtual reality short form content and unique viewing environments created for VR devices. We're seeing content that's curated specifically for these devices.

O'Reilly: That's a big deal. I'm looking at these notes and my eyebrows are up.

Lewis: Some of the other things that came out: Netflix will be available in the Gear VR store this week, but it doesn't seem like Netflix is going to be giving spherical video specific content. It's going to be the standard flat content that you're viewing, you'll just be viewing it with a headset on. Maybe there's something to be said there if you want to be totally immersed in what you're watching.

Other content providers like Vimeo and TiVo (NASDAQ:TIVO) should also be available for the Gear VR in the near future.

O'Reilly: I mentioned them briefly before because it was a Segway. It was all the rage and everyone was talking about Facebook's Oculus Rift and then it went away. Nobody is talking about it anymore. What's going on with Facebook now?

Lewis: Oculus does develop the Gear VR for Samsung so they're partnered up. This is something they're working on. I think if you're interested in the long term viability of the VR as a platform you have to like the Gear solution because it's bringing the price down and making it more accessible to the average consumer.

An update of what's going on with the Oculus Rift specifically, it's still at the higher end. I think it's still something that's going to attract hard core gamers. There's no determined price point out at this point, but I think it will be between $200 and $400. I've seen the number $300 floated by people that work on the project.

O'Reilly: $400 to get motion sick. Cool.

Lewis: Mind you, that's the headset, but you also need a pretty powerful computer.

O'Reilly: A very powerful computer. These games and the whole situation is...

Lewis: You're not sure what the whole platform is going to look like. I'm assuming it would be something like what you'd see with current gaming models and what you're paying for games. It seems crazy that you'd be getting that stuff for free. I think Gear VR is a gateway device for a lot of people to...

O'Reilly: It's a gateway drug. Is that what you're saying?

Lewis: Yeah. For them to experience virtual reality with something they're familiar with -- their phones -- at a price point that's pretty acceptable and see if, by the time the Oculus Rift launches in Q1 2016, maybe it's something they're willing to try. I think the initial market for it is going to be small and for dedicated gamers. We'll see what happens.

O'Reilly: Just to give our listeners a little color, we were talking about the Oculus and to think that most people haven't tried this, but The Fool has one. We're very lucky. We actually got it a year and a half ago I think. I was lucky enough to use it once for 20 minutes. I think I played Half-life, or some shooter game.

Folks, if you have access to one of these you should fiddle with it for 20 minutes, but full discloser: you will lose your lunch. I felt motion sick.

Lewis: Yeah. Have to wait half an hour to play.

O'Reilly: Yeah. My brain thought I was moving, but my body is not.

Lewis: Yeah. It's not something your senses are used to.

O'Reilly: One of our tech guys here that actually set me up on the machine said you would have to do it for 30 to 60 minutes a day for a week in order for your body to adapt to it.

Lewis: It takes a lot of internal calibration there. While talking about Oculus, I think it's natural to also talk about the company that owns Oculus: Facebook. Earlier this week Facebook decided to let us in and tell us that users can now post immersive video shots on 360 degree cameras like GoPro (NASDAQ:GPRO) spherical rigs on their social network.

O'Reilly: Oh, boy.

Lewis: Yeah. It's available on some Android devices. It should come to iOS devices in the coming months. To flash the new content style that's very cool, it's available and I suggest you check it out. They demoed some content feature Star Wars, LeBron James doing his workout stuff and some GoPro footage.

O'Reilly: Can I be Darth Vader? What's the Star Wars stuff?

Lewis: It's like riding around on a fighter.

O'Reilly: Oh, on a sphere? Oh, perfect! Cool.

Lewis: Yeah, it's pretty sweet. It is not the look around type functionality that you're used to when you're on desktop. You're just dragging and pulling around in this orbit. It's very cool though.

O'Reilly: Unacceptable. I don't want it.

Lewis: Again, I think it's priming people to be more used to seeing this kind of content down the road.

O'Reilly: Right. Cool. Before we move on to talk about what Google is up to with all this, I want to make everybody aware and reiterate once again that a very special offer to join The Motley Fool's Stock Advisor newsletter. It's available to all Industry Focus listeners.

As a loyal IF listener you have access to a special discount on Stock Advisor that works out to $129 for a full two year subscription. Just go to focus.fool.com to take advantage of this offer. Once again that's focus.fool.com. It's actually a newly designed page. We look good on it, Kristine is on there, and everybody's looking good on the new page. Have you seen it?

Lewis: No, I haven't.

O'Reilly: I can't wait to show it to you. Head over, folks.

Dylan, what's up with Google? Last I checked they got that virtual reality headset made out of cardboard. There. I said it.

Lewis: Yes. Aptly named Cardboard. We're sticking to the conversation of a couple publicly traded companies and their involvement with VR. That's why we haven't gotten into some of the niche players. Google has Cardboard.

O'Reilly: Alphabet, Cardboard.

Lewis: They're going for simple and playful.

O'Reilly: They're the KISS rule incarnate. Keeping it simple, baby.

Lewis: Yeah. Cardboard is on the super low-end of VR solutions right now. It is a cardboard box that basically folds out...

O'Reilly: Folks, it's literally a cardboard box.

Lewis: There are dedicated lenses and some button functionality, but other than that it's very bare bones.

O'Reilly: You slide your cell phone in there and then you're good.

Lewis: Yes. They're retailing for $15 to $25. In my opinion this is definitely more of a novelty VR than a platform, in and of itself. It's compatible with every smartphone, which is nice. When you look at what Samsung's doing with the Gear, that's not something that's available to iOS owners.

O'Reilly: "Buy our cell phones!"

Lewis: Right. I think Google's intentions in this market aren't quite as clear.

O'Reilly: They're just screwing around.

Lewis: It's hard to know because I think Samsung has a natural tie in with their devices, but Google's hardware isn't nearly as big of a part of their business.

O'Reilly: It's like they're trying to have a toe in on the off chance that virtual reality with cell phones becomes big because then they can just throw Android at it. I don't know. I'm with you. I don't get it.

Lewis: The monetization side of it isn't as clear to me with Google. They've done some really cool stuff with it. They have this "expedition package" and it's this kit of Cardboard's and Nexus phones and it's in this drawer -- this Cardboard Drawer -- that they send to schools.

O'Reilly: Does Sergey Brin like Cardboard?

Lewis: Maybe he owns cardboard producers, or something.

O'Reilly: Yeah. I don't know what's going on here.

Lewis: They send them out to schools and teachers can use them for education. They can take these simulated field trips to national parks or wherever they have these setup.

O'Reilly: The Smithsonian?

Lewis: Yeah.

O'Reilly: Cool.

Lewis: They have experiences setup on the platform. That's pretty cool. I don't know if that's the route they're going to go, or whether they're sticking with education. I have to think there's a money making side to it at some point.

O'Reilly: They don't care about making money.

Lewis: It seems like more of a pet project right now. Some of the cooler stuff that Google is doing is the Jump project that they're working on.

O'Reilly: They're so creative with all these names. It's amazing.

Lewis: As you might imagine, with anything VR related, one of the biggest barriers is capturing content in a VR friendly way.

O'Reilly: Right. It's like Google Maps or something. You have the giant ball with a bunch of cameras in all directions.

Lewis: Yeah. The technology will only take off quickly so long as the content is there to support it and it needs to be compelling for people to watch.

O'Reilly: This is a chicken before the egg kind of thing.

Lewis: Exactly. So Google's Jump initiative is looking at capturing content. They have 16 camera rigs that are arranged in a circle and they collect 360 degree video and I watched an interview that one of their project managers did with The Verge. He spoke about how, rather than simply stitching these different video streams together, what they're doing is taking thousands of images and layering them and creating this extremely visually rich environment. So the experience is better, but it's also more intensive for the computers to put together. I saw some previews of it and it looks fantastic.

Again, not 100% sure what the application is there, but for the most part those rigs are being fueled by GoPro cameras.

O'Reilly: Did you get a glimpse -- I don't know if our listeners have seen it, but I'm sure you have -- the Google Street View cars that drive around all over America with the ball on top and they're taking street views. Is that the size we're talking about, or is it a much smaller thing to fit on a desk?

Lewis: If you picture 16 GoPro HERO4 cameras in a circle.

O'Reilly: So, it's small?

Lewis: Yeah. It's probably about this big.

O'Reilly: Okay. I'm on. Speaking of which, who's the sleeper company here?

Lewis: It's a name we've mentioned. I just said it before, but it came up earlier when we were talking about Facebook. You'll notice GoPro came up a few times during this conversation and Google is using their 16 camera rigs.

O'Reilly: Google is using GoPro cameras to do this dance. That's very interesting.

Lewis: They have a joint offering out that's available through Google's Jump project, also hosted on GoPro's online store called The Odyssey and it features the GoPro HERO4. Facebook is also featuring a lot of content using their rigs and it's all shot there. I think it's setting the foundation for spherical content to become big.

This is a quote from a Quartz article that I read earlier this week: "It seems that GoPro is set to become the standard for 360 degree video capture. If it can figure out how to make 360 capture as affordable as its regular cameras, or perhaps how to incorporate this technology into forthcoming drones it will have another massive success on its hands."

O'Reilly: That is possibly the most bullish thing I could have heard about this company.

Lewis: Yeah. They've been hit recently. A lot of it is stuff we've talked about in the past. A lot of it is tied to their suppliers more than stuff that they're doing on their own. I think it's nice to see they have another catalyst out there. They've talked about the impact of VR, or drone capture video and it's nice to see they might become that go-to name in that space.

O'Reilly: That's a big deal. If they're perceived as the quality video capture company, the other concern I have is the fact that GoPro is making hardware and we all see what happens to prices of anything tech/hardware related. We can go get a laptop for $300. It was $2000 15 years ago. If they're perceived as the quality video capture company for virtual reality, that's interesting.

Lewis: Yeah. I think it's also getting them out of that consumer tech market a bit. These have much more specialized uses and it might lend themselves to contract uses where you're getting big purchase orders rather than relying on retail.

O'Reilly: The American consumer is finicky.

Lewis: Yeah. There are a lot of concerns about market saturation with action cameras and people thinking "How many people are really going to buy a dedicated action camera?" Having these other growth catalysts up their sleeves just seems like a great opportunity.

O'Reilly: Before we head out here, this is The Motley Fool, we sound kind of bullish on GoPro; I'm interested to hear your thoughts. How do you see this shaping up? Do you have a good way to play this right now?

Lewis: I don't know about hard estimates number-wise. I will say that I've talked about GoPro and we've talked about it on the podcast a couple weeks, I talked about it on WRKO on a rotating segment we do with them; I like them. I don't personally own them, but I've been eyeing them for a little while. Their valuation looks fantastic for a really high growth company. I think they're around 29x trailing earnings.

O'Reilly: Okay. At least they're making money.

Lewis: Yeah. They're profitable. There seems to be a lot of big markets out there that they could get a pretty good foothold in.

O'Reilly: Cool. Thanks for your thoughts, Dylan.

Lewis: Always a pleasure, Sean.

O'Reilly: Let's go get some pizza. If you are a loyal listener and have questions or comments we would love to hear from you. Just email us at IndustryFocus@Fool.com. Again, that's IndustryFocus@Fool.com. As always, people on this program may have interests in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I'm Sean O'Reilly. Thanks for listening, and Fool on!

Dylan Lewis has no position in any stocks mentioned. Sean O'Reilly owns shares of Facebook. The Motley Fool owns and recommends Facebook, Google (A shares), Google (C shares), and GoPro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.