When Google released Cardboard in 2014, it almost seemed like a joke. The crude virtual-reality headset crafted from cardboard looked like it must be powered by imagination more than anything. But the Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) company continued promoting the product as a real VR solution, partnering with several companies over the past year or so to add legitimacy to the platform.
Now, Google is getting serious about virtual reality. The company created a new division dedicated to the format, promoting product management chief Clay Bavor to VP of VR. As Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT) gear up to bring their VR headsets to regular consumers this year, Google is looking to catch up with its new dedicated division.
The Android approach
Google has seen incredible success with Android for smartphones and tablets. Offering a practically free operating system for hardware developers enabled it to become the most popular operating system in the world and proliferated Internet-enabled devices across the globe. As a result of the increase in smartphones and tablets, Google has seen its advertising opportunities soar.
Google's approach with virtual reality is likely to be very similar. While Facebook and Microsoft are building very high-end devices with total costs for the consumer over $1,000, Google's Cardboard costs about $5 and uses the smartphone consumers probably already own. In fact, Cardboard is so inexpensive that companies are compelled to give units away to promote their content. The New York Times did just that, sending out 1.3 million units to its Sunday subscribers to try out its new VR content.
In this way, Google is making it possible for consumers to easily get a taste of what VR has to offer. In the long run, this may actually benefit Facebook and Microsoft, which would have a hard time reaching a massive audience with their expensive units.
When Facebook's Oculus announced that its Rift headset would cost $599 earlier this month, people were quite surprised at the pricing. Even at that price, Oculus says it's selling the units at breakeven pricing. Microsoft's Hololens costs about $3,000.
Google may very well release its own high-end headset down the line featuring technology from Magic Leap, an augmented-reality company in which Google invested more than half a billion dollars in 2014. Its technology is still years away from reaching the market, but it poses a real challenge to Microsoft's Hololens.
But Google doesn't care
Google doesn't care that much if you're using an Android phone or an iPhone. It cares much more that you're using its services, such as Maps, Gmail, and YouTube. You can do that on any device with an Internet connection. Likewise, the services that Google builds for VR are accessible regardless of who manufactures the unit.
Google's biggest strength is in advertising, and the potential for advertising in virtual reality is huge. Instead of just taking up a screen, an ad in VR takes up a person's entire field of vision, and he or she can't look away. VR advertising demands a viewer's attention, making it extremely valuable. The company that can capture that market stands to make billions in revenue over the next decade. And Google is positioning itself to make that happen.
YouTube already has partnerships with companies to produce VR content and advertisements, giving it a head start as a hub for VR content. With a dedicated team at Google working closely with YouTube, it should become one of the essential apps for VR headsets regardless of whose hardware it's running on. That means YouTube could become an even bigger piece of Alphabet's revenue going forward. It currently accounts for about 5% of total revenue at the company.
The software opportunity for VR is also relatively large. Goldman Sachs estimates that the VR software market will grow to $35 billion over the next decade. A large part of software sales will come from games like those being designed for the Oculus Rift. Nonetheless, Google has an opportunity to capitalize on that market through its own software or as a distributor -- just as it does with Google Play for Android.
The opportunities for Google in virtual reality are huge, potentially generating billions of dollars of revenue for Alphabet investors. It's about time it created a dedicated division for the platform and get serious about competing with Facebook and Microsoft.