Summary

Virtual reality is a simulated environment experienced through an immersive headset or multi-projected environment. It sits on the fully immersive end of the extended reality (XR) spectrum with fully virtual experiences with Augmented Reality sitting at the other end with the real-world augmented by digital information. In the middle of the spectrum sits mixed reality, a merging of real and virtual worlds to produce new environments and visualisations. The upcoming Apple device is expected to be a mixed reality device and it’s unclear if and when the market will converge on different AR and VR devices, or on a combined device that can do both. It’s very likely in the next 5 years, VR devices will optimise for immersivity and performance as AR or MR devices aim for portability. 2030+ assuming battery breakthroughs is may be possible to combine immersivity and portability.

Viability (5)

Virtual reality experiences have been around for medical, flight simulation, automobile industry design and military training since the 1970s. These experiences were limited by primarily by compute power. The 1990s saw the first wave of failed consumer headsets from Sega and Nintendo, subsequently followed by the 00s “VR-Winter” as the technology was unable to live up to VR hype. The latest cycle began in 2012 with the Oculus headset sold to Facebook in 2014 and shipped in 2016, the the latest Oculus device accounts for 90% of the market with ByteDance Pico, DPVR, HTC, and iQIYI all with products in market. New products from Meta “Project Cambria”, Sony, and Pimax continue to push the frontier of screen technology, foveated rendering, and wider field of view. However, users still complain of headaches, eye strain and nausea limiting how long the devices can be used and the types of applications that can be built.

Drivers (1)

In 2022, there are few drivers of the VR market. Meta, ByteDance, and Sony are in the market, but much of the consumer electronics R&D has moved to AR and MR. Although some VR devices allow MR, and some MR devices allow for fully simulated experiences so it’s likely R&D for AR/MR will be useful in VR too. The installed base is growing relatively slowly and is about 16 million units today which is substantially smaller than all other devices with Playstation and Epic at 100m+ each. The small installed base means developers are reluctant to develop content, and less content means fewer reasons to buy a VR headset. The Metaverse is a vision for the software that might connect VR experiences and bring a social element to VR experiences, but this vision has yet to be clearly articulated and it’s unclear why consumers would prefer a VR metaverse experience over a PC, smartphone, or AR version.

Novelty (2)

Virtual reality primarily competes with PC and games consoles at the immerse end of entertainment. In theory it is in the entertainment market and competes with television, movies, and even social media for attention and leisure time. But the reality is that VR content today is games and competes in terms of immersivity. The failure for VR to take off to date has been because PC and console games continue to deliver better graphics and higher levels of immersivity. For most, the inconvenience of putting up with a bulky and uncomfortable device strapped to their face hasn’t been worth it. In other niches such as training and education, for which there are less compelling alternatives, the novelty is higher.

Diffusion (2)

On the one hand, unlike AR/MR, VR does not need any progress on batteries and low-power chip design, software or algorithms. Much of the technology stack used for PC or console gaming is utilised for VR headsets. We can expect high quality VR experiences to arrive before AR experiences simply because there is no power constraint. Nevertheless, VR headsets are still expensive at $500 (Meta recently increased price of Meta Quest 2) and devices compete directly with an installed base of consoles and PCs. Assuming, devices become lighter and adaptive focus displays are used to stop users getting nausea and headaches, adoption will come from enterprise use cases first until the ecosystem is large enough to support investment by developers for exclusive content.

Impact (5) High certainty

Assuming the issues with the device specifically and users comfortably being able to spend days in VR then the main driver of impact is the value of immersivity and the amount of time that can be spent in such environments. In the long run, our simulations will get better and more realistic with zero visable pixilation, near-zero latency and wide field of view, until they reach a point in which simulated environments are better than reality for the vast majority of people around the world. Virtual reality may in 2022 just like in 1993 and 2016 be a technology before it’s time. But the convergence of Generative AI, Metaverse, Digital Twins, Quantum Hardware, 6G, Brain-Computer Interfaces and a whole bunch of other technologies will in the long-term deliver better than reality experiences. These experiences will more than likely end up being so compelling as to fundamentally reshape human leisure and work.

Timing (2025-2030) Medium certainty

The market was worth $22 billion in 2021 and growth rates vary wildly from at 10-45% per year, which is reflective of the uncertainty around demand. Market definitions also vary with some forecasts combining Augmented Reality and Virtual Reality. Regardless, the market is already investible today. But in terms of speed of adoption, we err on the side of caution with no device on the horizon that solves the issues of motion sickness, nausea and headaches. The catalyst for growth will be progress in optical engineering to make wearing VR comfortable for long periods. Only then can VR compete with PC and consoles for the best games and move beyond gaming and training use cases to big opportunities around commerce, travel and Metaverse.