Move Over Sony And Microsoft

Includes: MSFT, SNE, VR
by: Shareholders Unite

Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) have each launched their new gaming console in the last couple of months. Both have solid market positions. The last big innovation in the gaming platforms was provided by Nintendo (OTCPK:NTDOY). Nintendo's innovation, to render the players movement as part of the game has been effectively reproduced by Sony's move and the X-box Kinect and it has struggled ever since.

There are a few other players, like the Ouya, but the market is effectively a duopoly. Technology often offers interesting business models because of the importance of standards, the existence of network effects (the benefits to one rise disproportionately or even exponentially with the number of other users) and the need for large up-front investments (fixed/sunk costs).

Industries with such characteristics often award solid market positions to those who manage to bend these to their advantage. Once a platform is established, on the basis of standards, network effects, and large up-front investments, it's often difficult to unseat these players, witness Microsoft's iron grip over the PC market, Amazon's lead in online retailing, or the duopoly in gaming platforms.

Such seemingly impenetrable platforms can crumble with amazing speed when a new, superior platform emerges that offers a quantum leap on the price/performance axis. We believe there is every reason to assume such a quantum leap in gaming performance is about to happen, and make life quite difficult for Sony's and Microsoft's gaming platforms.

The new platform offering such quantum leap in price/performance is the Oculus Rift, or more specifically, the Oculus Rift can enable PC games to leapfrog over the competition in terms of immersiveness. The Rift, in essence, is another virtual reality (VR) head-mount, but one with a myriad of possibilities and rave reviews. It is the brain child of founder Palmer Luckey, who was frustrated with existing VR headsets.

Luckey's early prototypes were unpolished amalgamations of other devices, culled from what he believes to be the largest personal collection of head-mounted displays in the world. [Buckley]

Going through 19 prototypes, the sixth of those was the first that was called the Rift, and people started to take notice and a trio of tech veterans joined the startup with Kickstarter money. Since they believe that the hardware is only as good as the content it runs, they started shipping prototypes to game developers.

Experimentation on its final (consumer market) form is still ongoing depending on feedback, but the first HD (1920x1080) version already exists, making the experience even more immersive. The latest state of affairs can be read at the Oculus Rift website's FAQ.

What is it?
The shortest description comes from Wikipedia:

The Oculus Rift is an upcoming high field of view (FOV), low-latency, consumer-priced virtual reality head-mounted display (HMD).

It offers an unrivaled 3-D immersive experience, why exactly is again best described by Wikipedia:

The field of view is more than 90 degrees horizontal (110 degrees diagonal), which is more than double the FOV of most competing devices, and is the primary strength of the device. It is intended to almost fill the wearer's entire field of view, and the real world is completely blocked out, to create a strong sense of immersion.

There are rave reviews, but also accounts of the device producing motion sickness. Keep in mind that the Rift and the hardware it contains are still evolving, motion sickness can be significantly reduced by reduced latency and motion blur. For instance

The latest version includes Oculus' new 1000 Hz Adjacent Reality Tracker that will allow for much lower latency tracking than almost any other tracker. It uses a combination of 3-axis gyros, accelerometers, and magnetometers, which make it capable of absolute (relative to earth) head orientation tracking without drift. [Wikipedia]

The significantly reduced pixel switching time of the new 7-inch HD panel also helps. The wide field of view (FOV) is another main thing that distinguishes the Rift from previous headsets and is mostly responsible for it immersive character:

the field of view (FOV) is so wide that a switch in your brain flips, and within a few seconds your brain feels like that is reality. It feels that what it's looking at is actually where you are. If you have a small FOV, like many of the previous devices out there, your brain knows it's looking at a screen [pc world]

The holy grail of virtual reality is the sensation known as 'presence,' that is, the experience of having your brain tricked into thinking you're actually in the virtual environment, rather than in the actual environment. People have described looking at 4K TV's as if looking out of a window, which comes close, but the Oculus Rift is quite something else.

The problem is that such 'presence' is very fragile, it's very easy to break, which (apart from the hardware cost) VR has been an eternal promise but hasn't really delivered. And 'presence' depends on a myriad of factors. In one experiment participants displayed a flat response to experiencing a virtual bar fight because they claimed that a "fight like that would never take place in a bar looking like this." Movement is another big problem:

The act of simply walking around a virtual space is still restricted by the awkward correlation of that virtual room to the real room in which a VR user is standing. [The Atlantic]

There are gadgets and gizmo's to deal with that, like the Omni, but all of these have limitations still. One can expect rapid innovation though, an exciting new world is likely to open up pretty soon, as there are already 13,000 developers working on applications.

What can it do?
Well, basically, the possibilities are limitless. It is starting as a VR headset for gaming. Games have to be adapted to work with the Rift because they have to include the first-person vantage point and motion tracking. Wikipedia has a list of games that can be rendered by the Rift already, but the possibilities really don't stop there.

David Cole, co-founder of Next3D, is embarking on using the Rift for making TV shows, movies, and live sports events immersive.

This immersive visual and audio content is captured using a rig with dual Red 4K cameras fitted with wide-angle fisheye lenses and 3Dio binaural microphones. The twin 180-degree field-of-view lenses allow the 3D rig to capture everything you might be able to see from the same vantage point. This makes it possible to leverage the head-tracking abilities of a VR headset to allow the viewer to look anywhere in the field of view. The plethora of pixels in the 4K cameras far exceeds the resolution of the Oculus Rift, but they're essential in order to fill every pixel of the headset, no matter where the viewer is looking.

People are already working on applications in medical science, virtual tours of villas, known worlds (Total Recall-esque tourism), or virtual worlds. Titans of Space offers a trip through the solar system. Tours of exotic locations could entice exercisers to treadmills or stationary bikes. One could learn to drive in virtual cars. It can help veterans overcome post-traumatic stress disorder. Immersive journalism can virtually embed us at important events, etc. etc.

The potential for social VR applications could be even larger. Faster Internet, CPUs and GPUs make shared collaborative VR systems possible where users can interact remotely in real-time.

What happens when you look not just a video game bot or monster in the eyes, but when you're in a social multiplayer experience when you look your friend in the eye in this virtual environment? [PC world]

While all this sounds quite exciting, who wouldn't want to visit new or remote worlds and assume new identities from the comfort of his living room, but some bleak future visions also emerge in which people tune out of the real world because the virtual world is that much more exciting.

In "We're Amusing Ourselves to Death" Neil Postman argues that Huxley's Brave New World was a much more realistic future scenario than Orwell's 1984. Indeed. Or take the solution of the Fermi Paradox, as offered in the 2006 version of the annual Edge question by Geoffrey Miller.

The Fermi paradox states that it is curious we haven't met extraterrestrial life considering the large numbers of inhabitable planets there must be in the universe. For a while, it was thought that if civilizations become intelligent, they also become intelligent enough to make deadly weapons like thermo-nuclear devices, so perhaps they've blown themselves up after passing some intelligence threshold.

Miller offers another possibility:

Basically, I think the aliens don't blow themselves up; they just get addicted to computer games. They forget to send radio signals or colonize space because they're too busy with runaway consumerism and virtual-reality narcissism. They don't need Sentinels to enslave them in a Matrix; they do it to themselves, just as we are doing today.

Let's not get distracted by these exciting visions of the future, what can Oculus Rift do for investors?

In the first place, the company seems to have a smash hit, but as of yet, there is little investors can do with that as the company is private. If and when it goes public, much of the first wave of the product's potential will likely be priced in. But it's possible the Rift is going to make some casualties on the way.

At present, the Rift works with PCs and Android, and the intention is to make it work with Linux as well (given that Android came out of Linux that can't be too hard). The big question, of course, is whether it will work with the Sony and Microsoft consoles, especially the recently released new generations.

According to CEO Brendan Iribe, there is no technical reason why it should not be able to work but his worry is that the consoles have a far too long cycle (7-8 years). Within such a lengthy period, the danger is that "fixed console hardware won't offer enough headroom for evolving VR and AR devices in years to come."

Iribe expects AR and VR to evolve rapidly and the console hardware is becoming a constraint. Whether Microsoft's enlisting of the power of the cloud via Xbox Live Cloud will take care of this remains very much to be seen, latency is likely to remain a considerable hurdle for that.

Sony's Computer Entertainment boss of Worldwide Studios Shuhei Yoshida, who is very much aware of its existence (it would be unforgivable if he wasn't), had "no comment" when asked whether there are any plans for the PlayStation 4 to support the Rift.

It seems unlikely Sony and Microsoft will not ultimately work with the Rift, as there seems to be every chance this product takes off in a major way when a consumer version will be launched, based on the rave reviews. Not to do so could be a tragic mistake, unless they come with their own VR headset. In any case, the gaming world is about to get a whole lot more interesting.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.