The Virtual Reality Race Is On

Includes: FB, MSFT, SNE, SSNLF
by: Shareholders Unite


VR headsets are finally emerging as a mass-market consumer product.

The possible applications are sheer endless and VR seems set to become a big market.

There are three early contenders on the hardware side, but the money is likely to be in the software side.

About a year ago, we wrote about the potentially disruptive nature of the Oculus Rift, the virtual reality headset built from scratch by Palmer Lucky basically out of a garage. Even before a consumer model has arrived at the market, it has been acquired by Facebook (NASDAQ:FB). We specifically argued that Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) could be in the firing line with their gaming businesses.

We didn't think these companies would just roll over, and indeed at least Sony hasn't. It was impressed with Oculus from the start, and now it's building its own virtual headset under project Morpheus.

What's at stake?

After at least a decade and a half of promise, it seems that virtual reality for the masses is at last arriving. The ability of a credible immersive experience did exist, but in very expensive equipment not suited for mass-market adoption. The Oculus has changed the game entirely; when the final consumer version comes out, it will almost certainly cost less than $500 (the Kickstarter prototype cost $300).

It can be so cheap because it has been developed with mass market standard parts, with which Palmer endlessly toyed and experimented. Many of these parts, like cheap, small HD screens and gyroscopes have been developed for the booming smartphone and tablet markets.

A second important element is the rise of ubiquitous, licensable game engines like Epic Unreal Engine and Unity 3D (both of which support the Oculus) that have made the creation of VR-accessible worlds much simpler.

Cheap VR has the potential to disrupt a whole host of markets, and create quite a few new ones. We're only scratching the surface here with some examples:

  • Gaming
  • Films and TV shows
  • Training and education
  • Virtual presence, like education, tourism
  • Search and rescue
  • Social VR applications

As an example of the latter:

A recent study into innate or ingrained racism in white people has found that spending just ten minutes in a virtual world can change the way they view people with different colored skin [BBC]

The opportunities for VR in training seem endless, from the military to architecture to medicine, design, sports, it's hard to think of a field where VR couldn't potentially be a game changer.

While progress has been spectacular, let's not forget that we're at the start of this exciting new development. There are still numerous problems to overcome. For instance, it is quite difficult to make fluent video content for VR. For instance, one of the problems is framing. Camera's can record 180 or even 360 degrees so you'll be able to look around, but movement is an altogether different matter. Another kink is navigating menus in games.

In the short video here, you see that multiple-cameras giving 360 degree view are used (the pictures are stitched together by software), but that means that "you cannot move the camera and aren't able to hide the crew." Start-up Condition One is pioneering a drone with a 360 degree camera (the "Octocopter") to get rid of these problems.

What will be the main drivers in the competition?

  1. Technical ability
  2. Content

The holy grail for virtual reality is called 'presence,' which is basically tricking the brain into believing it is actually looking at reality, rather than just a screen. The Oculus promises rather a lot:

VR Cinema 3D, an Oculus-compatible app created by Joo-Hyung Ahn using the popular Unity game engine, dropped me into a movie theater, complete with rows of seats and a flickering projector behind me. After a moment, a theatrical trailer for The Hangover Part III sprang to life on the big screen.

Sure, it sounds simple, and it was. But the sense of just plain being there was palpable: I felt as though I were truly sitting in a cinema seat, giggling at Zach Galifianakis. The Oculus Rift's wide field of view completely blocked out the real world and immersed me in the digital, while the responsive sensor package built into the Rift tracked my head movements flawlessly. I was in that theater. The only thing missing was the popcorn. [PC World]

This isn't exactly the only raving review, and remember, reviews so far are about prototypes. The most important technical elements behind "presence" to be sorted out are:

  • Field of view
  • Latency
  • Screen door effect
  • 3D cross-talk

The field of view (the part of the person's vision the screen takes up) should not be a problem, it's simply a question of placing the screen (or screens) closer to the eyes. However, at times where 4K TVs, monitors (and even 4K tablets) are coming alive, VR headsets have to offer similar detail, especially since the screens are covering a large part of the field of view.

Earlier sets suffered from pixelation (the "screen door" effect), which detracts from the experience of "presence" and even the newer versions still suffer from that. This is no wonder, given that the Oculus, at present, puts two 1080p screens up close in front of your eyes, while the Sony headset offers a single 1080p screen split between two eyes.

One of the reasons Oculus closed a cooperation deal with Samsung (OTC:SSNLF) is to get its hands on higher resolution OLED screens, which offer superior quality.

The most vexing technical problem seems to be latency, the time between a movement by the player (like a head turning) and the corresponding change in the VR experience. Noticeable latency is causing motion sickness in many people, probably the single biggest thing putting them off of VR. Here is CEO Brendan Iribe:

This wants a maximum latency of 20-30 milliseconds from your head moving to the headset updating your eye on screen - what we call motion-to-photon. Right now it's at 30-50 milliseconds in the current versions, but we do expect that to come down and reach that 15-20 millisecond 'Holy Grail' timing. [OXM]

So, we still have some way to travel on this. The cross-talk problem shouldn't play an issue, at least for the Oculus, as it is working with two independent screens, one for each eye. It might be more of a problem for Sony and Samsung, since they're working with a single screen. But today, 3D TVs and projectors have managed to overcome most, if not all of the problems here, one would expect this to be the case as well for VR headsets.


In describing the drivers behind the cheap Oculus, attentive readers will have realized that the old Johan Cruyff maxim that every advantage has its disadvantage reasserts itself in this situation as well. Cheap VR is made possible by off-the-shelf parts and licensable game engines.

That means that at least in theory, the barriers to entry have been drastically reduced. We purposely said "at least in theory" because we're not entirely discarding the possibility that the work of Palmer Lucky is so vital and unique it will be difficult to replicate by others, but we have to admit we would be surprised if that turned out to be the case.

His approach seems to have been trial-and-error with different parts, and much of the progress has been in the parts themselves. It's also quite likely that the whole thing can be reverse engineered. So it's likely that building a cheap VR headset isn't a tall order for would-be entrants.

Which means that what will drive the success is the ability to quickly build a compelling platform for content development. The two main competitive drivers here are:

  • First mover advantage
  • The ability to build a compelling alliance pretty quickly

The players
So far, we know of a few players:

  • Oculus Rift (Facebook)
  • Project Morpheus (Sony)
  • Samsung
  • The Avegant Glyph

The latter isn't exactly the same, it's basically a personal home theater. It streams content directly to your eyes. Although a bit of a semantic discussion, it's not real VR, you can't look around and it leaves you aware of your surroundings.

Microsoft was rumoured to be working on 3D goggles for the Xbox One shortly before the console's announcement, but as of yet, nothing concrete has come of it. The Oculus might have first-mover advantage to build out the platform, here is Brendan Iribe, CEO of Oculus:

"In the first 30 days on Kickstarter, we started getting almost inundated with emails from people in [nongaming] markets," says Iribe. "A lot of them came from medical fields, the military, architecture, automobile design, even fitness. There were just so many people reaching out to us." [PC Mag]

And we know that quite a number of applications have already been build for the Oculus:

much of the $16 million in venture funding that Oculus VR recently secured will be used to ramp up staffing, to improve training, and to upgrade support for software developers. [PC Mag]

For instance, Next3D:

has been using his Rift dev kit to bring TV and film to life since the kits started shipping in March. The company is combining its video processing and compression technology with its experience in content production and stereoscopic delivery to offer what it's called Full-Court. Next3D hopes to leverage its existing relationships with creators and providers to assist them in jumping into the world of live-action VR content. This includes both pre-recorded and live broadcasts. [Engadget]

Oculus, in building out a broad platform:

"We've already got Unreal Engine 3 and Unity integration, but beyond that we want to add Mac support, Linux support and we want to continuously improve our feature set," Mitchell tells us. [Engadget]

One likes to think that the Oculus would have nailed it if it would have gotten the consoles on board as well. However:

We'd like to see it eventually become compatible with consoles, but right now we're mostly focused on the PC side [OXM]

That seems to be a missed chance and now Sony is providing competition, but there was at least some logic behind that decision:

Iribe is worried, however, that lengthy console lifecycles won't allow for the rapid iteration and innovation he expects VR to undergo in the next few years. [OXM]

However, to go up against the likes of Sony and Samsung is a bit of a tall order. Sony has its own PlayStation platform and content with games, films and TV shows, but they're clearly not going to leave it at that:

Sony's Jeff Stafford told me that Morpheus, more than any other PlayStation product, is going to be driven by developers. He doesn't simply want to port Sony's popular games over to Morpheus (though, you can bet that they will). He wants to see people creating worlds specifically to maximize VR's potential. [Gizmodo]

Samsung's VR set is set to be announced this year in a race to beat Oculus and Sony to market and the technology is a bit of a surprise:

Some developers already have early versions of the headset, which -- at least in the development stages -- is powered by flagship Galaxy devices

But exactly how your Galaxy phone will power it isn't yet clear, but the aim is to be cheaper than the competition and leverage the Android gaming platform. By the way, it's not all competition though:

Sony and Oculus have worked with each other to improve their respective headsets, Iribe said, though the two probably will be incompatible because they use different software to get the devices to talk to applications [Bloomberg]

And Samsung's headset is also the fruit of cooperation with Oculus whereby the latter handles the software:

The deal is a swap: Oculus gives Samsung early access to its mobile software development kit and helps develop user interface software, while Samsung gives Oculus early access to its next-gen OLED screens.


Based on early enthusiastic reviews and the ample room for improvement (HD+ OLED screens, etc.) still on the table, VR headsets really look like they have a fair shot at becoming the next big consumer technology platform. We think it can become very big very quickly, only hampered by the tedious and time consuming handiwork that is needed to build games and applications that can take advantage of it.

But with the likes of Facebook, Samsung and Sony, and by enlisting a world of developers and having ready made gaming platforms off the shelf, good progress should ensue.

While Oculus seems to enjoy something of a first-mover advantage, we don't think that's decisive, and it will be all about who can build the platform that is most attractive for developers to work on, creating a positive feedback loop in which a better platform becomes bigger because it attracts more consumers and therefore more developers.

But since there are so many different dimensions possible here (in the form of different applications, not just games), we don't expect a single winner, and the market will be somewhat like smartphones and game consoles where different platforms co-exist.

It also remains to be seen whether there will be much money to be made in the hardware (like smartphones), or whether it will be more of a razor and blade model, like game consoles, but due to the similarities with game consoles we think the latter is considerably more likely.

That means that for the likes of Facebook, Sony and Samsung, even a strong market uptake might not mean all that much for the bottom line from the hardware sales alone, the money will be in the applications.

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

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