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Picture sourced from PS4 Daily
Even though HTC and Oculus have demonstrated themselves to be respected pioneers in the PC VR space, I've observed that this industry will have the strength of diversity and that the market's 2016 sales potential is tiny in comparison to its true opportunity in the not too distant future.
I wrote this article because several analysts and spokespeople have been promoting that VR's grandest future will begin to happen in 2020, and I figured it would be helpful to share some fundamentals to help secure that viewpoint.
There really is a natural order of things, and this article explains why in this author's opinion, the virtual reality market's potential audience is destined to grow to hundreds of millions of PCs within the next three to five years and what the markers are that support this forecast.
Key topics include:
The Early VR Sales Expectations for PC
Last December, I published an article forecasting that the PC HMD unit sales would be between 300,000 and 500,000 units within a twelve-month period from launch based on available graphics card sales data provided by Jon Peddie Research. This isn't a calculation for sales in 2016, this is just 12 months from launch, and it can reflect staggered launches between brands. These numbers refer to the Oculus Rift and HTC Vive products plus anything else PC based.
I also said that Oculus and HTC and every other PC brand could delay their launch as much as a year or more because the launch would have little to no impact on securing market share. My reasoning is the current audience potential is so limited, there isn't anything to fight over. The sooner the market forces come to grips with this, the industry's path to viability will be much clearer and more secure.
Sheryl Sandberg, COO, Facebook (picture source: fortune.com)
Supportive Market Behaviors
Facebook's latest market developments seem to be adding credibility to the December forecast numbers. It was only a year ago that Mark Zuckerberg described the Rift as only being worthwhile if Facebook could sell between fifty and a hundred million units. Since December, Facebook's Palmer Luckey started Tweeting about having realistic sales expectations, Oculus was effectively dismissed from Facebook's relevant financial projections, and Sheryl Sandberg, Facebook COO, described VR as a ten-year plan. Mark Zuckerberg later described mass marketability happening within ten to twenty years, and Brendan Iribe, CEO of Oculus, most recently predicted that a million units in sales in the lifetime of the Oculus Rift would be a huge success. In March, the Associated Press published an article entitled "Oculus' Virtual Reality Headset to Launch Without Fanfare".
Facebook's developments aren't good or bad; they just reflect that they have to play a fruitful long game because their traditional revenues are too out of scale to be relatable in this space. There is no way for VR to be a material income in such a short time in Facebook's world. Their mid to long term potential is a different story, however, and will be discussed shortly.
Despite both HTC and Oculus having bumpy product launches with delayed shipping and piqued customers, this has little to no impact on my 12 month sales predictions. In fact, the silver lining is that upset customers are a good sign that consumers care and are passionate about VR.
Superdata's Latest VR Sales Expectations (March, 2016, Source: Superdata)
Since December, the analysts have also starting to rethink their numbers. In March, Superdata slashed their 2016 virtual reality sales expectations by 30%; a resulting $3.6 billion in VR revenues instead of the $5.1 billion they projected in January this year. In this author's opinion, their projections are still on the aggressive side, and their expectations that PC would out-value the console in such a short time is difficult to support so early in the game. It might be because the PSVR's scheduled launch is so late in the year (October, 2016) relative to the other players.
To date, Strategy Analytics is one of the first analysts I've seen that describes VR product sales in terms of units sold instead of X value in dollars which has limited meaning on its own. In their view, 2016 will only see 1.7 million VR HMD units sold that are designed for PC and video game console. Again, I think this has to do with PSVR's October launch relative to the other players which got released far earlier. Had all the launches been simultaneous, I think the numbers could have been more aggressive.
What this all comes down to is that the VR market has been behaving as though Lamborghini-class gaming PCs are sitting in everyone's basement when this is far from reality. In a best case scenario, there are at most fifteen to twenty million of these units at any one time, and I maintain that only three million of these will be qualified for virtual reality by the end of 2016 - perhaps less.
These numbers are perfectly fine for the traditional hardcore gaming market; especially for a first year product release. Everyone accustomed to working in this space is in good shape. It's the content makers and technology platform businesses that are dependendent on reaching tens if not hundreds of millions of consumers that may need to reshape their thinking and roadmap for the short term.
This is why it's so important to look at 2016 as a proof of concept year for something far greater. Everyone's cup is three quarters full provided the market can see far enough in the distance, and they won't have to look TOO far!
What is Required to Demonstrate Viability and Show Mass Market Potential
For consumer VR to become an industry, it needs two things. First, it needs iron clad proof that consumers want and will buy virtual reality. Not early adopters and pre-sold advocates - I mean customers. This has to be demonstrated with a large measurable purchase, it has to be definite, and the investment has to be significant enough. This is often referred to as "the killer app".
Next, there has to be a quantifiable and sizable audience. Everyone has to be able to throw out a number of potential customers that hold up to scrutiny and is reasonable to reach out to. I think a solid number would be how many PCs are actually qualified for the technology.
By combining the elements of demonstrated purchases of virtual reality and what the potential audience really is, the market will have a solid formula of things to come. Instead of VR being a weak faith-based endeavor, it becomes a promising future that everyone can clearly visualize because they have the market's laws of behavior behind them.
Virtual Reality's Killer App
Bumpy or smooth, the early Oculus Rift and HTC Vive product launches have limited influence in the grand scheme of things, and I mean this in a positive way. To prove demand for virtual reality, all we have to do is look back at how the 3D industry first proved viability. While there was a growing excitement for stereoscopic 3D entertainment and technology, it wasn't until James Cameron's $2 billion hit Avatar that the market got wildly excited about the industry's potential. 3D had their shining white knight that justified it all. Forget about how the opportunity was squandered with divided platforms, crappy 2D/3D conversions, and customer confusion - Avatar was the vision and the proof that the 3D industry needed to move forward. More importantly, Cameron used S3D to help tell the story, and not just for novelty or unnecessary effects.
In the virtual reality world, we too have been talking about our "killer app". Is it a game? A 360 VR movie? A VR broadcast? A metaverse? I say none of the above.
Sony PSVR HMD
Our "killer app" isn't an app at all...it's a brand: Sony. This isn't an endorsement of Sony or a statement that they are somehow better than the rest. I'm only talking about the market's nature and how I think that nature will work. As I've mentioned before, Sony already has a potential community of over 36 million PS4s in the universe. If they achieve a 10% attach rate for their PSVR HMD, that's a solid 3.6 million units in sales within 12 months of launch. Whether it's less or more, it doesn't matter. They are well positioned to sell those units and we are already seeing anecdotal evidence of this thanks to their required launch delay to October so they can meet the required production demands.
Sony also exemplifies a best case scenario where the messaging is 100% about selling VR and not requiring expensive secondary purchases like a powerful computer. Despite the difference in quality and processing capability, Sony showcases everything a PC ecosystem would want and need to sell VR on a wide scale. The PSVR HMD is the "what if" proof of concept for PC, and it just so happens that Sony is fully outfited to deliver very early in the game.
If this forecast is correct, Sony's success is the iron clad proof that there is real consumer demand for virtual reality which is the most important factor of all. Unlike a freebee Google Cardboard or a seeded HMD like Samsung's GearVR, Sony would represent actual sales in a mature platform for a significant price ($400 - $500 US). If there are pronounced VR sales in the Sony world, PC and mobile have every reason to have relative sales in their ecosystems. The killer app is all about proving the demand and follow-through with VR; the choice of platform is a secondary decision.
Source: Paramount Pictures (via meme)
The Benefit of Moore's Law
PS4's likely end of life market size is about 100 million units. I maintain that through 2016, the number of VR capable gaming PCs is about three million units, and the dedicated gaming PC maxes out at between 15 to 20 million units in a few years. I appreciate that these numbers look so ridiculously far apart, it's a wonder they are even in the same paragraph.
Remember Moore's Law! The amount of circuitry on a chip doubles every two years; and this is strongly bound to delivered performance. It takes about three to five years for the world's top graphics boards to be in a mass marketable category; eventually advancing to the point of having a near-equivalent as a CPU/GPU on a single die.
According to Jon Peddie Research, there were 314 million embedded GPUs sold in 2015 - and that doesn't include console. Unlike discrete graphics boards (also known as Add in Boards or AIBs), embedded GPUs represent one to one relationships between the graphics chip and the motherboard and therefore the PC. While the embedded GPU mass market doesn't yet have the required VR horsepower, I expect to see this readily available by 2020, and there will be plenty of sequential market growth leading up to that. This is still a bit simplistic because the CPU and memory has to add up equally well, but once the basics are there, the market potential grows by hundreds of millions each year.
However, there is a hefty price for this mass market opportunity. The discrete graphics boards will always be magnitudes better than anything you would find on an embedded motherboard five years from now. The two sides are never one and the same. So mass market gamers are either going to have to play titles using processing power requirements that are at least five years old, or mass market VR will have a casual gaming category and an advanced gaming category. AMD and others are now proposing a segmentation categorization to identify just such content.
So what does this mean for the PC market stakeholders like Facebook, HTC, and others?
Under the right conditions, VR on PC will blossom from being the dwarf relative to the console, to being the mass market king. Once the romance and hype of VR is stripped away, we're only talking about new computer displays and what's needed to drive these displays. We're just waiting for the mass market specs to add up over the next few years.
Why Does the Console Get to go First?
There are very good reasons for the console being first with VR mass marketability.
First is consistency; Sony’s games work on all their devices equally well. While we kind of see this with PC developers supporting multiple SDKs, the market is really going to have to support some form of open standard on a wide scale to maximize the audience for content makers, make for a great customer experience, and firm up that viability.
Next, there is going to have to be good content and lots of it. Sony has fifty games ready for launch with countless more developers working on new titles. They've got momentum, and so can the PC industry. However, this is still dependent on diverse hardware support or it won't be beneficial enough for the content makers and the consumers. I'm very confident that the content will be compelling in VR; Sony has rarely taken the gimmick route and will likely max out what can be done with their medium.
Be warned! A console has a practical lowest common denominator spec which is a key advantage, and PC will eventually achieve something similar with its own version of this. However, the second the HMD makers push their specs too high with a little more field of view or higher resolution requirements, BOOM! We immediately drop from hundreds of millions of potential customers to a few million. It's a razor thin difference between the two outcomes.
There is also a great deal of value in the hardcore gamer universe of 15 - 20 million PCs. Even when VR is at a mass market level on PC, this core group is going to have the benefit of the best experiences and bleeding edge content that will drive preferred purchases of high margin performance equipment like better CPUs and graphics cards.
The only interests that have cause for concern in the next few months are the hype drivers, the hype profiteers, and the entrepreneurs expecting rags to riches the moment the PC-based HMD solutions hit store shelves. The long term winners will be those that keep a sharp eye on market behavior and business fundamentals versus just accepting the hope and excitement of VR alone.
I think Sony is positioned to be VR's strongest savior because anyone who has doubts about the demand for virtual reality only needs to look at PSVR for their answer. As long as they sell enough units and gamers enjoy and buy the content on a regular basis, there is a very good reason to expect the PC market to follow suit. We are already seeing this today with console games being ported to PC; there is a natural balance to things as games and entertainment find their ecosystem in each platform.
The market only needs one successful VR platform to prove the system will work on a wide scale. Even though Moore's Law prevents PC from having its mass market today, they will have it tomorrow - we just have to wait for the entry level processors to catch up with VR's basic needs.
For these reasons, instead of ten years, VR on PC has every motivation and opportunity to be a three to five-year plan. It's during this lead-up period that the market will benefit most from building bridges and firming up that viability.