Game Marketing Tips, Analysis, and News

Sunday, October 25, 2015

Why VR and AR Games Won't Be Profitable Soon

The excitement over virtual reality (VR) and augmented reality (AR) games has been reaching high hype levels lately, but if you're expecting to make a profit you'll need to have patience and deep pockets. There are several reasons for this, and some strategic ways around the problem. First, though, why is there so much excitement about VR and AR?

Much of the enthusiasm is infectiously transmitted through those who have experienced it directly and have a following. When John Carmack gets so excited by something he leaves his company and goes to work for a startup, that means something to a lot of people. As demos spread for Oculus and other platforms, and videos began to be distributed, we saw more well-known people in the industry get excited. Science fiction thrills that were imagined long ago are on the verge of becoming available... at least in a crude form.

Where there's enthusiasm among leaders, money follows. We are now seeing billions of dollars being invested in startups like Oculus and Magic Leap, and companies like Sony, Microsoft, and HTC/Valve are investing heavily. Dozens if not hundreds of developers are working on VR and AR titles. Some of the hardware will be arriving soon -- Samsung's $99 Gear VR, created in connection with Oculus, is slated to ship before the end of the year. (It's basically a holder for the latest Samsung smartphones, but is said to work quite well.)

So there's plenty of money being spent, lots of developers working on titles, and hardware that's going to arrive soon. Shouldn't profits follow quickly? No, and there and some good reasons why.

First, the hardware's going to be relatively expensive at first... and it's hard to say how long it will be before the cost drops. The Oculus Rift is, according to founder Palmer Luckey, going to be more than $350 -- not counting the fact that you'll need a very powerful PC to drive it. (The short version is if you didn't buy your PC at the high end of the power scale in the last couple of years, you'll need to spend about a thousand dollars on new PC hardware.) Sony's PlayStation VR will likely be in the $400 to $500 range from hints they've dropped, not counting the PlayStation 4 you'll need to have. Microsoft HoloLens... we have no idea, but the development kits are going for $3,000 each. HTC/Valve's Vive is probably going to be well over $500, not counting the beefy PC you'll need to drive it. Magic Leap's hardware is a complete unknown, but don't expect all that investment ($542 million so far, with a rumored $1 billion round being readied) to go into a low-priced consumer item.

Price is critical for mass market sales numbers, unless the value proposition is so obvious people are happy to spend high prices. Apple can sell 50 million new smartphones in a quarter at prices north of $500, but that's because people already know all the uses they have for the device, and they feel that's worth it. For VR and AR gear, we still don't really know what complete applications will be like -- and what they'll be charging for them. The value proposition is unknown, which means the initial sales will be to deep-pocketed enthusiasts. There are perhaps a few million of those, but that's not enough to generate massive profits for software.

Which brings us to the virtual elephant dancing on your palm -- software. There's plenty of great demos being shown, but hardly any complete experiences. No killer app has emerged, though Minecraft has some potential given its power on other platforms. How long until we see a killer app? Unknown. It could be months... or years... or maybe never. These are difficult things to create -- every designer I've spoken to working on VR and AR tells me the same thing: "You have to rethink every aspect of the design." And then you have to create some things, and try them out, and until they're in the market where people can buy them, we don't really know if ten people or ten million will love them.

The business model (or models) for VR software is also unknown. Should we expect a ten-minute experience for $10? For $50? Nothing I've seen so far looks free-to-play with virtual goods on VR, and I wouldn't expect that model right away. Experiences may have to be brief because of motion sickness concerns, at least the more intense experiences -- and the more intense experiences are what you're likely to pay more for. This all makes trying to predict how much money you can make from your VR game, and when you can make it, a complete fantasy not anchored by any facts. This must make things fun for venture capitalists trying to evaluate investment in VR developers.

One investment banker I talked to said he doesn't expect profits from VR for three to five years. That sounds about right to me. Why, then, is money rushing in now? Because many of these people feel that AR and VR has the potential to be the next big market -- perhaps exceeding the mobile mrket in size. Placing your bets now, and going through the learning curve early, will position you better for success when the field becomes profitable.

So what's a small developer to do? Find a sugar daddy -- an investor with deep pockets and plenty of patience. A major publisher who's looking to make a mark in VR, or a venture capitalists with a long view, or perhaps one of the makers of VR hardware that wants to have software to take advantage of the hardware. If you don't have one of these connections, the best way to get there is to do something dazzling with one of the VR development kits already available. Find something interesting that's not already being done, or solve a problem that's been identified, Whatever you do, be different.

One final thought: Gaming may not even turn out to be the biggest market segment for VR and AR devices. Certainly vertical markets will have more money to spend on expensive hardware early on. Yet much of what game developers come up can be used in non-gaming applications as well, perhaps to great effect. Keep your mind open to other possibilities for VR and AR, and make sure you've got plenty of funding lined up. You're going to need it.

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