BITKRAFT Ventures is pleased to present “Reality Check: 2021 Perspectives on Extended Reality (AR, MR, VR)

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VR/AR Shipments Expected to Surpass Consoles Soon

“Reality Check” represents our latest thinking on the prospects of extended reality. It presents us with an opportunity to explain why we believe the outlook is better than most pundits would have you believe—and that it’s potentially closer to fruition than you might think. Moreover, in just a few short years extended reality headset shipments are expected to surpass console sales by 20 million units. 

What might this mean for interactive entertainment? And what inferences can we make about how business and investment opportunities might evolve as a result?

Before proceeding further, it is important that we first define our terminology, as many of the terms and acronyms we’ll use throughout this piece are often conflated with one another. When we refer to “extended reality” (XR), we are really talking about three distinct sets of technologies:

  • Augmented Reality (AR) – Interacting with the real world via a digital overlay, where physical reality remains central to the experience.
  • Mixed Reality (MR) – An intermingling of real and virtual worlds, where users can interact with and manipulate both environments.
  • Virtual Reality (VR) – Immersing oneself in a completely digital environment in a fully enclosed, synthetic experience.

These three forms of extended reality differ mainly in terms of their levels of immersion and interaction with the physical world. It is important to understand these key distinctions in order to fully grasp the opportunities available for entrepreneurs, investors, and creators. 

Where Are We Now?

For many outside observers, much of the hype behind extended reality fizzled out in the latter half of the last decade. Investors poured huge sums of money into virtual reality startups, yet few have anything to show for it today. DigiCapital reported that VR and AR investment last year was at its lowest level since 2013. Clearly, extended reality has entered the “Trough of Disillusionment” phase of the Gartner Hype Cycle chart. But has it emerged on the other side yet?

Despite the lull in investment, we believe that the business opportunity remains significant. Riding a wave of increased adoption (driven in part by COVID-19 lockdowns) VR and AR spending is experiencing notable growth: potentially a 32% CAGR in AR/VR gaming, and a massive 57% CAGR in other AR/VR applications (both from 2020-2024; see chart below).

Much of this recent momentum behind AR and VR can be attributed to continued investment from major tech companies. Facebook’s Oculus Quest 2 has set the standard for consumer-friendly VR headsets in 2021, while Snap’s AR tools are now used by more than 200 million Snapchat users every day. Additional investments are being made by Apple (with an expected Q2 ‘22 launch date for its mixed reality headset) and Sony (also rolling out its PSVR 2 in Q2 ‘22). By 2024, we could see consumer-grade AR glasses from all of these companies, as well as Samsung and others. The technology supporting extended reality continues to show signs of improvement, and we expect new devices from these major players to drive broader consumer adoption. 

Our Take

If we continue to project consumer adoption of extended reality increasing, and that meaningful investment in the space will continue to occur—then where does that leave us?

We have identified six key areas of opportunity for tech-driven businesses, forward-thinking creators, and savvy investors:

  1. Virtual Fashion, AR NFTs, and Avatars
  2. The AR Cloud
  3. Immersive Virtual Spaces, Virtual Showrooms, and WebAR Experiences
  4. VR Developers and Creators
  5. Narrative-driven VR Role-playing Games
  6. VR Esports

Virtual Fashion, AR NFTs, and Avatars

As AR capabilities continue to improve, we expect to see meaningful growth in the number of use cases for these technologies beyond gaming and entertainment. The tech being featured on platforms like Snapchat and Instagram, such as 3D body mesh and cloth simulation, will help to push forward virtual fashion for both producers and consumers. Design tools can also be further democratized, allowing fashion creators to unleash new experiences for consumers, and allowing individuals to digitally express themselves in ways never before possible.

Previously reserved for in-game use on virtual avatars, we believe that digital fashion will make the leap to the physical world through AR Try-On experiences. This may present a lucrative business opportunity for retailers, as Snap has already reported 94% higher conversion rates for this advertising channel (Source: Shopify, 2020; comparing data from e-commerce interactions between online stores with and without 3D/AR content). 

The AR Cloud

The AR Cloud enables the unification of physical and digital worlds by delivering persistent, collaborative, and contextual digital content overlaid on people, objects, and locations to provide people with information and services directly tied to every aspect of their physical surroundings. 

Gartner predicts that by 2025, 15% of organizations with more than $1 billion in revenue will use AR cloud to monetize the physical world through new interactions and business models. 

Although we are still early in the AR Cloud’s full mapping, current releases of location-based technology advancements from incumbent players have the potential to allow consumers and brands to drive deeper engagement from their AR experiences.

Source: Gartner, 2021

Immersive Virtual Spaces, Virtual Showrooms, and WebAR Experiences

To support the technologies emerging from the AR Cloud, businesses may need new types of developers with AR-focused skillsets. Unfortunately, more than half of AR developers have less than one year of experience (according to a report from Snap and Deloitte). This has two implications: 1) that there may be a shortage of talented AR developers, or 2) that most AR developers may actually be hobbyist users or aspiring creators. While there may be training or upskilling opportunities available to address the first issue, the second is perhaps more intriguing from an investment perspective given the seeming tailwinds of the Creator Economy. In fact, Snap recently announced the launch of its Creator Marketplace, connecting businesses to creators across the Snap Lens Network. Facebook, too, has invested in tools for its 600k AR creators, focusing on video calling and chat as its users have shifted to remote work and social distancing. 

Another outcome of this COVID-induced change has been an uptick in e-commerce, with some retailers and brands going from 15% to 85% e-commerce in just a couple of months, according to Vogue. Furthermore, digital fashion experiences have become increasingly commonplace. Brands like Gucci, Tommy Hilfiger, and Charlotte Tilbury have all recently created successful digital activations, potentially signaling a sea change in the way fashion is merchandised. When considering this in conjunction with the developments in AR referenced above, it may not be difficult to imagine brands creating their own immersive virtual spaces, developers crafting white-label virtual showrooms, or businesses unveiling AR storefronts to stake their claim in the Metaverse. 

VR Developers and Creators

Of course, the promise of extended reality will be difficult to achieve without groups of dedicated developers and creators leading the way. In VR, much of those development resources have thus far been devoted to social experiences such as Rec Room or VR Chat. These multiplayer platforms are deeply social and engaging. Rec Room reports that their VR users spend an average of 2.7 hours per day on the platform, which is nearly an hour longer than Minecraft’s DAUs.

However, we believe that these social platforms may be just the beginning. Additional creator support will be required to attract new audiences and keep the experiences fresh with additional content. As such, we are beginning to see competition among platform holders for developers’ and creators’ affinity. In February, Oculus launched App Lab as a way for developers to more easily distribute their apps via link or Sidequest (a third-party platform) without the need for store approval or side loading. This allowed developers easier access to quick player feedback without many of the hassles of traditional publisher restrictions. Meanwhile, just a few weeks later Viveport (the distribution platform for HTC’s Vive headset) announced an increase in its developer net revenue split from 70% to 80%. The company also gave developers 100% of net revenues during the 2020 holiday season. Just as we’ve seen competition for developer affinity among traditional platform holders, so, too, do we expect to see VR incumbents battle for dominance among VR creators.

VR developers, like BITKRAFT portfolio company Resolution Games, are raising notable funding rounds, providing for experimentation with new content formats and business models.

Narrative-Driven VR Role-Playing Games

According to a 2019 Oculus VR segmentation study, the largest group of gamers in the United States are those identified as “Story Seekers”. Of these 27.7 million Americans, Oculus observed a near-even split of 47% men and 53% women, representing 23% of the overall U.S. gamer population. These players prefer Puzzle (49%) and RPG (47%) titles and tend to be primarily solo players, opting for games about problem-solving, escapism, and exploration.

It is here that we see the next potential large sum content opportunity. To sell this audience on VR, game developers will need to focus on helping players escape from reality and visit new worlds. VR has the potential to take RPG, fantasy, and narrative games to a new level of immersion, enveloping players in rich new environments and stories not possible with traditional platforms.  

VR Esports

Just as the proliferation of live streaming and content creation has driven interest in and adoption of competitive gaming on traditional platforms, we expect similar forces to spur interest in VR esports. Already platforms such as LIV, which develops software for mixed reality video capture, are seeing 30k hours of user-generated content created every month. There is also meaningful potential for this number to grow as launches on mobile platforms, Oculus, and PSVR are planned.

While MR content creation is mostly limited to VR rhythm games, we expect other genres to grow in popularity in the future as new content is introduced and other metaverse social worlds are brought to VR. One such example of this is the first-person shooter (FPS) genre, which has recently seen Facebook acquire two developers: Downpour Interactive (makers of FPS game Onward) and BigBox VR (makers of battle royale game Population: One).

If we project that competitive titles can take hold on VR, driving greater consumer adoption of the medium, we should also expect subsequent related developments in games business models (e.g. F2P), broadcasting, league/team structures, and eventually sponsorship and media rights. Just as today’s esports ecosystem has given rise to numerous business opportunities, we at BITKRAFT expect to see similar growth in the VR esports scene.

Conclusion

We are excited about what the future may hold for extended reality technologies, businesses, creators, and content. We will closely monitor the six focus areas referenced above as we believe they may continue to shape our new Synthetic Reality. If you are a creator, entrepreneur, or builder in one of these areas, we’d love to hear from you.

BITKRAFT Ventures

Gaming, esports, and interactive media.

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