On July 8th, 2014 the website Road to VR published an article Exclusive: Early Oculus Rift DK2 Unboxing, “The color, contrast, and motion is leaps and bounds over the DK1″ .  While I have been following the developments in the virtual reality (VR) space for some time, it was standing at the exit to Oculus’ booth at GDC 2014 in March when I realized that VR was finally ready for the masses.  Standing there for half an hour I watched the expressions on people’s faces and the enthusiastic discussions of friends who had the opportunity to play with the headset. It was clear that this was going to be big, at least for the gaming space.  With Oculus’ DK2 starting to ship and news of developers creating new content daily it looks like VR is set to explode into the consumer market in 2015. Investors would be wise to try to get in front of the trend as there will be many beneficiaries from hardware manufacturers and component suppliers to game developers and content creators.

Oculus Rift DK2 Unboxing Photos

   

Source: http://www.roadtovr.com/early-oculus-rift-dk2-unboxing/

While there are several applications being discussed for VR including medical, military and immersive video consumption to name a few, I am going to focus largely on the gaming market in this post.  While I expect all of these markets to become significant over the next several years, I believe it will be the gaming market where we will see the initial rapid mass adoption.  NPD Group estimated the total gaming market to be $21.5 billion in 2013 and stories like the one in the Globe and Mail on July 11, 2014 “Pro video gamers level up as tournament offers a $10-million prize” illustrate how popular the gaming market is.  I believe virtual reality can give the market a further push that will accelerate growth in the coming years.

So How Big Could VR be in the Gaming Market? A Case Study: Microsoft’s Kinect

For this question let’s look at a similar disruptive new platform that hit the gaming market at the end of 2010, Microsoft’s Kinect, which made hands free gaming a reality.  When Kinect launched it was a massive hit.  So big that when it hit the market around the world in November 2010, Microsoft sold 8 million units in the first 60 days claiming the Guinness World Record for being the fastest selling consumer electronics device.  Sales remained strong, and by February 2013 24 million Kinect units had been sold. These numbers are even more impressive when you think that Kinect was only available on Microsoft’s Xbox and no other gaming platform.

Source: http://www.geekwire.com/2013/microsoft-24m-kinect-sensors-sold-xbox-live-reaches-46m-members/

While the numbers above are huge for Kinect we do have to remember that the price of Kinect when it launched was $150 and the initial estimated pricing for VR headsets is in the $300 price range.  That said, it can also be argued that gamers will pay for the immersive experience only captured by wearing a VR headset.  This remains yet to be seen, but as we illustrate below industry analysts are predicting big growth in year one (2015) from essentially nothing.

So What are Industry Analysts Forecasting Over the Next Few Years?

According to KZero, a consulting firm for companies and organizations in the virtual space, they believe the hardware market will be over $2 billion by 2016, with software reaching above the $2 billion mark a year later.  Looking at their forecast for virtual reality devices the analysts have divided the market into three categories, Hardcore Gamers, Light Gamers and Tween and Teen.  While 2014 is anticipated to be more of a demo year with 200,000 units sold, 2015 is the break out year with 5.7 million units rising to 23.8 million units by 2018. Based on the Road to VR article referenced above, Oculus says that 45,000 Rift DK2s have already been ordered since GDC in March.  These units are only intended for developers and have not been marketed to the public (it is actually discouraged).

Screen Shot 2013-12-30 at 11.06.22

Source: KZero

Assuming an ASP of $300 in 2014 and declining by $50 annually through 2018, KZero forecasts 2015 revenue from hardware to be $1.4 billion growing to $2.4 billion by 2017.  While the hardware numbers are impressive, the software revenue is also anticipated to be $947 million in 2015 and grow to over $2 billion.  Assuming these numbers are legit Facebook’s acquisition of Oculus seems reasonable and is likely good for the market as Facebook has the resources to accelerate development and have a product ready for the consumer market in 2015.

Sony, Samsung and Others Entering the Market

Sony’s Project Morpheus debuted at GDC 2014 and the Company has big plans for its virtual reality platform that will connect to the PS4.  Sony’s initial focus is expected to be in the gaming space but Shuhei Yoshida, the President of Sony’s Worldwide Studios recently said that beyond gaming there are other applications.  He described VR as “the feeling, the belief that all your senses believe that you are in a different place”. He then went on to describe the idea of traveling to Barcelona virtually, or being on the moon.  He said that just being present will be a new experience that even without gameplay will offer applications to other markets than just gaming.  There is no release date for Project Morpheus but some news sources and blogs are anticipating a 2015 launch date.

Sony’s Project Morpheus                                         Initial Images of Samsung Gear VR

Source: ExtremeTech and SamMobile

Most recently the rumour is that Samsung will enter the market by announcing Gear VR at Samsung IFA 2014 in September.  So far industry analysts are guessing that the Gear VR will use a Galaxy phone for the screen, which docks into the headset via USB and VR software uses the built-in gyroscope, accelerometer and processor to track the head movements of the user.  It is rumoured that Samsung will have some cinema theater and apps at launch and is working with Oculus on the software for the product.   I would expect several other entrants over the next 6-12 months as the market continues to mature.

There will be Many Investment Opportunities Beyond Just the Tech Bellwethers 

While I am not recommending specific stocks or investments in this article, I believe that virtual reality is going to be a good investment theme in gaming and other markets for several years.  Clearly Facebook believed this to be true with its $2 billion purchase of Oculus.  Investors should look not only at the large players like Facebook, Samsung and Sony but to all the other segments of the market that could be positively (or negatively) influenced from this revolutionary new platform of immersive media consumption.