ALLPCB
Overview
Virtual reality (VR) has emerged recently as a concept driven by 360-degree visual experiences and realistic human-computer interaction. As a relatively advanced technology area, VR has attracted market optimism. Although the market potential is large, there are still notable risks, so investors should exercise caution. The following analyzes risks in the VR market.
VR investment risks
The gaming sector within VR has grown rapidly and attracted significant financing in recent years. VR hardware has also received investor attention. Key technical metrics such as screen refresh rate, resolution, latency, and device computing capability have become more mature, and VR technology continues to develop. However, some niche segments remain at the conceptual stage and require longer-term development.
As the industry develops, content becomes richer and intellectual property norms improve. Because the content available to users through a single hardware vendor is limited and hardware companies distributing applications is often uneconomical and inefficient, application distribution is likely to become an independent industry segment. Platforms that cover more headsets and users will control the gateway to this segment. Accordingly, public companies are positioning headsets and user platforms to create synergies with their existing businesses.
Many VR companies are currently unprofitable, primarily because the industry requires substantial upfront capital for technology research and development, which consumes large resources. In addition, user habits need time to develop. Therefore, investments in VR carry risks and typically require long-term capital commitment.
Business models are not yet established
VR arcades in China are still in an early exploratory phase regarding equipment and operating methods. Franchisees commonly sell peripherals and collect franchise fees, but specific operating models and emphases vary. Differentiation mainly lies in whether operators focus on peripheral sales or building a branded experience. The "VR experience store +" model is emerging, typically combining VR with dining or retail to offset costs. Common operating approaches include transaction boosting and membership systems, with many stores employing both. High-traffic locations may rely solely on transaction boosting. Cooperation between platform operators and arcades typically falls into three areas: content operations, revenue sharing from operations, and assistance with store openings.
Factors that prompt consumers to pay for offline VR experiences are primarily a positive prior experience and curiosity. Barriers include limited attractive content, relatively high per-session prices, complex operation, and heavy equipment. Therefore, arcades need to introduce higher-quality content and better devices to attract more customers.
Current status of VR companies in China
Although the VR market has been widely regarded as promising, many Chinese VR companies are facing difficult conditions. These companies encounter both internal and external challenges and struggle to survive amid market pressures.
Bankruptcy can occur at any time, which is a severe blow for VR firms. While VR has provided opportunities for some companies, many Chinese VR firms find it hard to scale in the face of strong market headwinds. The difficulties stem from technical limitations as well as broader market environment factors.
Tech giants hold positions and resources
Market research forecasts the VR/AR industry could reach a scale of $120 billion. While this suggests VR could evolve into a major platform, many Chinese VR companies have already struggled in this wave. Competition from large players such as Google, Facebook, and Microsoft is a key factor, but more critically, shortcomings in funding, technology, and talent among Chinese VR companies greatly constrain their development.
Competition drives industry progress but also creates casualties. Although the industry has attracted many startups during this early growth phase, the overall framework is taking shape and giants such as Samsung, Facebook, and Google hold leading positions and substantial resources. In such a high-entry-cost competitive environment, Chinese VR companies face significant pressure.
User adoption and conversion difficulties
Leveraging the popularity of the Galaxy S and Note series, Samsung partnered with Oculus in September 2014 to release the $99 Gear VR hardware, and the device was often bundled with phones. However, by May 2016 Samsung announced Gear VR users had only surpassed 1 million, indicating a low conversion rate to VR. If large companies face this challenge, it is even more difficult for Chinese VR companies to acquire and convert users. Without mature business models, sustaining user growth is challenging.
The main global VR players include Facebook, Samsung, HTC, and Sony. Except for HTC, the others are market leaders in their respective domains and have large user bases, which is an important prerequisite for VR development. HTC Vive’s popularity is tied to strong hardware performance and immersive panoramic experience, as well as HTC’s strategic gamble following setbacks in the mobile market. Such a strategy is likely beyond the reach of most Chinese VR startups.
Delivering quality experience requires high costs
Cost is a core survival issue for any company. For a VR startup facing competition from tech giants, the key is to improve core competitiveness. For VR, that core is immersive experience, but delivering high-quality immersion incurs substantial costs. Attracting users with high-fidelity immersive experiences requires significant investment in content and hardware, and marketing such experiences can be capital-intensive.
Although technology advances may reduce development costs for VR content and hardware over time, the VR ecosystem—including components, algorithms, software, and business development—still requires large financial support. Chinese VR companies face not only funding shortages but also immature technologies, inconsistent content quality, and limited brand recognition, which further increase survival difficulty and reduce available market space for these companies.
