While the virtual reality (VR) industry is growing, there are still questions over its ability to generate strong revenues. However, the expected uptick in market growth is a strong proof point that this emerging entertainment technology is here to stay. In fact, Goldman Sachs predicts that, by 2025, virtual and augmented reality will become an $80 billion market – roughly the size of the desktop PC market today.
The immense potential in VR has service providers thinking about how to harness its power to offer consumers a new, more engaging television experience that will positively impact their bottom line. But before VR can go viral, there are challenges to overcome.
Rising up to the challenge
The mainstream adoption of VR technology requires headset makers to sell their product to the widest possible audience. According to IDC, VR headsets sales are expected to grow from $2.1 billion in 2016 to $18.6 billion in 2021. As more headsets are developed, there will be a wider range of products and prices ensuring more people have the chance to experience this immersive technology. But a low-cost experience may potentially disappoint first time VR users and deter long-term uptake.
Another key piece to the puzzle is the content. The good news is that, according to IDC, VR spending is forecasted to rise in 2017 and 2018. And as spending increases, more VR content will be made available. However, the technical and cost challenges of generating this content are not trivial. The lack of cost-effective, broadcast grade cameras capable of capturing VR content is just one of many VR hurdles. In addition, high-resolution content production also comes with high-production costs. Compared to non-VR content, VR content requires higher frame rates, greater dynamic range, and better resolution. And, to ensure quality distribution of the end product, bandwidth speeds have to be higher than they would for HDR or 4K content. This makes universal access to VR challenging for users outside of major cities who don’t have reliable access to broadband speeds high enough to enjoy the VR experience.
All things equal, these growing pains are important to market adoption, but will not matter if VR content cannot be monetized.
Show me the money
When determining the best way to monetize the VR experience, TV service providers are likely to test the waters before diving in. Many are looking to the gaming industry, where developers have found varying degrees of success with in-app purchases and premium content. Many will aim to bring in sponsorship deals to offset the uncertain costs of experimentation. And, as the number of people using VR grows, ad revenues are expected to rise to meet this demand.
Overall, monetization looks likely to be determined by the type of content being watched. Premium and live events could be monetized in a similar way to pay-TV and be adapted into a premium business model. For example, broadcasters could give users the option to virtually attend games of their favorite football team for a price.
Short form experiments will likely be free or advertising supported. One potential advertising model is YouTube-style pre-roll ads sold on a cost-per-view basis. With these comes the risk that users will turn away from VR technology if advertising becomes too intrusive. One solution is to experiment with interactive ads similar to movie trailers, but where the user is a part of the action. If the online model offers any guidance, providers may decide to opt for the targeted ad model with subscriptions offered to those who want an ad-free experience. The eagle-eyed will look to China where the VR market is strong and there are large audiences to act as a testing ground.
The road to adoption
Changes to advertising models may help generate revenues, but it will take time. To get a sense of how long, it helps to take a look at some numbers. There are currently approximately 1.59 billion TV owning households worldwide. By comparison, in 2016, there were approximately 12.7 million VR headsets sold. It’s fair to say, therefore, that VR has a long way to go before it has a major impact on mainstream consumer experiences.
For now, we are in the early days, constrained by the lack of a definitive business model. The TV industry is taking greater care to fully assess the market with trials and pilots before taking the plunge. As the VR industry is likely to be gaming-led, the trials and successes in this segment will continue impact business decisions. The gaming world is already experimenting with monetization models and the TV industry is watching and learning from this trial-and-error phase to build its concrete VR strategy. Partnerships between gaming and video could also prove extremely interesting.
With hopes high, the next five years will be a period of experimentation. VR’s capability is likely to improve over the years as processors improve, screen resolutions increase and more content creators produce more VR content. Yet, the hype will only carry VR into the near term. Any long-term success will require consumers to truly embrace VR technology.