New Business Strategies To Monetize VR

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New Business Strategies To Monetize VR
March 21, 2017

A lot of people love the experience of virtual reality, but not many have figured out the business side of it. The fledgling medium for games, entertainment, and many other applications has sprouted a lot of startups, but not much revenues yet.

 

But where there’s investment, there’s likely to be profits. Or so the VR believers say. We explored how to make money in VR in a panel at the recent Game Developers Conference in San Francisco.

 

Nelson Rodriguez, director of games industry marketing at Akamai, moderated the panel. The panelists included Dean Takahashi, lead writer for GamesBeat at VentureBeat (yes, me); Mihir Shah, CEO of Immersv, a mobile VR advertising network; and Arnaud Dazin, cofounder of ADVR.

 

Here’s an edited transcript of our panel. (And check out our panel onmonetizing VR from last year’s GamesBeat event.)

Above: VR panel, left to right: Dean Takahashi, Mihir Shah, Arnaud Dazin, and Nelson Rodriguez. Image Credit: Dean Takahashi

 

Nelson Rodriguez: In a lot of ways, VR is the Johnny Depp of technology. It’s been around 60 years, but it seems like an infant. It hasn’t gotten its moment in the sun, just like Johnny Depp has never won an Oscar. With VR we’re still waiting to see if this third wave — which I think it fundamentally is — is the wave where it will happen.

 

Last night we were having a conversation with Jordan Weisman, the creator of Crimson Skies and Shadowrun, and he talked about building a VR network multiplayer system in 1987. These were arcades, like the BattleTech Center. A lot of people I talk to can’t conceive that it’s been around that long. We’re at a place now where investment is so massive that there’s real opportunity.

 

I work on Akamai’s game-focused team. This is an obsession for us because we think about all the technical barriers. Our obsession as a company is reducing friction, removing barriers, figuring out how to make it easier for people to interact with their entertainment. We invented a content delivery network. We try to accelerate networks, try to secure them. That’s our side of the business. From a tech point of view, we want to make sure the networks are ready to handle whatever is coming.

 

These panelists are experts on the other side — on the business side, on the player sentiment side. If you wouldn’t mind, tell us what you do and tell us about the last VR game you played. For me it was EVE: Valkyrie.

 

Arnaud Dazin: I’m the CEO at a company called ADVR. We focus on providing monetization solutions for VR developers and AR developers, to create thriving businesses in this new ecosystem. My last game was Smashbox VR, a VR dodgeball game.

Above: VR is more engaging when it comes to ads that drive installs, according to Immersv. Image Credit: Immersv

 

Mihir Shah: I’m the cofounder of Immersv. We’re in the business of delivering mobile 360 and VR ads on behalf of brands and content developers. We’ve been doing it for about a year and a half now. Last game I played was Archiact’s unreleased, super-secret game in their super-secret Marriott suite. I promise I’m not a hipster now, but I was for about an hour. Joking aside, this game was lights-out. It’s a Vancouver-based studio. Great partner of ours. They have a fantastic new title coming out that I cannot announce yet.

 

Dean Takahashi: I’m the lead writer for GamesBeat at VentureBeat. I’ve been writing about games for 21 years now and covering tech for 26 years. This is another interesting new cycle. We have our own conferences as well, talking about VR and tech and games. Our next event is the GamesBeat Summit in May. It’s a continuous conversation on VR these days. I played Sprint Vector from Survios yesterday. It’s an interesting new game, like an endless runner in VR, but you move by swinging your arms back and forth with the Vive controllers.

Above: VR ads are immersive. Image Credit: Immersv

 

Rodriguez: When you think about media and entertainment business models, to my mind there have been three main models. One is premium — people pay up front for content. The next is ad-based, ad-driven. And the third is downloadable content, additional content. Those are the big business models.

 

VR is fundamentally a different medium in a lot of ways. Are there any other models we’re missing? Are these the three, or is one of them going to be bigger than the others?

 

Shah: It’s different in that it’s immersive and 360, but in terms of digital monetization, I don’t know why it’ll be any different. You’ll have a premium track that you’ll be able to charge for. It sounds like what I’m hearing is there’s not a lot of price sensitivity right now on Oculus and HTC. It’s early adopters. Then you’ll have an ad-based model and you’ll have freemium.

 

If you look at the mobile world, some ridiculous percentage of revenues is generated through freemium, through a combination of ads and in-app purchases. It’s like 95-plus percent. If you look at digital music, it’s either subscription or premium, paid, depending on the content. If you look at console, it’s paid and then microtransactions to get more stuff. So it’ll probably be some combination of those three.

 

All of this is dependent on two things, to call out the elephant in the room. One is content experiences people want to engage in. Guys like us are dependent on content. We need a healthy ecosystem that’s producing lots of content. Some of it will be crap and that’s okay. The second is there needs to be enough devices out there to reach enough users. Our ads work really well, but unless you have a large installed base of folks who are engaged, it doesn’t matter. We’re generating probably double the (cost-per-1,000 users) CPMs of mobile, if not triple, because the ads are working, but if there’s a million active users compared to mobile’s billions, do the math.

 

There’s a very clear path for monetization. But it depends on those two things. The monetization is frankly the easier part. It’s a hard execute, but if you’ve got a premium title you charge for it and do in-app purchases. If you have media you’re probably going to do microtransactions. If you have games or YouTube-like experiences you’re going to do ads, with maybe a premium upgrade.

Above: Intel CEO shows the Project Alloy all-in-one VR headset at IDF. Image Credit: Dean Takahashi
 

Rodriguez: In the current model for ads, whether that’s logs or video, there’s an opportunity to escape the ad. At some level we accept ads in our daily lives because we can look away. We can turn the volume down on the TV. We can do something else when an ad shows up on our phone. In VR we’re sort of trapped. How are users going to respond to that?

 

Shah: In our case, all of our ads have exit buttons. They’re prominent. You can’t miss them. But we still have 75-80 percent view-through rate. Partly it’s because some of the ads are pretty cool. But still, you need that exit button. It’s irresponsible on a number of levels not to allow either back or exit.

 

Dazin: In VR it’s important to understand your user. When you’re in VR you’re in this great new environment, but you still want to retain control over what you’re doing. For us it’s a lot about user discovery. People hate ads, but they love discovering things that are interesting. If you’re in a virtual world and there are physical things that attract you in a direction and you can go down the rabbit hole, if you will, things like that are much more exciting. The user remains in control from the second they step inside and they can turn back whenever they want.

 

Takahashi: I have no expertise in VR. I’m a journalist. But I get to listen to a lot of people talk about this. In this early age for VR, we have a premium model that’s predominating now because there’s such a small number of people in the market. If that persists for a while, then it’s possible for some of these companies to make money that way. They’re making maybe a larger amount of money per person. The number we heard today from the Venture Reality Fund was that nine games have generated more than $1 million in revenue through the premium model so far.

 

When you scale this up and eventually get larger numbers in the market, making less money per person is okay. You’re collecting pennies by the millions and billions. Then it seems to make sense to have models like in-app purchases, and eventually advertising. It’s interesting to me that all the models are there for different stages of the market. Eventually you want to get to a point where you use all of them at once to serve different kinds of users.

 

My question is, when is it appropriate to use which model? Does it make sense to have an advertising model in the very beginning?

 

Dazin: I think there are going to be lots of hybrid models in the space right now. HTC just announced they’re doing a subscription model. That’s a great way for developers to hit a certain baseline of revenue. But if they’re really trying to make more, at that point it becomes IAP and things like that, where they can get a bit more out of players who are more involved with their app than others.

 

A subscription model, if you’re doing royalties based on time spent — as an industry we need to figure that out. The Steam numbers are kind of weirdly reported, if you look at which apps are being used and the time spent there. For developers it’s a very scrappy time. Whatever makes you money will make you money in VR right now. If you go subscription, if you sell a full version that has everything available, or if you sell it piece by piece, people are going to do what they can to get by at this stage.

 

Rodriguez: I’m curious about VR and how it relates to mobile gaming when it comes to session length and engagement. When I think about premium content, it tends to center around long form content. That tends to be the driver of up-front premium. With VR there’s a question about session lengths. You guys must be studying this all the time. What do you see?

Above: The PlayStation VR headset. Image Credit: Sony Computer Entertainment

 

Shah: The problem I have is the framing of the question. The most confusing part of big talks at conferences like this is I think we’re talking about two different VR markets. One is the console market, which is Oculus and HTC Vive and PSVR and others out there. We’re talking about really low volumes, fairly high production costs and quality. It’s a console market. It’s an engaged console market. You don’t want ads in those games, full stop. On my PlayStation at home I don’t want ads coming up. Also you can’t play on the exchanges, and in general it’s a much lower-volume game.

 

If the question is about what sort of metrics we’re seeing around console VR, the user counts are so low that it’s hard to draw any conclusions. I’m from the mobile space, and social before that, where our user counts were — literally, it was a bad day if we did a billion impressions in a day. “Wow, we’re slipping.” So I don’t know the answer, but I do know that it’s a premium market for console or tethered VR.

 

The reality is that the far larger usage is on what we don’t talk about as much, which is mobile VR and mobile 360. It’s not as sexy. The production quality isn’t as high. But for those experiences — those are a lot of the folks doing social game development, social app development, mobile game development, mobile app development, they’re coming into this new platform, which is 360 on mobile and on VR. It runs on things like Cardboard, which is not sexy. It runs on Gear VR, which is slightly sexier.

 

In those cases we’re seeing anywhere between three- and 10-minute engagement times per day. We saw about 1.5 million active users in December. I think that makes us one of the largest VR platforms out there, to give you an idea of the scale. We’re seeing on the order of $20-40 CPMs on the really good titles and $7-15 on not as good titles.

 

Rodriguez: That’s significant for folks looking to develop when you compare it to other business models. When you say 1.5 million, we’re talking about an installed base of maybe 6 million devices, right?

 

Shah: Yeah. We saw about 20-25 percent of the total worldwide VR user base. We all love them, because they’re trying to so hard to find content. They’re really trying.

 

Takahashi: I interviewed Chris Early from Ubisoft about their first VR game, Eagle Flight. They were told, when they were making the game, by the platform folks that the average user experience should last no more than seven minutes, because that’s how long people have patience for wearing a VR headset. They launched and found that the average user was playing for more than an hour. It’s a different kind of user. They found a way to get to someone who’s much more hardcore. As soon as you get to that audience, all those numbers tend to change.

 

 

Shah: I think that’s right, in terms of time. The most successful engagement numbers, and frankly the most successful apps from a monetization and re-engagement standpoint, are those guys who are doing mobile 360 crossing to VR. There’s a monoscopic mode and a fully immersed mode. You have examples like YouTube, Hulu, Jaunt, or LittleStar. These are VR apps, but the majority of the usage is mobile 360, because everyone has a phone and you can use your phone on the bus. It’s a little different from strapping on a VR headset. Those guys are doing well because they’re driving a bridge for consumers to engage with 360, anywhere and anytime, without having to lean in to hardware that they don’t understand well enough to choose from yet.

 

Another great example is Panorama 360. Another great example is Fractal Combat X, which is a great game that’s VR and mobile. Your game state is persistent between the two. That’s pretty cool.

 

Rodriguez: I want to expand on the point you made earlier about the platforms. It’s pretty clear by the way the press generally covers it that dedicated hardware is what gets a lot of lines.

 

Shah: But nobody’s using it on a mass scale.

 

Rodriguez. Right. So is mobile really the VR market?

 

Shah: It depends, again, on who you’re talking to. If you’re a console game developer who’s made PlayStation games for the last 20 years, that’s what you do. You do category-topping titles that take years to develop. Don’t talk to the ad guys. You should be talking to HTC and Oculus and publishing massive titles. The issue there is that you’re still not going to get that many purchases. Not many people have these devices. So the question is how much you invest now versus later.

 

If you’re talking to traditional mobile app developers, it’s all going to be mobile VR and mobile 360. That’s my personal opinion, based on the data we’re seeing.

Above: The VR Fund’s 2016 VR industry landscape. Image Credit: The VR Fund/Tipatat Chennavasin

 

Takahashi: I think Superdata said that 6.3 million headsets shipped in 2016 and 5 million of them were Gear VR.

 

Rodriguez: This morning we had our VR breakfast, talking with some VCs and startups looking to build games in the space. One thing the VCs recommended, which I hadn’t thought much about, is that there’s right now still a business opportunity from the manufacturers. We’re seeing subsidized game development in the range of several hundred million dollars. We’re still in that space at this time.

 

Shah: I don’t think that’s a business model. That’s a funding model. It’s a way to get funding that’s non-dilutive, and it’s a great way to do that, but it’s not a business model. You can’t get that forever.

 

Takahashi: It’s a necessary seeding of the market. Everyone’s learning. Everyone’s practicing. Nobody’s paying that much for experiences yet. This large amount of money from the platform owners — HTC, Facebook, Intel, maybe Microsoft soon, Sony — is a necessary part of kickstarting the market.

 

Jason Rubin from Oculus said earlier that the VR transition is probably the hardest transition he’s ever seen for the game industry, because there are so many things to learn. You’re probably going to fail several times before you get it right, but when you get it right, there should be a gold mine at the end of that.

 

Dazin: The world we live in right now, mobile VR exists because it’s easy and it’s cheap. But desktop VR will be the mobile of tomorrow at some point. Seeding these developers to take risks and build larger projects that will take more time and money but be highly polished, I think that will bode really well for mobile a year, a year and a half down the line. That development is going to be largely the same. We’re seeing mobile headsets start to have hand-tracking controls. In the future they’ll have inside-out tracking. Developers will only learn how to do that if they start working on the platform today. If there’s no money there, sometimes there needs to be an incentive to do that.

 

Rodriguez: I’m curious about design considerations. When you’re building your game out — let’s take ads for an example. If you think that might be part of your business model, what’s different for VR? I’d argue, by the way, that mobile still hasn’t gotten it completely right. The way ads get inserted in some mobile games is still pretty clunky. What design considerations do people still need to think about for ad insertion into VR?

Above: Virtual avatars in VR. Image Credit: Dean Takahashi
 

Dazin: It’s almost like security. In games that have good security, that security is architected in from the beginning. Ads are the same way. Slapping ads on top of a game will make you some money, but nothing performs as well as ads that are native to the core game experience. Kim Kardashian makes a lot of money off video ads because it’s directly tied into the app’s currency system. That was an intentional choice. Things like that are important — designing around the ads being part of the experience. In VR that’ll be even more important, because slapping something in that’s totally irrelevant or taking over the screen with 360 video is shattering to an experience where you’re immersed in the world around you.

 

Rodriguez: You referred to ads being engaging and interesting. Could you elaborate on that.

 

Shah: We’re experimenting with three different ideas from a UX standpoint. One is very YouTube-like, a pre-roll. You get that prior to whatever experience. A lot of that is non-gaming apps — photo-sharing or utility-type apps or video apps. Before you see the video you’re looking for you see a short ad and you can skip it. That’s one option. The second is a kind of mid-roll, and this is to your point — it’s integrated somewhere in a logical place within the experience. The third is rewarded. You watch an ad to get something, whether it’s more currency or something else.

 

The interesting part is we’re really not seeing any difference in utility between those three. It’s slight. With rewarded we see a bit of a higher view-through rate, but we’re talking about the difference between 70 percent view-through and 80 percent. People seem to enjoy the ads, given that they have an exit. That’s how the placements are going. How we’re thinking about it currently within the mobile 360 and VR ecosystem is very similar to how we’re thinking about it in pure mobile.

 

 

Takahashi: The way you describe that, it almost sounds like the ads you can do in VR are almost the same as what you’d do on a mobile phone.

 

Shah: They are. What works is native, within the experience, but at logical times within the experience. The difference, in our case — and it might be different in your case — the only discernible difference I can tell, which is driving better economics for these kinds of ads — I don’t know how many people here are mobile developers, or who have done mobile development. The highest performing pure mobile ad right now is playables, interactive and playables. Everyone’s coming out with them.

 

The reason for that is because it’s novel, and because it gives users choice. They’re interactive in some way. That’s the difference here. This is what an interactive playable can be in VR. You just have a larger field of view. They’re interesting. The user can choose what to engage with, choose to exit, choose to look behind themselves and see what’s going on over there. That drives better economics. But other than that, it’s very similar in how we think about UX.

 

Takahashi: Why can’t we have different kinds of ads for VR, though? Invent something that’s more engaging than watching a video.

 

Shah: We do have a different ad. It’s not just watching a video, right? You’re actually in a full environment. We can put characters in there. You can interact with those characters. What I hesitate to overpromise is that somehow ads will be integrated into VR experiences. We’ve joked about it internally. You’re in a game with the Coca-Cola polar bear and he gives you a toast with a bottle of Coke. Or you could do that with beer if it were 21 and over.

 

You can do those things. It’s just that the cost for developers to integrate that tightly — we used to do that on Facebook. We actually tried this whole thing with the Milk Advisory Board, sticking a flipping cow in FarmVille. They paid us some huge amount of money. But it took us a good three months to get it in the Zynga development pipeline and get it to behave according to the brand guidelines. At the end of it you think, “What the hell did we just do? We could have run five billion app-download ads.” I know people don’t like to hear that, but that’s what drives economics for developers.

 

Dazin: It’s just more realistic and more practical.

Above: MixCast VR lets you create from within VR. Image Credit: Blueprint Reality

 

Shah: Right. Think more playable, more interactive.

 

Takahashi: Customized ads are not really a great business, then?

 

Shah: I’m sure there are people out there who can make great businesses out of customizable ads. I think it’s an agency model. I don’t think you generate a lot of enterprise value.

 

Dazin: Actually, I disagree with that. I think that as we get into more of these 3D environments with AR and VR, the same way that we have 2D press kits for companies, 3D content is going to be equally important. We’re going to have brands where, sure, the up-front cost to make the Coca-Cola bear may be pretty high, to do the art outsourcing and make sure everything works correctly, but once you have it you can re-use it. For us, that’s something we look at directly. Seeing as how large amounts of VR developers use Unity, we have a very consistent way of being able to deliver interactive content directly into people’s scenes that can take people to a whole different VR scene. Sure, that’s a high up-front cost for the brand, but it has eternal value to the space.

 

Rodriguez: I’m very curious about hybrid VR experiences. There are folks now developing 360 video on one hand, Unity lobbies on the other hand, and merging them together. It feels like there’s an opportunity for game-style content to find its way into what is now still just video. Do you see that as a business opportunity, for games to be a part of the ad model for video VR?

 

Takahashi: Epic had a very customized technology announced yesterday. They’re racing around in a generic vehicle with QR codes all over it. They were on the fly, in real time, reskinning the vehicle to make it a Camaro or whatever else. As the director is viewing this, they could see what that car looked like through a viewfinder in the racing environment and make changes on the fly. “I don’t like that color. I’ll make it blue.” This is something that used to take months of preproduction work to get done. It makes that more efficient. It’s a cool blending of artificial reality with reality.

 

Rodriguez: My question, really, is whether there’s an opportunity in merging what is now the video VR world and the gaming VR world? Which are still fundamentally being treated as two separate things, but they’re emerging at the same time. You have this hardware that people will use for both. In many ways gaming is seen as the real promise of current VR, but will those come together?

 

Dazin: Right now, the skillset to make cinematic VR is a little bit different from making games. It’s so early. People are going deeply down these different paths and it’s hard to reconcile, because they’re different interaction models. It’s definitely a challenge. But it may be interesting. You had things like the Bjork record.

 

Rodriguez: Right. Bjork made an entire VR album where the lobby was built in Unity, but you could visit 360 videos from there. It was the combination of the two models. While video has been seen as a different version of VR, that was a place where they came together. 360 VR is a very different experience from navigable, rendered VR. Merging the two is an interesting space.

Above: Pokemon Go is leading the conversation about VR/AR.

 

Shah: I think it’s a big opportunity. This blending of video, real-world environments, where you then go in and play — it’s already happening. We kind of saw one last night, something I can’t quite talk about yet. From a commercial standpoint — that’s an interesting thing for the gamer in me, and we want to see that market drive. In the theme of this panel, though, from a commercial standpoint, I continue to believe that commercial success will come from people who figure out how to blend mobile with mobile VR. That’s going to get you the reach you need.

 

Again, it’s a little bit different. But the single largest commercial success last year, which was a bit unexpected, was Pokemon. That was a blending of mobile and AR. You don’t have to put on an AR device and do something totally different. Those kinds of walk-before-you-run blends are going to drive the commercial successes in the next couple of years. It’ll be the folks who figure that out.

 

Dazin: Making games is all about cheating behind the scenes without players seeing what you’re doing. There are a couple of games out there right now, where it’s a mix of VR and video. It’s not volumetric video. The video just turns with the player enough and fits in the frame so it looks 3D. There are ways to skate by that can help you cut down on costs and reuse content.

 

Rodriguez: AR versus VR. We talk a lot about VR, but AR for a lot of folks represents different opportunities. Some people are more bullish on AR. Are there different economic considerations for someone who’s developing content for AR versus VR? Are you looking, as VR ad companies, at the AR space?

 

Shah: We absolutely are. The idea, from an ad standpoint, from a content delivery standpoint — ads are just another form of content you deliver. In this case we pay people to deliver it. But it’s about putting physics into something else, whether it’s AR, VR, or mobile 360. Unlike banner ads, which are flat, you have to put physics into a different experience to show a full 360 environment.

 

There’s a whole discussion around the enterprise market that we’re not going to touch today, developing enterprise applications in VR and AR. There are some really interesting things going on there. But in terms of consumer applications, the single largest thing, whether it be VR or AR, is whether consumers will adopt the necessary hardware. And that leads to a chicken and egg problem — is there enough content, and content that everyone’s friends are playing, that people go out and spend the money and go to the trouble of using another device?

 

The question with VR and AR, and I’m sounding like a broken record, is what experiences can be blended with mobile, so you can have cross experiences? I don’t know yet. In the absence of mobile there’s no reach.

 

Takahashi: With something like FarmVille, maybe two percent of players would ever make an in-app purchase. You needed that billion-person market to make real money. But Wargaming had an interesting experience on the consoles, where they found that when they brought World of Tanks to Xbox 360, the fans were so rabid that they bought a lot more. You change the economics of that model such that more than 10 percent of players is spending, and they’re spending a lot of money.

 

When you get to that kind of market with the right kind of content, the rules that used to apply in a different situation are no longer true. There may be more potential for good content.

Above: Raw Data from Survios is now on the Oculus Touch. Image Credit: Survios

 

Rodriguez: This morning we were having this conversation about microtransactions and what VR games have proven so far that microtransactions can work. The room struggled to come up with examples. The one title that was mentioned was Bait!, the Gear VR game, one of the few that anyone could point to as an example of a VR game that’s done well with microtransactions. Dean, you mentioned a list of six or nine titles that have made $1 million. What games would you recommend folks look at as good examples of what can be done in VR?

 

Takahashi: Raw Data, the first-person shooter game from Survios. It’s one of those titles that’s done more than $1 million. Job Simulator has also done very well.

 

Job Simulator seemed to benefit from this idea, what turned out to be the falsehood, that VR is not social. Mike Abrash from Oculus was quoted as saying that’s totally wrong, and that VR will be the most social platform we’ve ever seen. With Job Simulator, it became a party game. You show it at a party, have it running on the TV, and everyone sees what you’re doing. It can be something that entertains everyone, even though there’s just one person in the experience, and everyone passes it around.

 

Shah: We see a number of examples on mobile VR and mobile 360 with microtransactions. But again, it comes back to the content, not the monetization. Microtransactions work when you have content that’s episodic, and you have a lot of depth and breadth to the experience. If you have a VR game that’s the greatest casual game in the world, but it only has one level, microtransactions don’t work, because there’s nowhere else to go.

 

If you think about mobile games that monetize exceptionally well, there are infinite levels and lots of stuff to get you through those levels. You have energy packs and weapons. All that comes through microtransactions. From a VR standpoint, we’re starting to see that, but again, it’s fully driven by the content developer creating those rich environments, such that the player wants to come back and there’s a reason to transact.

 

Dazin: Spending is directly tied to how much time the player spends in the app. That’s a big thing we see in VR right now. Even on Steam, the top 10 most played VR games, hours-wise, aren’t even VR games. They’re productivity apps like Bigscreen or Virtual Desktop. It’s hard to make money off microtransactions or ads if your players aren’t coming back every day. That’s something we can solve with compelling content.

 

We’ve learned that in desktop and console and mobile. We’ve learned how to get players excited to come back once a day or five times a day for something exciting. That needs to translate to VR, but the same mechanics don’t quite apply. You reflexively pull out your phone all the time and check on your farm. You never accidentally put on your VR headset. That’s a challenge we need to address.

 

Rodriguez: When you talk to developers, when you talk to indies, what would you say is a common misconception about the VR space for folks just breaking into it?

 

Dazin: A lot of the groundwork is already done for you. Unity has democratized development for a lot of people. It makes it really easy to create a baseline of content. But actually building full high-quality games with voice recognition and all these other things that you might think are part of the ideal VR game, that’s not there from the beginning. A lot of developers are creating this stuff for themselves in-house and building off that for future titles. I’d love to see more of that get shared with the community, so everybody can more easily build robust games.

Above: Qualcomm’s VR headset prototype at GDC 2017. Image Credit: Dean Takahashi

 

Shah: Here’s what I think is the number one issue. For traditional developers making games on social, on Facebook or even MySpace before that, or on iOS and Android, we had an advantage when we were building that. Your consumer was going to pick up their phone. They pick up their phone to make a call or check their email or send a text. The killer app was already on the device.

 

The biggest thing that we need to re-teach ourselves is — the killer app is not on the device anymore. You have to give them a reason to come to the device. It’s our responsibility. I guess we could say YouTube VR is maybe a draw, but it’s not texting. We have to figure that out as an industry, what that killer app is in VR, or that set of killer apps. All of a sudden everybody will benefit if I’m already in the headset because I need to do something. In that situation I’m much more likely to play Wheel of Fortune. Nobody is going to play Wheel of Fortune on a stand-alone device.

 

Rodriguez: Other platforms have other reasons. Gaming on the PC wasn’t the first use of the PC.

 

Shah: Facebook, you were there to check out what was going on, and then you thought, “Might as well play FarmVille.” Again, all due respect to the developers, but the players were already there. That’s the biggest thing we tell folks.

 

Takahashi: VR needs a reality check about whether the platform is ready or not. I enjoy showing it to people for the first time, people who’ve never used it. They go crazy over it sometimes. My 13-year-old kid and her friend went into it for 90 minutes straight. But they don’t come back to it. The retention is near zero. The next day, the next month, they’re not asking about the next cool thing they can experience.

 

Part of these problems here — there’s the time to your first image, for instance. It’s something like 15 minutes, maybe? “Let’s plug the thing in the computer again…” The platform isn’t ready. It needs to be wireless. It needs to have all these other things that haven’t arrived yet. The controllers are pretty weird. Why not just use your hands? Leap Motion probably has a good idea there, trying to make hands work instead of things that you hold, which are more of an artifact of the console era.

 

Shah: On the edges I might disagree a bit, because I think VR and AR represent enormous enterprise opportunities. When I say “enterprise” I mean the value of your company, the value of what you’re doing in the coming years. It’s hugely exciting. We all like to go from zero and get to one. But the untold story I think is the bridging that’s happening with mobile 360. The amount of usage that’s happening on 360 is staggering from a CAGR standpoint, cumulative average growth rate. Nobody’s talking about it, because it’s not as sexy as talking about the Rift.

 

I think that’s what’s going to drive the market. It’s going to be pure mobile 360 and mobile VR as a bridge to when we do get ready for a fully strapped-in experience. And it’ll come from the high end as well, in arcades. It’ll come from the low end and the high end until it’s ready. The low end has to be ad-funded, because you can’t charge $10 a download for a casual mobile 360/VR experience.

 

Takahashi: Speaking of arcades, I think HTC was suggesting that something like $10 an hour isn’t a bad amount of money to charge for a VR arcade experience. That can turn into a lot of money.

Question: I was wondering if you could speak to ads that are user acquisition. A lot of the ads you’re talking about are Coca-Cola, McDonald’s, cruise lines, the more traditional brand ads. But when you’re doing user acquisition on the mobile platform, you have Mobile Strike and their ad spend, or Slot Mania. These are ads where you can click through and deep link into the store. That also helps to let users know more about the content that’s available on the device and grow the ecosystem in general. Can you speak to where you see the current state of UA in VR advertising?

 

Dazin: A big key right now, if you’re in VR and I want to get an install for another app, I don’t want you to have to take the headset off to make the purchase. Any kind of interruption in that flow is not good for the user experience. There’s still some work that needs to be done on the platform side to help that be a smooth transition from the app to the store to the purchase and back to where you were.

 

That’s something we have solutions for that we’re focused on. But there’s a very small market so far of people trying to advertise in VR for other VR games. Also, in the mobile space, that tends to be a touchy subject. If you’re a casual game, you don’t want to advertise other casual games in your app, because you can lose valuable users. You only want to advertise the lowest quality users that you have. In VR there’s just not a sizable enough market for that to happen. Everybody wants all their users, wants to hold on to them. That’s another challenge.

 

Shah: Mobile marketing is absolutely dominated by CPI. It represents probably about 50 percent of Facebook mobile revenue. It’s the only thing that matters in mobile. It’s going to be the same thing in VR. I do agree that it’s a bit early, but about 90 percent of our ad inventory is ads for other apps.

 

It’s working very much the same way, except the conversion rates are about 10 times higher. Some of that is because folks are really interested in what’s available. They want to discover new content. Some of it is because the ads are pretty cool. We’re also doing quite a bit of cross mobile to VR distribution. You’re in a mobile game and you’ll see a 360 ad for a VR experience and vice versa. We work with a lot of the mobile guys in 360. That’s helping.

 

Again, the fundamental problem is you can’t have a healthy app distribution market unless the apps that you’re advertising are actually making money. There’s no arbitrage to spend. If I spend $5 for an app install and I’m Machine Zone, I can make that work all day long because my average revenue per monthly active user is higher than that. They can spend all day long. Gabe Leydon made a science out of it. The problem in VR is that VR apps aren’t making any money — not because they don’t know how, but because there aren’t enough users yet. How can I spend $3 or $5 for an install when I’m not making money? That’s not a business. It’s an experiment.

 

The fundamental playbook that made a lot of people very successful in social and mobile is working in VR, with the huge difference that there’s one million active users, not 500 million. That’s the difference. Everything else works the same. In fact, the monetization is higher in VR, because people are more engaged. The ads work better. Cross-promotion works better. There’s just not enough people yet.

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