I’m usually thoroughly unimpressed by new technologies, at least from a business perspective. While I can appreciate technological leaps combined with alternative functionality as with GoPro (GPRO), it’s pretty clear that a clever contraption doesn’t always translate into mass adoption.
Ditto for 3D TV. That is, while the technology that made it possible is ingenious, 3D has pretty much been a bust.
Turns out most consumers just want to relax when they’re watching television, not “immerse” themselves in it. And as for the few who do want an immersive 3D television experience, price becomes a limiting factor.
I’m not a complete curmudgeon stuck in the last century, however. Although I was similarly unenthused about the soon-to-be-released Oculus Rift from Facebook Inc (FB) and similar virtual reality technologies hitting the market, I’m coming around to the idea that at-home and affordable VR platforms have a shot at a place in our collective living rooms.
Meet the Oculus Rift
On the off chance you have no idea what I’m talking about, the Oculus Rift is a device that fits on your head, displaying an image in front of your eyes that makes it seem you’re in a different place; an onboard gyroscope turns the screen image appropriately when you turn your head.
Facebook, oddly enough, owns developer Oculus VR, and is already taking pre-orders for the device, which launches March 28.
It’s not the only virtual reality platform on the way. In fact, there are some respectable commercial VR efforts already on the market.
The Oculus Rift, however, has largely been treated as the pivotal device that will turn a hobby into an industry, with 29 Oculus Rift-friendly video games ready to go.
And it may be that little detail — a bunch of video games — that paints a misleading picture of what a VR device is good for. It’s not just for video games, or at least it won’t be for long.
The Rift offers an immersive experience that will eventually allow virtual travel, remote repair work, military training or even virtual visits with friends and family.
That wasn’t something I always wanted to believe, but after reading enough of articles like this, this and this by people who have no particular vested interest in puffing up the Oculus Rift or VR in general, I’m willing to accept this technology has a place beyond a teenager’s video-gaming ambitions.
Crunching the Numbers
While I’m a converted believer, that doesn’t mean I’m blindly drinking the Kool-Aid. Turning demand for virtual reality technology into meaningful revenue (and more importantly, into profits) won’t be a walk in the park.
Let’s just start out by assuming half of the 320 million people in the U.S., or 160 million people, will own one VR platform within the next five years. Too many, given the price and still-so-far lack of usefulness?
Not so fast.
Per Nielsen, there are 116 million “TV homes” in the United States, most of which have more than one television. That’s a huge chunk of the nation’s 125 million households. And even in houses where there is only one television set, more than one person can watch it at a time.
Not so with a virtual reality platform like the Oculus Rift. It’s plausible any household that owns any VR headset is going to own more than one, since people may want to use them simultaneously.
So, let’s conservatively say the average home has an average of 1.25 virtual reality platforms. That math works out to be on the order of 160 million.
But the price of $600 of the Oculus Rift is stifling for most households? Give that time too.
Assuming Moore’s Law more or less applies to virtual reality devices, the current price of $600 could be whittled down to $200, give or take, within five years.
Even then, at a sales pace of only 30 million units per year, you’re still talking about a market worth $6 billion annually just in the U.S. And that’s a conservative price/demand outlook.
More important, that outlook only considers hardware sales. The real money is in the software and media that makes the Oculus Rift and other VR headsets worth owning. Video games sales in the U.S. alone reached $15.4 billion in 2014; but again, a VR headset can be so much more than a gaming device.
Patient owners of Facebook stock have something to be excited about.
Bottom Line for Facebook Stock
I still say far too many people are expecting way too much from virtual reality as a business, equating “cool” with “profits” without ever actually appreciating the little things like the distinct possibility that it may cost Facebook more than $600 to build an Oculus Rift.
Virtual reality headset buyers aren’t going to all materialize at the Rift’s launch either; some will take years to come to the table. This isn’t going to be like winning the lottery.
Still, VR is one of those few technologies that has potential beyond being the curious-but-passing ideas 3D television and high-end action cameras were/are. And the Oculus Rift seems to be the device to beat, appealing to a broader audience more than the gamer-oriented VR headset from Sony (SNE) does. Facebook also has more opportunities to monetize a Rift owner than Sony has with its VR.
Food for thought: While the bulk of the discussion so far has focused on how big the virtual reality market is going to be and who’s going to win the race, we all should be talking about the adverse impact virtual reality is going to have on an already struggling cable television industry that’s struggling just to compete with tablets.
Just know it’s going to take some time to get there.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.