Virtual reality: Set to disrupt the mobile ecosystem?

By Tara Seals

Virtual reality (VR) and augmented reality (AR) are nascent mobile development areas that have seen significant investment this year, from startups to Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT) and Facebook (NASDAQ: FB). Just how disruptive VR/AR will be for the mobile ecosystem remains to be seen, but boosters are banking on a massive platform shift to create an immense amount of opportunity for developers and everyone else.

Incubator activity should always be seen as a sign of market maturity. So it's interesting that a new early-stage venture capital firm launched in early December with $10 million in inaugural funding. It focuses on companies building VR/AR projects and is dubbed, fittingly, "Presence Capital" (get it?). Harmonix, which is currently working on a VR version of Rock Band, Waygo, which will build animated character-driven stories for VR headsets, and Baobab, a creator of "cinematic experiences" for VR, are among the first recipients of Presence support.

The company was founded by longtime startup investor Paul Bragiel, Amitt Mahajan (co-creator of social gaming phenomenon FarmVille) and Phil Chen (author of the HTC Vive virtual reality project). Mahajan told Develop-Online that he believes that virtual reality and augmented reality are major computing platforms of the future.

"From our experiences working on the social and mobile platforms we've seen that companies early to platforms have unique distribution and reach advantages afforded to them," he said. "For example, a VR app company with great content or product today has a high chance of getting featured on the VR app stores because they want to ensure they are providing their early headset adopters with great experiences. That may not be true in a year or two when there is more competition and the quality bar is higher."

And indeed, there is already a growing apps/games ecosystem around early players like Unity, Valve, Razer and others. In a vote of further confidence, the space has attracted bigger names as well. Facebook famously spent a whopping $2 billion for VR goggles firm Oculus, while Google has largely shuttered its Google Glass initiative in favor of a $542 million investment into Magic Leap. Microsoft meanwhile has been talking up its HoloLens AR technology.

But all of that said, the VR/AR in 2015 feels early, and like a lot of investment has been made for something that is in desperate need of a mainstream use case.

Analyst firm Digi-Capital forecasts that case will come along, eventually. It said that VR/AR could hit $150 billion in revenue by 2020, with AR taking the lion's share at around $120 billion and VR coming in at $30 billion.

"We think VR's addressable market is primarily core games and 3D films, plus niche enterprise users," the firm said in a report earlier this year. "VR could have tens of millions of users, with hardware price points similar to console. AR software and services could have similar economics to today's mobile market, as they both cannibalize and grow it. A large AR user base would be a major revenue source for TV/film, enterprise, advertising, and consumer apps from Facebook to Uber to Clash of Clans. Amazon and Alibaba would have an entirely new platform for selling to a mass audience."

And aside from the obvious gaming segment, there are amazing early stage platforms and apps out there too, especially in some niche markets. Take, for instance, the Google Expeditions project, which is a classroom initiative in beta that Google plans to fully launch this fall. It uses virtual reality lenses to immerse students in an engaging learning environment. Already, more than 100 classes have used it to transport students to places such as Verona in Italy to study Romeo and Juliet and to the Great Wall of China to examine that wonder of the world.

The problem with all of this though is the same issue that plagued mobility before the iPhone magically appeared in the world: a lack of affordable hardware that leverages developer-friendly platforms that can support a range of apps built on standard building blocks. Right now the hardware piece of the market is fragmented and most options are priced beyond the average consumer's reach -- providing very little incentive for developers.

Mahajan admits that it will take a while for the opportunities to crystallize, given that several pieces of the market need to fall into place. But, he noted that first-mover developers will stand to gain. "Anytime there's a platform shift, there's an opportunity to create billion dollar companies," Mahajan said.-- Tara