Wang: Smartphones and virtual reality need each other, for now

By Jefferson Wang

Jefferson Wang

The rise of virtual reality is coming at an interesting time for the smartphone business. High-end smartphone growth is facing challenges in a quickly maturing market due to slower innovation, rise of the "good-enough" smartphone, competitive Chinese device manufacturers and the trend of consumers upgrading more infrequently in a saturated market. Even Apple is experiencing smartphone growth issues, selling about 16 percent fewer iPhones while making about 18 percent less revenues on iPhone sales in 2Q 2016 versus the same period last year.

Quite frankly, it has become harder and harder to impress and excite consumers with each successive flagship smartphone launch. But given the ubiquity of smartphones, VR has the opportunity to piggyback on them to not only expand beyond a home environment but drive mass adoption. As virtual reality head-mounted displays vie to become the next "it" wearable, all eyes are on VR to breathe new life (and dollars) into the mobile smartphone market.

VR's financial barrier to entry is substantially higher when compared to smartphones as users must purchase a head-mounted display (HMD), computing power and compelling content. Without any HMD promotions, consumers must spend on two different pieces of hardware. As the market waits for costs to come down substantially, leveraging a high-end smartphone for computing power could not only drive smartphone upgrades but also help start to drive VR toward mass adoption. After all, outside of a dedicated computer or game console, where else will widely available processing power come from for at least the next couple years? 

It's worth noting results from a recent IBB Consulting consumer study that showed a majority of customers interested in VR believe that it is here to stay. Only 9 percent thought VR was just a fad. Further, more than three-quarters of consumers that are interested in VR say they are willing to spend on HMDs, suggesting a strong market in the making.

Smartphone manufacturers are betting on VR

Device manufacturers have a lot riding on virtual reality. If VR takes off, consumers will need to upgrade high-end smartphones with improved processors for imaging and advanced sensors for head tracking. This VR technology innovation could rejuvenate high-end smartphone upgrades and stimulate growth. Device manufacturers also have the potential to pad VR revenues with accessories and companion device sales. This could include HMDs, 360 degree cameras for UGC capture, headphones for immersive sound, and sensors for interaction.

This opportunity points to interesting partnership opportunities that could help combat the growing trend of smartphone commoditization. A premium smartphone with top specs on its own no longer justifies top-of-the-market costs. So to preserve high-endpricing, smartphone device manufacturers have turned to bundling -- an important strategy in a commoditized market. Samsung is giving away a free Gear VR headset when you purchase Samsung's high-end Galaxy S7 or Galaxy S7 edge. LG announced its new G5 flagship smartphone with smart friends that included the LG360 VR headset. ZTE also recently announced that it is entering the HMD market.

Device makers know better than to expect HMDs to fly off the shelves simply because they're available. To speed adoption, virtual reality ecosystem players are working to lower barriers of entry across head-mounted display purchase, computing power and content:

·         Head-mounted displays. There are several options across price ranges to fulfill diverse needs: $0 - $99, $100 - $249, $250 - $499, and $500+.

·         Computing power. Being tied to a gaming console or dedicated computer may be a non-starter for certain VR experiences due to cost and non-mobility, so an existing smartphone may eliminate both friction points of additional spend and stationary nature.

·         Compelling and diverse content. The smartphone content ecosystem understands the reciprocal relationship that exists between smartphones and VR. Google announced the Daydream VR solution and should leverage Google Play, Amazon is reported to be developing a VR video app (as is Hulu), Facebook continues to push the importance of virtual reality in the social experience, and YouTube 360 is getting UGC makers in on the action.

The stage is set. Device manufacturers are tracking the rise of virtual reality closely and trying to ride the wave to the tune of high-end smartphone upgrades, HMD accessory sales and a technology generational leap. The industry's pursuit of a mobile ecosystem that offers affordable and accessible computing power, subsidized HMDs, and a compelling content ecosystem will keep the virtual reality market alive in the near term as we wait for the most premium experiences to become more affordable. Smartphones won't provide virtual reality's processing power forever. If the market takes off on the backs of consumer experiences or enterprise use cases, we can expect VR HMDs to ultimately integrate computing power to become stand-alone devices, eventually leaving the smartphone in its dust. For now, VR is offering smartphones a strong potential lifeline.

Jefferson Wang is a senior partner with IBB Consulting, leading the firm's wireless and mobility group's work with network operators, device manufacturers, and content providers on technical and business strategy from product innovation through launch. Follow him on Twitter at @jeffersonwang13

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