AR and VR Are Cool Tech Ideas, but They Are Not Hot Investments

Another effort to make virtual reality a mainstream form of entertainment just bit the dust.

Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) breadwinner Google confirmed this week that its newly debuted Pixel 4 smartphone won't support its VR platform, Daydream. In fact, the company is discontinuing its Daydream View virtual reality headset, deciding a smartphone wasn't the right means through which to cultivate virtual reality users.

Were it just Google's Daydream View falling off the landscape, it might not mean much to the broader industry. But it's not just Google's tech having issues. Apple (NASDAQ: AAPL) opted to hold off on adding virtual reality and augmented reality to its product mix earlier this year. And Samsung (OTC: SSNLF) appears increasingly disinterested in seeing its smartphones used as VR vehicles, according to Oculus' John Carmack.

There are two interpretations of the trend. The more optimistic of the two is that virtual reality has finally matured enough as an industry to support higher-performance (and higher-priced) devices like the Oculus Rift or the virtual reality headset powered by a Sony (NYSE: SNE) PlayStation. The more plausible interpretation is that there's just not a lot of mass-market interest in the idea, which in turn means there's little support from content and tech developers.

Big noise, little market

"VR and AR have been about five years from the mainstream for the last two decades," writes ZDNet's Steve Ranger. He added to his early October commentary:

Don't misunderstand me -- there is a market for virtual reality hardware and its corresponding content, casual or otherwise. An estimated $3.8 billion was spent on VR hardware and content last year. There's likely to be an even bigger market for augmented reality solutions, which can solve specific and practical problems with a modest amount of computing power.

A measurable degree of demand, however, doesn't necessarily make for a market that's big enough to become and remain profitable enough to support multiple players ... or really even one player. Even winning that whole $3.8 billion would mean little to most companies.

By the way, back in 2016, right after Google launched Daydream, SuperData Research predicted the VR market would be worth a little more than $12 billion by last year, mirroring several other overly optimistic outlooks. Those observers have demonstrated a penchant for expecting too much too soon.

Sony and Facebook are big fish in a little pond

Still, the thinning of the field seems to favor Sony first and then Facebook (NASDAQ: FB), as it owns Oculus. Between the former's year-to-date virtual reality headset market share of 36.7% and the latter's 28.3%, the two companies enjoy a strong co-control of the VR hardware market that's sure to grow.

And it is expected to expand. Technology market research outfit IDC foresees sales of dedicated VR/AR headsets growing more than 50% this year as well, with shipments expected to swell exponentially into 2023. Both Oculus and Sony should be able to leverage their leadership in the space to secure more market share rather than cede it.

Take a closer look at IDC's outlook, though. It's only expecting sales of 8.9 million AR/VR headsets this year. And the explosion in demand between now and then is still only expected to drive annual purchases of VR/AR headsets to just shy of 70 million units.

For perspective, the world bought almost 368 million smartphones in just the second quarter of this year. Sony's VR headset is the market-leading device, but the company has only sold a little more than 4 million units versus sales of more than 90 million PlayStation 4 consoles -- the device that powers its VR tech -- since it landed on store shelves. Facebook, meanwhile, boasts more than 2 billion regular users, which are far more valuable to it as advertisees than as potential users of the VR world it's building as a means of selling more Oculus headsets.

The point is that even if Sony and Facebook are able to lead what ends up being better-than-expected demand for virtual reality solutions, so what? This is still a very small market that won't add meaningful revenue to Sony's or Facebook's top line anytime soon.

Not a bullish argument

Never say never. Virtual reality is a real product that can drive real revenue. As prices come down and content libraries expand, interest will increase.

It's not an evolution that's going to be measured in months though. It's going to be measured in years, and it's going to be led by tech organizations that will likely continue to make the bulk of their money outside of the VR market. That's Facebook and Sony, and perhaps Microsoft (NASDAQ: MSFT) now that its HoloLens 2 is on the market.

The tech is cool to be sure, but beware the predicted double-digit growth rates. That relatively strong growth is rooted in very modest historical comparisons. Samsung and Google are backing off for a reason, while Facebook is pulling out all the stops for the same reason. There's just not a ton of money to be made here ... at least not yet.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. James Brumley owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Facebook, and Microsoft. The Motley Fool has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, and long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.