Understanding the Market for Virtual Reality Gaming

In this segment from Industry Focus: Consumer Goods, virtual reality is the name of the game as Vincent Shen and Seth McNew look at the companies vying for a dominant position in this exciting, fast-growing segment of the video game industry.

Some of the first dedicated headsets hit store shelves in 2016. While sales for some devices have been promising, others have stalled due to high price tags and a lack of titles. How big will this market ultimately be?

A full transcript follows the video.

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This video was recorded on March 23, 2017.

Vincent Shen:A lot of the big players have been putting money into this, and also,people not typically into thevideo game industry. Sony(NYSE: SNE)has the PlayStation VR. This offering issupposed to be meeting management expectations. This is a headset, sells for about $400for most of the retailers that I checked before the show. It was released late last fall. So far, they've sold about 1 million units. Management seemsvery happy with the progress they've seen with this. What do you think?

McNew:I think they had a great advantage ofhaving the first console to make this a real part of the console. I think it works great. I love being able to play on it. And there's a lot of upsells they have with that, different kinds of controllers, the games that go along with it. It seems like it's agreat opportunity for them to continue getting revenueoff of that release. And obviously,other companies are following along.

Shen:Yeah. In terms of that dedicated headset, two other main competitors are the -- OK, thepronunciation on this, I've heard two differentthoughts --HTC(NASDAQOTH: HTCXF)Vive. I don't mind either one,we'll just call it HTC. Theirheadset is being compared a lot to the FacebookOculus Rift. These companies have not offered nearly that level of detail that Sony has in terms of their PlayStation VR, but some people say the VR is outselling the Rift three to one,in terms of some analyst estimates. But ultimately, bringing this back,what kind of impact is this going to have for these companies, their bottom lines, and their overall revenue? A research group called CCS Insight, they put virtual and augmented reality device sales at 11 million last year, which is actually way more than you would think. We talk about console sales. Nintendo, with the Switch, is hoping that,if they can hit 10 million,that's really a good threshold for them to attractdeveloper attention. They would be very happy with that. But, while that seems really great, and the forecasted device sales might top 60 million by 2020, there is a caveat to all of that:most of this volume comes from low-cost solutions, likeGoogle Cardboard.

McNew:Sure, or even ones like theGoogle Daydreamthat they released for the Pixel, that'ssomething like $80, but that has to be used with the phone. There'snot a lot of technology thereother than the screen that views the phone. Here, you'retalking about real headsets that have the technology to be a serious gaming solution. And you have the early adopters thathave used that so far. But,here in the next couple of years,you'll see the prices start to decrease a little bit,and they could be a little bit more mass market.

Shen:And that's the big challenge, I think, with this technology in general. A lot of people have said that 2016deflated a lot of expectations for virtual reality. Not that there isn't a lot of optimism behind it, but a reality check, in a sense. When it comes down to it, if you want something like what the Oculus Rift offers, you need not just the headset itself, which costs anywhere from $500, for Facebook's offering, to $800 for HTC's offering,at least according to Amazon. Inaddition to that, you need a PC with some really strong specs, and a high quality GPU video card to be able to even run these games. So, at the moment,like you mentioned, early adopters --although, you're going to get early adopters, but otherwise,people are going to be very reluctant to shell out over $1,000 for a dedicated system when the titles themselves arelimited in the virtual reality space.

McNew:Andas we talked about earlier in this podcast, that's going to be a holdback. When you have the content that makes people want to pay that much money, then people will. But, of course, the other thing about the virtual reality is that you're still waiting to see what other industries it can be used for. People arealready going to have one at home for gaming,and it also works for something else. Might be moreimpetus to buy something, if it works for something more than just the game.

Shen:Thevalue proposition,it's easier to shell out that kind of money. And the thing is, over time, likeanything with technology, it will get cheaper.Going back to that original number I mentioned, 11 millionvirtual and augmented reality devices sold in 2016. If yougo to those dedicated headsets, the ones that are hundreds of dollars, muchmore sophisticated than, for example, theGoogle Cardboard, sales at just over 1 million. Still really early, butdefinitely something that I personally am very excited personally to see develop. Anything else from you, Seth, in terms of takeaways forpeople who are thinking big picture about video games, be it eSports, virtual reality, digital downloads? Anything else?

McNew:Yeah,especially, we were talking about the chips that go in your computer that are going to power all this stuff,that leads into a whole other discussion of companies likeNVIDIA,for example, that's making that technology that'sdriving the technology behind the gaming industry. That's for a whole other podcast, but it's something to look at.


Seth McNew has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Facebook, and NVIDIA. The Motley Fool has a disclosure policy.