Market Analysis

One of our recent reports forecasts that VR in the UK entertainment and media industry alone will reach a value of £801m by 2021, making it the fastest growing and largest VR industry in EMEA (PWC) IDC states that VR headsets will make up more than 90% of the market until 2019, but between 2020 and 2021 AR headsets will experience exponential growth, grabbing a quarter of the market by the end of that period.

Worldwide revenues for the augmented reality and virtual reality (AR/VR) market are forecast to increase by 100% or more over each of the next four years, according to the latest update to the Worldwide Semiannual Augmented and Virtual Reality Spending Guide from the International Data Corporation (IDC). Total spending on AR/VR products and services is expected to soar from $11.4 billion in 2017 to nearly $215 billion 2021, achieving a compound annual growth rate (CAGR) of 113.2% along the way.  The United States will be the region with the largest AR/VR spending total in 2017 ($3.2 billion), followed by Asia/Pacific (excluding Japan)(APeJ) ($3.0 billion) and Western Europe ($2.0 billion). But then things get interesting as APeJ jumps ahead of the U.S. in total spending for two years before its growth rate starts to slow in 2019. The U.S. then pushes back into the top position in 2020 driven by accelerating growth in the latter years of the forecast. Meanwhile, Western Europe is expected to overtake APeJ for the number 2 position in 2021. The regions that will experience the fastest growth over the 2016-2021 forecast period are Canada (145.2% CAGR), Central and Eastern Europe (133.5% CAGR), Western Europe (121.2% CAGR) and the United States (120.5% CAGR). 

 

Within the regions, the industry segments driving AR/VR spending start from roughly the same place, but then evolve quite differently over time. The consumer segment will be the largest source of AR/VR revenues in each region in 2017. In the United States and Western Europe, the next largest segments are discrete manufacturing and process manufacturing. In contrast, the next largest segments in APeJ in 2017 are retail and education. Over the course of the forecast, the consumer segment in the U.S. will be overtaken by process manufacturing, government, discrete manufacturing, retail, construction, transportation, and professional services. In APeJ, the consumer segment will remain the largest area of spending throughout the forecast, followed by education, retail, transportation, and healthcare in 2021. Consumer spending will also lead the way in Western Europe, with discrete manufacturing, retail, and process manufacturing showing strong growth by the end of the forecast. 

 

 

"The consumer, retail, and manufacturing segments will be the early leaders in AR & VR investment and adoption. However, as we see in the regions, other segments like government, transportation, and education will utilize the transformative capabilities of these technologies," said Marcus Torchia, research director of IDC Customer Insights & Analysis. "With use cases that span both AR & VR environments, we see a significant opportunity for companies to re-cast how users interact in business processes and everyday tasks." 

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What´s next ? Major players

While the market could play out in many ways, let’s look at what major players’ strategies might be. Things could turn out differently, so we’ll revisit as we learn what is (and isn’t) happening.

 

Facebook is the largest single investor in VR/AR after buying Oculus for $2 billion and investing at least $500 million more. The company began telegraphing what might come next by splitting Oculus into PC and mobile divisions and showcasing two different VR social platforms. Oculus’ PC VR division looks set to remain in VR Specialist and Enthusiast markets because of price, so increasingly doesn’t look like a Facebook-sized (i.e. 100s of millions to billions of users) asset. Facebook could keep the Oculus PC VR division as a high-end test bed to support mobile VR/AR efforts, or spin it out (like Niantic from Google), merge it (potentially consolidating the high-end PC VR market) or sell it outright. Oculus’ mobile VR division is in a prime position to continue running Samsung’s Gear VR appstore and drive Gear VR innovation. Mark Zuckerberg has already said he believes in mobile AR, but as a non-phone maker Facebook could stick to its roots as a software player in that market. Given its track record as a Snap fast follower, we might end up wearing Facebook “Spectacles” too.

 

Apple is the best placed of all major tech companies to potentially drive mobile AR, with its end-to-end ecosystem of hardware, software, app store, developers and retail. The company has been characteristically enigmatic despite Tim Cook’s stated enthusiasm for AR, but all it needs are a few additional sensors, integrated Metaio software and some serious intent. As above, our base case sees this happening next year (outperform 2017, underperform 2019). For Apple customers, there would be no marginal cost to buying an AR enabled iPhone – they’re going to buy one anyway. 

 

Samsung is likely to remain a major player in mobile VR, despite what happened with the Galaxy Note 7. But it’s not a full ecosystem play for mobile VR because Facebook runs its Gear VR appstore. Samsung’s Gear VR headset, one of the cheaper VR headsets, is the most popular, according to an International Data Corporation report published on Thursday. Samsung shipped 490,000 (2017) of those headsets in the first quarter, giving the company a 21.5% market share.

 

Microsoft’s Satya Nadella focused HoloLens AR/mixed reality on the Enterprise market because of its high spec and price, and going mass consumer doesn’t look likely in coming years. So while you could play Minecraft on HoloLens, you’ll only do so as part of “research” at work. Microsoft’s Windows 10 VR is a game changer for the PC/console VR market with its inside-out tracking, low price and basic platform requirements, and the company is staying true to its Windows playbook with partners HP, Dell, Lenovo, Acer and Asus making the hardware. There’s also a good chance Xbox One Scorpio will see a Windows VR headset bundle at launch to drive console VR growth.

Yet despite all its assets, Microsoft doesn’t have a focused mobile VR/AR play apart from Minecraft (a big game, but not a platform). Until a clear strategy emerges, Satya Nadella’s Microsoft risks missing the mobile VR/AR platform shift in the same way Steve Ballmer’s Microsoft did with phones.

 

After its misadventures with Glass, Google is doing the Googliest thing possible for VR/AR – everything. For VR Explorers, Cardboard is a low risk entry point for VR and Daydream View could become the mobile VR leader (whether made by Google or others). Google’s approach with Project Tango (both inhouse and with hardware partners) is at the forefront of the impending mobile AR revolution. However, Apple vs Google in mobile VR/AR could end up looking like iOS vs Android: Apple with a hugely profitable end-to-end mobile AR ecosystem, Google enabling a larger open mobile VR/AR ecosystem to drive its core search advertising and Google Play revenues. A good result either way. Speculation about a merged Tango/Daydream standard using Tango sensors for VR might require a new form factor to the current closed back Daydream View, and it’s still too early to make a call on a potential Google Glass 2.

 

The console/PC VR market should also see Sony continue to drive core games revenues with PSVR, while HTC’s Cher Wang could consider how to make the HTC Vive more accessible to a mass consumer audience in terms of price. HTC might also adopt a Facebook-style dual PC/mobile VR strategy and enter mobile AR, but would need to grow its core phone market share to scale.HTC is the third biggest VR headset supplier with 191,000 of its Vive headsets shipped in the first quarter of 2017. Although the Vive is the most expensive VR headset on the market at still $599, HTC “enjoyes success in the commercial space as VR cafes have been popping up around the world, particularly in Asia. Imax (IMAX, +0.20%), for example, is using the HTC Vive in its handful of VR arcades that it is opening this year. The lighthouse room-scale will be improve in November 2017 and will be an alternative to expensive Optitrack capture system.

 

Intel’s Project Alloy all-in-one VR headsets look set to shake up the VR Specialist market when they launch later in the year.