[JD Says] Searching for the Real VR Unicorn Through the Jungle of Virtual Reality
[JD Says] Focusing on industrial investment, witnessing market development. With the power of capital, JD shares the insights and experiences with Chinese enterprises on the way.
[Who’s sharing?] VC Investment Team of JD Capital: a rigorous, but imaginative team of post-80s, focusing on intelligent technology, consumption upgrading, corporate services and smart healthcare. They are firm believers of the action concept: innovation drives development; executive force prevails.
Now, nothing in the field of technology and VC investment can be hotter than VR (virtual reality) as the global headline. In the 2016 Mobile World Congress, held in Barcelona, such technology shall be best experienced as follows:
Goldman & Sachs has predicted earlier in its newly-released 2016 report that, by 2025, the revenue of AR (augmented reality) and VR hardware & software is expected to reach USD 80 billion. If it comes to the public stage at a faster pace, the annual revenue may even reach USD 182 billion.
In China, the prosperity of VR comes different from the previous concept of O2O. While the latter is an aftershock of the era of mobile internet, the former is part of the global trend of technological innovation. With rough calculations, the total financing of China’s VR enterprises has exceeded 1 billion yuan, which is approximately 1/10 of that of the US. Despite the gap in between, the seemingly faraway industry has gained unanimously favorable market prospect.
Virtual Reality: also called VR for short. A technology offering immersive experiences in interactive three-dimensional environment generated on the computer through comprehensive use of computer graphics systems and interface devices with respect to reality and control.
The VR technology can block users’ original visual input and occupy their vision with virtual images and rays; it tricks the human brain through interaction with images.
How popular is VR?
Since it was distributed by 谷歌 Cardboard for free in the 2014 谷歌 I/O, over 5 million cardboard VR helmets have been sold, and the compatible mobile APP has entered 100 countries. The VR helmet, which functions with a mobile phone in it, sells for only USD 9.9.
Two years ago, 脸书 spent USD 2 billion in the acquisition of Oculus, a VR company, and planned to launch the VR device Oculus Rift in 2016 at the price of USD 600. In 2015, 脸书 joined hands with Samsung in developing the mobile device Gear VR which can already be seen in the market.
The VR technology is just about to gradually change our lives, be it recreation, social intercourse, or even work patterns. In the near future, VR shall also come into our lives just as smart phones.
In reality, VR is nothing new. Early in the 1960s, theoretically feasible products had already been developed in the labs of US universities. By the end of the 1990s, the VR industry has also triggered some interest in the field of business and education. However, since the technological level was insufficiently high to satisfy user experience, and that the devices were heavy and inefficient, the industry was not fully developed at that time.
This time, the VR industry has prepared itself for dramatically changing the current human-computer interaction interface. From the current engineering machine to enterprises along the industry chain driven by these machines, it can be seen that both industry giants and individual entrepreneurs are participating in the whole process.
China’s VR market: the offline experimental store becoming the booster
At present, the whole world is welcoming the boom of the VR industry, but the development of the Chinese market is not entirely the same. Foreign countries feature the culture of console games, so VR development emphasizes on heavy games and most participants are giant vendors. Whereas in China, due to the popularity of the mobile internet and smart phones, light VR games enjoy a broader prospect.
Heavy Games: games with high user adhesiveness, fixed and high-fidelity user groups, and long life cycle. Games mainly targeted at game fanciers and senior players.
Light Games: games mainly played in fragmented times, which are relatively simple and require low time costs and basic hardware. Games mainly targeted at more general game consumers.
While light VR games are enjoying a greater market potential, the prototypes for offline experimental stores in China have also witnessed rapid development and have become a booster for the development of VR industry in China. By the end of 2015, there has been 1,000 offline VR experimental stores in China. The number is expected to reach 3,000 by the end of 2016, with the total estimated production value of 150 to 200 million yuan.
It is worth noticing that though the most profitable one of these offline experimental stores has reached a monthly revenue of 2 million yuan, their user adhesiveness is still insufficiently strong due to lack of content. In the future, the addition of offline experimental stores shall be mainly dependent on the gradual enrichment and improvement at the content side.
Therefore, the overall reality of the VR industry in China is the relatively rapid development of hardware and offline experimental stores, combined with lack of content and relatively weak industrial foundations such as the production of screens, batteries and chips. If breakthrough can be achieved in terms of content production, the industry shall witness tremendous potential. With current hardware producers as the example: if hardware shipments in 2016 reach 10 million, and each user downloads 5 to 10 popular games after obtaining the device, supposing each game is priced at 10, then the total market size may reach 1 billion yuan.
Four focal points requiring attention before investing in the VR industry Chain
The expected market boom has rendered the whole VR industry as the beneficiary. The entire thing is not only a simple headset, but a whole industry chain, including the processing platform, middleware, operation platform, application, as well as the final user side.
1. Teams with strong capability of content development have more growth potential and investment worth
Temporarily, in the VR industry, the development of hardware devices, mostly headsets, leaves others far behind. The technological barrier of mature overseas hardware producers is already relatively high, and the products have become mature over a long period of development and iteration. Therefore, it is difficult to gain reward of growth spurts from similar start-up teams in this detailed field. It is more appropriate for start-up teams to involve as a solution provider or technical supporter.
Meanwhile, teams with relatively strong capability of content development are still worth the attention in the whole VR industry chain, so do the VR contents besides games, such as videos and live broadcasts. In China, the diversification of market demands also gives more development potential and investment value to local teams of content development. With the general trend of consumption upgrading in the Chinese market, investment into the VR content side centering on the pan-entertainment industry is well worth expecting in the future.
2. Light VR games and mobile VR is a non-negligible aspect of the Chinese market
As has been always, in the field of game development, there has been an obvious gap between the level of domestic heavy game developers and foreign teams. There is relatively small room for the contest between domestic start-up companies and overseas giants, and the investment risk is also greater. However, the development of light VR games is worth greater attention, since it is relatively easy for the large numbers of mobile game developers naturally formed in the Chinese market to turn to, with relatively low transition costs. Besides, the lower price thresholds means that even mobile VR cannot offer user experience as good as heavy VR games, the growth of users at the mobile side shall be undoubtedly faster.
Therefore, the rapidly growing mobile VR market is able to accommodate more than one device developers, and technologically capable teams with sufficiently high barriers are well worth the attention. Among these, the balance between performance and energy consumption, the optimization of graphics capability and reduction of delay, as well as the overall control of the supply chain, are important factors in technological application in production and assessment of the capability of the team.
3. Vertically converge along the industry chain to achieve mutual connection among teams
For this field with plenty of giants, if investors can connect quality start-up teams in different aspects along the industry chain in the period of a premature market and realize mutual support and growth, the result shall be more than a simple combination.
Apart from the above-mentioned aspects, production tools such as game engines and video devices, as well as interaction assistive tools such as tactile feedback and motion capture, are also attractive. Solutions like VR Room Escape, which combines all the above elements, have the highest R&D threshold and the most incomparable user experience.
4. Industrial securitization of listed companies with pan-entertainment background can be expected
As the VR industry is relatively new, its securitization may be still in the exploration period in the coming years. However, for listed companies with pan-entertainment background, start-up companies with certain R&D capacities may be favorable target for acquisition.
On one hand, the input of capital and resources from large companies may accelerate the growth of start-up companies and the industry itself; on the other hand, coordinated and forward-looking layout serves to increase the market value of listed companies. For early VC, it is also a desirable withdrawal channel, possibly creating a win-win situation for the three parties.
- Jiuding Group
- JT Asset Management
- JX AMC